Potential expansion in the use of nuclear power or other new energy supply technologies could change the supply and demand for energy and may impact frequency regulation pricing.
Although we are unaware of any challenges to our intellectual property, we cannot provide assurance that we have or will be able to maintain a significant proprietary position on the basic technologies used in our flywheel systems. Our ability to compete effectively against alternative technologies will be affected by our ability to protect proprietary technology, systems designs and manufacturing processes. We do not know whether any of our pending or future patent applications under which we have rights will issue, or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes from competitors. Even if all of our patent applications are issued and are sufficiently broad, they may be challenged or invalidated. We could incur substantial costs in prosecuting or defending patent infringement suits, and such suits would divert funds and resources that could be used in our business. We do not know whether we have been or will be completely successful in safeguarding and maintaining our proprietary rights.
Further, our competitors or others may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing on third-party patents, we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our systems.
We rely, in part, on contractual provisions to protect trade secrets and proprietary knowledge. These agreements may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors or others. Our inability to maintain the proprietary nature of our technology and processes could allow competitors or others to limit or eliminate any competitive advantages we may have.
Government regulation of our products, whether at the federal, state or local level, including any change in regulations or tariffs, product buy downs or tax rebates relating to purchase and installation of our products, may increase the cost and price of our systems, and may have a negative impact on our revenue and profitability. We cannot provide assurance that our products will not be subject to existing or future federal and state regulations governing traditional electric utilities and other regulated entities. We expect that our products and their installation will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, safety and related matters. We do not know the extent to which any existing or new regulations may impact our ability to distribute, install and service our products. Once our products reach the commercialization stage, federal, state or local government entities may seek to impose regulations.
We will require substantial funds to conduct research and development activities, market our products and services, and increase our revenues. We anticipate that such funds will be obtained from external sources and intend to seek additional equity or debt to fund future operations. We estimate that we will need to raise an additional $20 to $30 million to complete development of the Smart Energy Matrix. We expect the development to be complete in 2007.
Our actual capital requirements will depend on many factors. The additional funding we require may not be available on favorable terms, if at all. Such additional funding may only be available on terms that may, for example, cause substantial dilution to common stockholders, and/or have liquidation preferences and/or pre-emptive rights. If we raise additional funds by issuing debt securities or additional equity securities, existing stockholders may be adversely affected because new investors may have rights superior to current stockholders and current stockholders may be diluted.
If we do not succeed in raising additional funds we will be unable to complete planned development for our products and services. In addition, we could be forced to take unattractive steps, such as discontinuing product development, limiting the services offered, reducing or foregoing sales and marketing efforts and attractive business opportunities, or discontinuing operations entirely.
We expect that it will be several years before we will recognize significant revenues from the products we intend to offer and the services we intend to provide. A large portion of our expenses are fixed, including expenses related to facilities, equipment and key personnel. In addition, we expect to spend significant amounts to fund product development based on our core technologies. We also expect to incur substantial expenses to manufacture our Smart Energy Matrix product in the future. As a result, operating expenses may increase significantly over the next several years and, consequently, we will need to generate substantial commercial revenue to achieve profitability. Even we do achieve profitability, we may not be able to sustain or increase profitability on a consistent basis.
The exercise of options and warrants and other issuances of shares will likely have a dilutive effect on our stock price.
As of December 31, 2005, there were outstanding options to purchase an aggregate of 5,581,803 shares of our common stock at prices ranging from $0.255 per share to $9.31 per share, of which options to purchase 5,306,799 shares were exercisable as of such date. As of December 31, 2005, there were outstanding warrants to purchase 5,093,860 shares of our common stock. Of this total, warrants to purchase 800,000 shares of our common stock are currently exercisable at $1.001 per share, subject to adjustment under the anti-dilution provisions of the warrants. On November 8, 2005, in connection with a private placement of our common stock, we issued to institutional investors warrants to purchase 2,960,527 shares of our common stock at an exercise price of $2.21 per share, which are exercisable as of March 8, 2006. In connection with an April 2005 private placement of our common stock, we granted to the investor warrants to purchase 800,000 shares of our common stock at an exercise price of $1.008 per share, and extended a warrant for two years for 1,333,333 shares at $2.25 per share. As of December 31, 2005, these warrants have not yet been issued.
The exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of our common stock. Additional dilution may result from the issuance of shares of our capital stock in connection with collaborations or manufacturing arrangements or in connection with other financing efforts.
We have a history of losses and anticipate future losses and we will have limited revenues in the near term. Unless we raise additional capital to operate our business, we may not be able to continue as a going concern as our cash balances are sufficient to fund operations only through approximately the first quarter of 2007.
We have incurred significant losses from operations since our inception. As shown in our consolidated financial statements, we incurred significant losses from operations of approximately $9,448,000, $9,049,000 and $9,138,000 and operating cash decreases of $8,832,346, $8,164,675 and $7,700,612, during the years ended December 31, 2005, 2004 and 2003, respectively. We are unsure if or when we will become profitable.
We had $13,890,162 of cash and cash equivalents on hand at December 31, 2005. Based on our current cash usage rates and additional expenditures expected in support of our business plan, we estimate that we have adequate cash to fund operations only into the first quarter of 2007.
We are focused on further development of the Smart Energy Matrix to provide frequency regulation services, but this product will not generate revenues in the near-term. We expect future revenues to come from a combination of the sale of services related to the Smart Energy Matrix and sales of Smart Energy Matrix units. Other than revenue related to our research and development contracts in the amount of $1.4 million, we have had no revenues to date from our Smart Energy Matrix. The timing of future revenues is uncertain.
Miller Wachman, LLP, our independent auditors, have included an explanatory paragraph related to a going concern uncertainty in their audit report on our consolidated financial statements for the fiscal year ended December 31, 2005, which identifies our recurring losses and negative cash flows and raises substantial doubt about out ability to continue as a going concern.
Our financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have not made any adjustments to our financial statements as a result of the going concern uncertainty. If we cannot continue as a going concern, we may have to liquidate our assets and may receive significantly less than the values at which they are carried on our financial statements. Any shortfall in the proceeds from the liquidation of our assets would directly reduce the amounts that holders of our common stock could receive in liquidation.
Our financial performance could be adversely affected if we are unable to retain key executive officers and retain or attract key technical personnel.
Because our future success depends to a large degree on the management provided by the executive officers, our competitiveness will depend significantly on whether we can retain members of our executive team. We have an employment agreement with Mr. Spiezio, Vice President of Finance, Chief Financial Officer, Treasurer and Secretary. Our employment agreement with Mr. Capp, CEO and President, expired on December 31, 2004 and our employment agreement with Mr. Lazarewicz, Vice President and Chief
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Technical Officer, expired on December 31, 2005. Negotiations with Mr. Capp and Mr. Lazarewicz are ongoing but both are now employees at will and there can be no assurance that either or both executives will not elect to leave the Company or that an agreement will be reached.
Our future success also depends to a large degree on the technical skills of our engineering staff and our ability to attract key technical personnel. Competition for skilled technical professionals is intense and we may not be successful in attracting and retaining the talent necessary to design, develop and manufacture our flywheel products.
We have anti-takeover defenses and a staggered board of directors that could delay or prevent an acquisition and changes in control in our board of directors and management, and could adversely affect the price of our common stock.
Provisions of our certificate of incorporation, by-laws, Rights Agreement and Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing changes in control of management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest.
Our certificate of incorporation permits our board of directors to issue preferred stock without stockholder approval upon such terms as the board of directors may determine. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding common stock. Although we have no present intention of issuing any additional preferred stock, an issuance of a substantial number of preferred shares could adversely affect the price of our common stock.
Our certificate of incorporation also provides for a staggered board of directors divided into three classes. Such a staggered board of directors will make it more difficult for our stockholders to change the composition of the board of directors in any one year, which could have the effect of preventing or delaying a change of control transaction that is not approved by our board of directors.
In addition, our certificate of incorporation and our amended and restated by-laws provide that:
• | our directors may only be removed for cause by a majority of the outstanding capital stock entitled to vote in the election of directors; |
• | our stockholders do not have the power to call special meetings of stockholders; and |
• | the provisions relating to the classified board, removal of directors and calling of special stockholders meetings may only be amended by a 66 2/3% vote of the outstanding shares of common stock, voting together as a single class. |
These provisions make it more difficult for our stockholders to change the composition of the board of directors and approve transactions they may deem to be in their best interests that are not approved by the board of directors.
Pursuant to a Rights Agreement, we issued rights as a dividend on common stock on October 7, 2002, each of which entitles the holder to purchase 1/100th of a share of newly issued preferred stock for $22.50 in the event that any person not approved by the board of directors acquires more than 15% (35% in the case of one large shareholder, Perseus Capital, L.L.C. and its affiliates, that at that time owned more than 15%) of Beacon’s outstanding common stock, or in the event of an acquisition by another company, $22.50 worth of the common stock of the other company at half its market value (in each case the rights held by the acquiring person are not exercisable and become void).
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Our principal executive offices, laboratory and manufacturing facilities are located at a single location in Wilmington, Massachusetts. This 51,650 square foot facility operates under a lease that expires on September 30, 2007. Our facility was designed for the assembly and test of flywheel systems and this capability continues to be available in the event that our designs gain market acceptance and we begin production. Currently, the facility is substantially underutilized.
Item 3. Legal Proceedings
We are not involved in any legal proceedings that are considered material; however, we may from time to time be involved in legal proceedings in the ordinary course of our business.
Item 4. Submission of Matters to a Vote of Security Holders
We held our 2005 annual meeting of shareholders on November 17, 2005. At the meeting, our stockholders voted on the following four proposals, all of which were approved. The shareholder votes were cast as follows:
Proposal 1: To elect the following nominees as directors:
Nominee | Votes for | Votes withheld |
F. William Capp | 39,627,049 | 659,613 |
John C. Fox | 38,930,531 | 1,353,161 |
Lisa W. Zappala | 39,453,157 | 830,535 |
Proposal 2: To approve and ratify the Beacon’s Third Amended and Restated 1998 Stock Incentive Plan to increase the number of shares of common stock issuable from 9,000,000 to 23,000,000 and ensure that the plan will be compliant with Section 409A of the Internal Revenue Code as it pertains to deferred compensation arrangements:
Votes for | Votes against | Votes abstain | Votes withheld |
11,693,929 | 3,229,338 | 239,190 | 25,121,235 |
Proposal 3: To approve an amendment to and ratification of the Beacon’s Employee Stock Purchase Plan to increase the number of shares of common stock issuable from 1,000,000 to 2,000,000:
Votes for | Votes against | Votes abstain | Votes withheld |
13,540,059 | 1,411,334 | 211,064 | 25,121,235 |
Proposal 4: To ratify the appointment of Miller Wachman, LLP as independent accountants for Beacon for the year ending December 31, 2005:
Votes for | Votes against | Votes abstain | Votes withheld |
31,916,786 | 60,488 | 43,984 | 0 |
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the NASDAQ Capital Market under the symbol "BCON". The following table sets forth the high and low sales price of the common stock for the period indicated.
| High | Low |
Twelve months ended December 31, 2005 |
Fourth quarter | $3.02 | $1.70 |
Third quarter | $5.35 | $1.01 |
Second quarter | $1.22 | $0.74 |
First quarter | $1.43 | $0.60 |
| | |
Twelve months ended December 31, 2004 |
Fourth quarter | $1.44 | $0.36 |
Third quarter | $0.62 | $0.25 |
Second quarter | $0.90 | $0.27 |
First quarter | $1.72 | $0.71 |
On March 20, 2006 the last reported sale price of our common stock on the NASDAQ Capital Market was $1.70 per share, and there were 334 holders of record of common stock. The number of record holders does not include holders of shares in “street name” through brokers.
We have never declared or paid cash dividends on shares of our common stock. We expect to retain any future earnings, if any, to finance the expansion of our business, and therefore do not expect to pay cash dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion.
Equity Compensation Plan Information. The following table gives information about equity awards under our stock option plan and employee stock purchase plan, as of December 31, 2005.
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance |
| | (a) | | (b) | | (c) |
Equity compensation plans approved by security holders | | 5,481,803 | | $ 1.18 | | 14,888,260 |
Equity compensation plans not approved by security holders | | 100,000 | | $ 1.24 | | -- |
Total | | 5,581,803 | | $ 1.18 | | 14,888,260 |
For additional information concerning our equity compensation plans, see discussion in footnotes 8, 9 and 10 to our consolidated financial statements, Stock Options, Employee Stock Purchase Plan and Restricted Stock Units.
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table shows our stock repurchase activity during 2005:
Period | | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
January 1, 2005 - January 30, 2005 | | -- | | $ -- | | -- | | -- |
February 1, 2005 - February 28, 2005 | | -- | | $ -- | | -- | | -- |
March 1, 2005 - March 31, 2005 | | -- | | $ -- | | -- | | -- |
April 1, 2005 - April 30, 2005 | | -- | | $ -- | | -- | | -- |
May 1, 2005 - May 31, 2005 | | 99,146 | | $ 0.89 | | -- | | -- |
June 1, 2005 - June 30, 2005 | | -- | | $ -- | | -- | | -- |
July 1, 2005 - July 31, 2005 | | -- | | $ -- | | -- | | -- |
August 1, 2005 - August 31, 2005 | | 125,593 | | $ 3.01 | | -- | | -- |
September 1, 2005 - September 30, 2005 | | -- | | $ -- | | -- | | -- |
October 1, 2005 - October 31, 2005 | | -- | | $ -- | | -- | | -- |
November 1, 2005 - November 30, 2005 | | 64,953 | | $ 2.10 | | -- | | -- |
December 1, 2005 - December 31, 2005 | | -- | | $ -- | | -- | | -- |
Total 2005 | | 289,692 | | $ 2.12 | | -- | | -- |
Treasury shares prior to 2005 | | 132,000 | | $ 0.76 | | -- | | -- |
Total treasury stock @ 12/31/2005 | | 421,692 | | $ 1.69 | | -- | | -- |
During 2005, we repurchased 212,940 shares of our common stock from certain officers and employees at an average price of $2.14 per share, to enable them to pay income tax liabilities resulting from stock distributed under our Restricted Stock Unit incentive plan. The repurchase price is established based on the closing price on the day the shares become available to all employees to trade. We also purchased 76,752 shares of our common stock at $2.05 from a member of our board of directors who surrendered vested stock options to pay down his outstanding loan balance owed to the Company. The repurchase price was established by the mid-point between the high and low trading price on the day the shares were acquired. These shares were added to treasury stock at cost. We have no formal stock repurchase plans.
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Item 6. Selected Consolidated Financial Data
The following selected financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, including the related notes, found elsewhere in this Form 10-K.
The following tables present selected historical financial data for the years ended December 31, 2005, 2004, 2003, 2002, and 2001, and for the period from May 8, 1997, the date of Beacon’s inception, through December 31, 2005.
| | | | | | | | | | | | Period from Date |
| | | | | | | | | | | | of Inception |
| | Year ended December 31, | | (May 8, 1997) to |
| | 2005 | | 2004 | | 2003 | | 2002 | | 2001 | | December 31, 2005 |
| | (in thousands, except per share data) | | |
Consolidated Statements of Operations Data: | | | | | | | | | | | |
Revenues | $ 1,487 | | $ 325 | | $ - | | $ - | | $ - | | $ 2,363 |
Cost of goods sold | 1,575 | | 1,458 | | - | | - | | - | | 3,033 |
Gross margin | (88) | | (1,133) | | - | | - | | - | | (670) |
Operating expenses: | | | | | | | | | | | |
| Selling, general and administrative | 6,334 | | 4,196 | | 4,936 | | 5,637 | | 8,940 | | 38,589 |
| Research and development | 1,408 | | 3,532 | | 3,550 | | 7,130 | | 17,628 | | 55,284 |
| Loss on contract commitments | 1,535 | | - | | - | | - | | - | | 1,911 |
| Depreciation and amortization | 83 | | 187 | | 285 | | 1,644 | | 1,324 | | 4,221 |
| Restructuring charges | - | | - | | - | | 2,159 | | - | | 2,159 |
| Loss on impairment of assets | - | | - | | 367 | | 4,297 | | - | | 4,664 |
Total operating expenses | 9,360 | | 7,915 | | 9,138 | | 20,867 | | 27,892 | | 106,828 |
Loss from operations | (9,448) | | (9,048) | | (9,138) | | (20,867) | | (27,892) | | (107,498) |
Interest and other income (expense), net | 136 | | 3,719 | | 520 | | 28 | | 1,746 | | 6,260 |
Net loss | (9,312) | | (5,329) | | (8,618) | | (20,839) | | (26,146) | | (101,238) |
Preferred stock dividends | - | | - | | - | | - | | - | | (36,826) |
Accretion of redeemable convertible preferred stock | - | | - | | - | | - | | - | | (113) |
Loss to common shareholders | (9,312) | | (5,329) | | (8,618) | | (20,839) | | (26,146) | | (138,177) |
Net loss per share, basic and diluted | ($0.20) | | ($0.12) | | ($0.20) | | ($0.49) | | ($0.61) | | |
Shares used in computing net loss per share, basic and diluted | 47,666 | | 43,453 | | 42,886 | | 42,797 | | 42,551 | | |
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| | As of December 31, |
| | 2005 | 2004 | 2003 | 2002 | 2001 |
| | (in thousands) |
Balance Sheet Data: | | | | | |
Cash and cash equivalents | $13,890 | $5,097 | $8,909 | $17,867 | $34,201 |
Working capital | 13,223 | 4,213 | 8,838 | 16,865 | 32,383 |
Total assets | 16,126 | 7,086 | 12,067 | 20,906 | 42,131 |
Total stockholders' equity (deficiency) | $13,655 | $5,110 | $9,692 | $18,075 | $38,981 |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements, the notes to those financial statements and other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain forward-looking statements that reflect plans, estimates, intentions, expectations and beliefs. Actual results could differ materially from those discussed in the forward-looking statements. See "Note Regarding Forward-Looking Statements." Factors that could cause or contribute to such differences include, but are not limited to, those set forth in the "Risk Factors" in Item 1A and contained elsewhere in this Form 10-K.
Critical accounting policies and estimates
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, management evaluates our estimates and assumptions including but not limited to those related to revenue recognition, asset impairments, inventory valuation, warranty reserves and other assets and liabilities. Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition. Although we have shipped products and recorded contract revenues, our operations have not yet reached a level that would qualify us to emerge from the development stage. Therefore we continue to be accounted for as a development stage company under Statement of Financial Accounting Standards No. 7 “Accounting and Reporting by Development Stage Enterprises.”
We recognize revenues in accordance with accounting principles generally accepted in the United States of America. Generally, revenue is recognized on transfer of title, typically when products are shipped and all related costs are estimable. For sales to distributors, we make an adjustment to defer revenue until they are subsequently sold by distributors to their customers.
Loss on Contract Commitments. Each quarter, we perform an evaluation of expected costs to complete our in-progress contracts that we account for using the percentage-of-completion method. In the event that the total expected costs to complete a contract exceed the expected total contract revenue, we immediately record a loss on the contract to the extent that the expected loss exceeds the expected revenue from the contract.
Government Contract Revenue Recognized on the Percentage-of-Completion Method. We recognize contract revenues using the percentage-of-completion method, based primarily on contract costs incurred to date compared with total estimated contract costs. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenues recognized in excess of amounts billed are classified as current assets, and included in “Prepaid expenses and other current assets” 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 construction contract costs and revenue.
All of our research and development contracts are subject to cost review by the respective agencies. Our reported results from these contracts could change adversely as a result of these reviews.
Inventory Valuation. We value our inventory at the lower of actual cost or the current estimated market value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on historical usage for the prior twelve month period and future sales forecasts. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and thus our reported operating results.
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Patent Costs. We will capitalize external legal costs incurred in the defense of our patents where we believe that the future economic benefit of the patent will be increased. We monitor the legal costs incurred and the anticipated outcome of the legal action and, if changes in the anticipated outcome occur, capitalized costs will be adjusted in the period the change is determined. Patent costs are amortized over the remaining life of the patents.
Warranty Reserves. Our warranties require us to repair or replace defective products returned to us during the applicable warranty period at no cost to the customer. We record an estimate for warranty-related costs based on actual historical return rates, anticipated return rates, and repair costs at the time of sale. A significant increase in product return rates, or a significant increase in the costs to repair products, could have a material adverse impact on future operating results for the period or periods in which such returns or additional costs materialize and thereafter.
Income Taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities as well as net operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences reverse. Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.
Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance or reduce our current valuation allowance which could materially impact our tax provision.
Long-Lived Assets. In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets we held and used are reviewed to determine whether any events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The conditions to be considered include whether or not the asset is in service, has become obsolete, or whether external market circumstances indicate that the carrying amount may not be recoverable. When appropriate 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. Our analyses indicate that there was an impairment of long-lived assets and recognized an asset impairment charge of $0 in 2005, $0 in 2004, $366,788 in 2003 and restructuring and asset impairment charges of $2,159,280 and $4,297,128, respectively, in 2002.
Overview
Our initial product strategy was to develop high energy, composite flywheels for back-up powering of telecommunications applications. With the collapse of the telecommunications market, which began in 2001, we recognized that our Smart Energy flywheel products as alternative backup solutions to the telecommunications industry were not a means to produce meaningful revenues. With that recognition, we initiated a series of cost cutting measures throughout 2002 and 2003. The focus of these efforts was to reduce cash usage while preserving our intellectual properties and maintaining the integrity of our public company requirements while evaluating all potential product markets for our technologies and considering acquisitions or mergers that could lead to increased shareholder value. We have:
(i) | identified promising applications for our Smart Energy Matrix design in the electric utility power grid marketplace. In the first quarter of 2005, we were awarded development contracts by CEC and NYSERDA to demonstrate the viability of our flywheel technologies for frequency regulation by grid operators. The demonstrations are one-tenth-power prototype of the Smart Energy Matrix; |
(ii) | pursued additional development and design contracts for a variety of applications by federal agencies. We have been successful in obtaining contracts and are continuing our efforts to obtain additional research and development funding; and |
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(iii) | introduced the Smart Power M5 inverter system into the renewable energy market in December 2003. We have not been able to gain market share with this product and have slowed development of further inverter products but are continuing to offer the product for sale through a distribution network. Although we are continuing to support the product, we do not believe that inverters will be a significant portion of our business going forward. |
We must raise additional equity to execute our business plan. Based on our rate of expenditure of cash and the additional expenditures expected to support our business plan we estimate that we have sufficient cash to fund operations through approximately the first quarter of 2007. We need to obtain additional investments during 2006 or 2007 to fund:
• | ongoing research and development of the 25kWh flywheel and the Smart Energy Matrix; |
• | ramp up of manufacturing capacity; | |
• | continuing as a going concern; | |
• | completion of the state demonstration contracts in California and New York; | |
• | working capital requirements; and | |
• | developing new business. | |
| | | | | | |
We have begun development of the 25kWh flywheel system, which is the core component of the Smart Energy Matrix. In order to complete development of the Smart Energy Matrix and field a full-scale one megawatt prototype we will need to raise $20 to $30 million of additional working capital.
As part of our new business development, we will evaluate possible acquisitions of enterprises or technologies that we would consider synergistic from a market, technology or product perspective.
From inception through December 31, 2005, we have incurred losses of approximately $138.2 million. We expect to continue to incur losses as we expand our product development and begin to increase our manufacturing capacity.
We recognized an asset impairment charge in 2003 and restructuring and asset impairment charges in 2002. As required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we periodically evaluate all of our property and equipment in light of facts and circumstances and the outlook for future cash flows. As a result of our ongoing evaluations, in 2003 we recorded a non-cash charge of approximately $0.4 million representing the impairment of capitalized costs of internally developed intellectual property including various patents and patents pending relating to our flywheel technology. In 2002 we took a non-cash charge of $6.5 million of which $4.3 million represented impaired capital equipment and leasehold improvements, $1.9 million related to a reserve against future lease payments and related facility costs and $0.3 million relating to severance costs. These charges related to a substantial portion of our long-term assets being idled, including machinery and equipment, tooling, office furniture and fixtures and leasehold improvements. The portion of the reserve that relates to future lease payments is classified as “Restructuring reserve” in the current liabilities section of the balance sheet.
Revenues. We were awarded fixed price research and development contracts from government agencies and are pursuing similar contracts from other government agencies. We have determined that we will recognize revenues using the percentage of completion method for such contracts. We are continuing to evaluate markets for our flywheel systems but we have not recognized revenues from these products. We have placed development prototype flywheels with potential customers and shipped pre-production units. These flywheel products were provided to potential customers without charge or on a demonstration basis to allow us access to field test information and to demonstrate the application of our technologies. We sell our Smart Power M5 inverter system in the solar renewable energy market through domestic distributors who in turn sell our products to installers who then make sales to residential homeowners or commercial customers. We will recognize revenues on our inverter products when they are sold by our distributors to their customers. Although we are continuing to support our inverter product, we do not believe that inverters will be a significant portion of our business going forward and we are uncertain as to when or at what price we will be able to sell the reminder of our inventories.
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Cost of Goods Sold. Cost of goods sold on fixed price research and development contracts are predominantly being recorded on the percentage of completion method and consist of direct labor and material, subcontracting and associated overhead costs.
In 2004, we established a reserve for all of our inverter product inventory as a result of lower than anticipated customer demand and uncertainty of our ability to sell those inventories. In 2005 we continued to have modest sales of our inverter products. The costs related to these sales are not fully reflected in COGS as a result of the inventory being reserved in a prior year. Therefore our cost of goods sold does not accurately reflect the costs associated with these revenues.
Selling, General and Administrative Expenses. Our sales and marketing expenses consist primarily of compensation and benefits for sales and marketing personnel and related business development expenses. In 2004 we expanded our sales and marketing effort into the renewable energy market for the Smart Power M5 inverter product. We continue to rely on engineering personnel to provide technical specifications and product overviews to our potential customer base. We expect sales and marketing expenses to continue to increase as we expand efforts to define new markets for our products. General and administrative expenses consist primarily of compensation and benefits related to our corporate staff, professional fees, insurance and travel. In 2005 we incurred significant non-recurring professional expenses relating to the failed attempt to acquire NxtPhase T&D Corporation and our fundraising efforts. We expect our selling, general and administrative expenses to increase in 2006 over 2005 due primarily to the implementation and reporting expenses associated with compliance with the Sarbanes-Oxley Act of 2002, fundraising activities, marketing and sales expenses associated with flywheel products and compensation costs associated with equity based compensation.
Research and Development. Our cost of research and development consists primarily of the cost of compensation and benefits for research and development, and support staff, as well as materials and supplies used in the engineering design and development process. These costs are expected to increase in 2006 as compared to 2005 as we accelerate the development of the 25kWh flywheel for frequency regulation applications and begin to record compensation costs associated with equity based compensation.
Loss on Contract Commitments. We will establish reserves for anticipated losses on contract commitments if, based on cost estimates to complete the commitment, we determine that a loss will be incurred. We recorded $1.5 million charge during 2005 for anticipated losses on our research and development contracts. We did not accrue such losses during 2004. We are most likely to recognize probable losses on contract commitments early in a product’s introduction prior to being able to realize expected decreases in cost per unit through engineering design changes, operating efficiencies, and volume purchasing discounts. On government contracts, we will, on a quarterly basis, evaluate our estimated costs to complete and establish reserves when appropriate.
Restructuring and asset impairment charges. We did not recognize any asset impairment charges in 2005 or 2004.
Depreciation and Amortization. Our depreciation and amortization is primarily related to depreciation on capital expenditures and the amortization of lease and leasehold costs related to our facilities. We have intellectual property in the form of patents on our flywheel vacuum system, our heat pipe cooling systems, DC output paralleling, metal hub, low-loss motor, co-mingled rims and earthquake-tolerant bearings on our flywheel products, and anti-islanding software, drawings, source code, and production know-how on our Smart Power M5 inverter system, and expect to obtain other patents during 2006 and beyond. These costs were being amortized during 2004, but we recorded impairment charges to write down these assets to zero on the balance sheet at December 31, 2004. These impairment charges were made due to the uncertainty of realizing any future value from this property mainly due the lack of substantial revenues to date.
Interest and Other Income/Expense, net. Our non-operating income and expenses are primarily attributable to realized gains on the sale of our available-for-sale securities and a warrant, a write-back resulting from loan payments on a reserved loan to a former officer of the Company, a cash settlement relating to our failed attempt to acquire NxtPhase T&D Corporation, interest income resulting from cash on hand, accrued dividends
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receivable and the 7% conversion premium from the conversion of our holdings of Series A Preferred Stock of Evergreen Solar, Inc., partially offset by interest expense associated with its capital leases.
Recent Accounting Pronouncements
Share-Based Payments
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”) that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and generally requires that such transactions be accounted for using a fair-value-based method and recognized as expenses in the statement of operations. The statement requires companies to assess the most appropriate model to calculate the value of the options. We currently use the Black-Scholes option pricing model to value options and we are currently assessing whether an alternative model will be more appropriate. The use of a different model to value options may result in a different fair value than the Black-Scholes option pricing model. In addition, there are a number of other requirements under the new standard that will result in differing accounting treatment than currently required. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under our stock purchase plan. In addition to the appropriate fair value model to be used for valuing share-based payments, companies will also be required to determine the transition method to be used at date of adoption. The allowed transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of FAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We expect to use the prospective transition method. The effective date of the new standard is as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.
Upon adoption, this statement will have a significant impact on our consolidated financial statements, we will be required to expense the fair value of our stock option grants and stock purchases under the employee stock purchase plan rather than disclose the impact on our consolidated net income within the footnotes as is the current practice (see Note 8 of the notes of the consolidated financial statements contained herein). The amounts disclosed within our footnotes are not necessarily indicative of the amounts that will be expensed upon the adoption of FAS 123R due to possible changes in the fair value of our common stock, changes in the number of options granted or the terms of such options, the treatment of tax benefits and changes in interest rates or we may choose to use a different valuation model to value the compensation expense associated with employee stock options.
In conjunction with the adoption of Statement of Financial Accounting Standards No. 123R “Share-Based Payment”, Beacon has also adopted other additional guidance related to the adoption of FAS 123R, namely the SEC Staff Accounting Bulletin 107 (“SAB 107”).
SAB 107 includes disclosure requirements on topics related to FAS 123R such as, how to determine the expected volatility used in estimating the fair value of an award, the method used for calculating the expected term of stock options, and disclosures to consider in MD&A to highlight the effects of differences between the accounting for share based payment arrangements before and after the adoption of FAS 123R and changes to share based payment arrangements. (See Note 8 of the notes of the consolidated financial statements contained herein).
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Inventory Costs
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – An Amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Adoption of SFAS No. 151 is required in 2006 and we do not expect the adoption to have a significant impact on our results of operations or financial condition.
Results of operations.
Comparison of Year ended December 31, 2005 and 2004
| Year ended December 31, |
| 2005 | | 2004 | | $ Change | | % Change |
| (in thousands) |
Revenues | $ 1,487 | | $ 325 | | $ 1,162 | | 358% |
Cost of goods sold | 1,575 | | 1,458 | | 117 | | 8% |
Gross margin | (88) | | (1,133) | | 1,045 | | 92% |
Selling, general and administrative | 6,334 | | 4,196 | | 2,138 | | 51% |
Research and development | 1,408 | | 3,532 | | (2,124) | | 60% |
Loss on contract commitments | 1,535 | | - | | 1,535 | | n/a |
Depreciation and amortization | 83 | | 187 | | (104) | | 56% |
Interest and other income (expense), net | 136 | | 3,719 | | (3,583) | | 96% |
Net loss | 9,312 | | 5,330 | | 3,982 | | 75% |
Revenue. In 2005 we recorded revenue from flywheel related government contracts of approximately $1,351,000 and recorded $136,000 from the sale of Smart Power M5 inverter systems and related products. In 2004 we recorded revenue from the sale of our Smart Power M5 inverter systems and related products in the amount of approximately $204,000. Revenue from flywheel related government contracts was approximately $121,000. Also in 2004, we provided $42,000 of engineering consulting services to third parties; these services were recorded as a reduction to research and development expense.
Cost of Goods Sold. Cost of goods sold in 2005 includes costs incurred in performance of government contracts calculated on the percentage of completion method in the amount of approximately $1,336,000 and the cost of materials, labor, overheads and warranty accruals for inverter products sold in the amount of approximately $61,000. Also included in cost of good sold is a charge for abnormal idle plant costs in the amount of $178,000. In 2004, we established a reserve for our Smart Power M5 inventory of $1,025,000 as a result of lower than anticipated sales volumes of the Smart Power M5 and uncertainty as to when or at what price we will be able to sell our inventories. In addition to this charge to Cost of Goods Sold, we recorded an additional reserve for future warranty expenditures relating to the Smart Power M5 inverter of approximately $28,000.
Selling, General and Administrative Expenses.
December 31, 2004 | | $ 4,196 |
Reductions: | | |
Directors & officers insurance premium | | (83) |
Travel | | (20) |
| | |
Increases: | | |
Merit increases, headcount increase | | 61 |
Public company expenses | | 451 |
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Merger costs | | 837 |
Legal & audit | | 796 |
Sales consultants | | 75 |
Other | | 21 |
December 31, 2005 | | $ 6,334 |
The increase from 2004 to 2005 of approximately $2.1 million was primarily the result of additional professional costs incurred in the potential acquisition of NxtPhase of approximately $837,000, additional audit and legal costs relating to the business combination proxy as well as drafting merger documents and costs of drafting and reviewing fundraising documents of approximately $796,000. This acquisition did not occur, and these costs were taken as period costs in 2005. Further cost increases included additional public company expenses such as Nasdaq fees, Board of Directors fees, and costs of a possible special meeting regarding the NxtPhase acquisition of approximately $451,000, headcount increases of approximately $61,000, additional business development consulting of approximately $75,000 and other general expenses of approximately $21,000, partially offset by lower D&O insurance premiums of approximately $83,000 and less travel of approximately $20,000. We expect our selling, general and administrative expenses to be somewhat lower in 2006 than 2005 due primarily to the non-recurring acquisition costs that will not be expended in 2006, partially offset by the additional costs expected in the implementation and reporting expenses associated with compliance with the Sarbanes-Oxley Act of 2002, fundraising activities, and marketing and sales expenses associated with flywheel products.
Research and Development Expenses.
Research and development expenses: | | |
December 31, 2004 | | $ 3,532 |
Reductions: | | |
Engineering and manufacturing overheads applied | | (1,719) |
Expense materials | | (302) |
Amortization of IP | | (109) |
Facility costs | | (120) |
Other miscellaneous R&D costs | | (86) |
| | |
Increases: | | |
Salaries, benefits/merit and new hires | | 212 |
December 31, 2005 | | $ 1,408 |
The decrease from 2004 to 2005 of approximately $2.1 million is primarily due to engineering effort being applied to government research and development contracts in the amount of $1.7 million, a reduction in development materials of approximately $302,000, lower facility costs due implementing FAS 151 accounting for idle plant capacity of approximately $120,000, and other miscellaneous development expenses were generally lower due to the focus of engineering on our research and development contracts. These decreases were partially offset by an increase in salaries due to yearly merit increases and salaries for strategic new hires of approximately $212,000. We expect cost of research and development in 2006 to be significantly higher than 2005 due to increased headcount and development material for the 25kWh flywheel and development activities on the Smart Energy Matrix.
Loss on contract commitments. We recorded contract commitment losses on our research and development contracts in 2005 of $1.5 million. These costs relate to a combination of planned cost-share expenditures, and unplanned overruns in the amount of labor required to complete the contracts.
Depreciation and Amortization. The decrease from 2004 to 2005 of approximately $104,000 is primarily attributable to continuing reductions in the depreciable base of our assets caused by budgetary restrictions on
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capital expenditures during 2004 and 2005. Depreciation in 2006 will be higher than 2005 due to capital expenditures relating to production capability for the Smart Energy Matrix.
Interest and Other Income/ (Expense), net.
Interest and Other Income (Expense), net | | |
December 31, 2004 | | $ 3,719 |
Reductions: | | |
Gain on Evergreen investment | | (3,623) |
NxtPhase settlement expense | | (150) |
| | |
Increases: | | |
Gain on sale of assets | | 50 |
Officer loan payoff | | 80 |
Increase in interest earned | | 60 |
December 31, 2005 | | $ 136 |
The decrease from 2004 to 2005 of $3.6 million is primarily attributable to gains from the sale of an investment in Evergreen Solar, Inc. realized in 2004 of approximately $3,623,000, and a small settlement agreement with NxtPhase of $150,000. These reductions were partially offset by increases in interest income due to higher cash balances of approximately $60,000, a reduction to the reserve established for an officer’s unpaid loan balance which was fully repaid in 2005 in the amount of approximately $80,000, and gains realized on the sale of equipment of approximately $50,000.
Net Loss. As a result of the changes discussed above, the net loss for 2005 was approximately $9,312,000 which compares to a net loss in 2004 of approximately $5,330,000, an increase in net loss of approximately $3,982,000 or 75%.
Comparison of Year ended December 31, 2004 and 2003
| Year ended December 31, |
| 2004 | | 2003 | | $ Change | | % Change |
| (in thousands) |
Revenues | $ 325 | | $ - | | $ 325 | | n/a |
Cost of goods sold | 1,458 | | - | | 1,458 | | n/a |
Gross margin | (1,133) | | - | | (1,133) | | n/a |
Selling, general and administrative | 4,196 | | 4,937 | | (741) | | 15% |
Research and development | 3,532 | | 3,550 | | (18) | | 1% |
Depreciation and amortization | 187 | | 285 | | (98) | | 34% |
Restructuring and impairment of assets | - | | 367 | | (367) | | 100% |
Interest and other income (expense), net | 3,719 | | 520 | | 3,199 | | 615% |
Net Loss | 5,330 | | 8,618 | | (3,288) | | 38% |
Revenue. In 2004 we recorded revenue from the sale of our Smart Power M5 inverter systems and related products in the amount of approximately $204,000. Revenue from flywheel related government contracts was approximately $121,000. Also in 2004, we provided $42,000 of engineering consulting services to third parties; these services were recorded as a reduction to research and development expense. In 2003, we reported no revenue. Proceeds from the sale of demonstration and test of 2kWh and 6kWh Smart Energy flywheel units as well as engineering services performed for other companies during 2003 was applied as a reduction against research and development expense. These amounts were approximately $130,000.
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Cost of Goods Sold. Cost of goods sold includes the cost of materials, labor and overheads for inverter products sold in the amount of approximately $235,000 and costs incurred in performance of government contracts calculated on the percentage of completion method in the amount of approximately $170,000. We established a reserve for our Smart Power M5 inventory of $1,025,000 as a result of lower than anticipated sales volumes of the Smart Power M5 and uncertainty as to when or at what price we will be able to sell our inventories. In addition to this charge to Cost of Goods Sold, we recorded an additional reserve for future warranty expenditures relating to the Smart Power M5 inverter of approximately $28,000. There was no cost of goods sold during 2003.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses (in thousands): |
December 31, 2003 | | $ 4,937 |
Reductions: | | |
Directors & officers insurance premium | | (972) |
Consultants | | (109) |
Reverse accruals | | (216) |
Increases: | | |
Bonus expenses based on RSU plan | | 364 |
Merit increases, headcount increase | | 50 |
Benefits including health | | 37 |
Legal & audit | | 105 |
December 31, 2004 | | $ 4,196 |
The decrease from 2003 to 2004 of approximately $741,000 was primarily the result of significantly reduced premiums for directors and officers insurance in the amount of approximately $972,000, a reduction in accrued expenses for contingencies that did not materialize of approximately $216,000, and lower spending on subcontractors and consultants in the amount of approximately $109,000 in 2004 compared to the prior year. These reductions were partially offset by increases in stock compensation expense due to our restricted stock unit program of approximately $364,000, higher legal and audit fees of approximately $105,000, increases in payroll costs as a result of 2004 merit increases and changes in headcount of approximately $50,000 and benefits cost increases of approximately $37,000. We expect our selling, general and administrative expenses to increase in 2005 over 2004 due primarily to the implementation and reporting expenses associated with compliance with the Sarbanes-Oxley Act of 2002, fundraising activities, and marketing and sales expenses associated with flywheel products.
Research and Development Expenses.
Research and development expenses (in thousands): |
December 31, 2003 | | $ 3,550 |
Reductions: | | |
Salaries and benefits due to reduction in force | (295) |
R&D materials | | (205) |
Other reductions | | (10) |
Increases: | | |
Stock compensation based on RSU plan | | 356 |
Patent legal expenses | | 89 |
Subcontractors | | 47 |
December 31, 2004 | | $ 3,532 |
The decrease from 2003 to 2004 of approximately $18,000 is primarily due to reduction in headcount during 2003 and lower purchases of research and development materials in 2004 and other reductions in 2004 of
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approximately $295,000, $205,000 and $10,000, respectively. This was partially offset by increases in stock compensation expenses due to our restricted stock unit program, increased legal expenses relating to patents on our flywheel systems, and increased use of subcontractors while developing the next-generation Smart Power M5 inverter of approximately $356,000, $89,000 and $47,000, respectively. The Company expects cost of research and development in 2005 to be somewhat higher than 2004 due to design and development activities of the Smart Energy Matrix. The costs of research and development in 2005 will be significantly higher if we begin full scale development of the Smart Energy Matrix.
Depreciation and Amortization. The decrease from 2003 to 2004 of approximately $98,000 is primarily attributable to the write-off of our patent technologies at December 31, 2003, and continuing reductions in the depreciable base of our assets caused by budgetary restrictions on capital expenditures during 2004. Depreciation in 2005 will be higher than 2004 if we begin full scale development of the Smart Energy Matrix.
Restructuring and asset impairment charges. We recognized an asset impairment charge for our flywheel patents and patents pending in 2003 of approximately $367,000. We did not recognize any restructuring or asset impairment charges during 2004 and do not expect to recognize any like charges in 2005.
Interest and Other Income/ (Expense), net.
Interest and Other Income (Expense), net (in thousands): |
December 31, 2003 | | 520 |
Reductions: | | |
Officer loan repayments | | (291) |
Interest from cash holdings | | (115) |
Loss on disposal of assets | | (25) |
Increases: | | |
Gain on sale of investment | | 3,563 |
Conversion of Evergreen Investment | | 60 |
Interest expense | | 7 |
December 31, 2004 | | 3,719 |
The increase from 2003 to 2004 of approximately $3,199,000 is primarily attributable to gains from the sale of an investment in Evergreen Solar, Inc. of approximately $3,563,000, premium received on conversion of Evergreen Series A Preferred Stock to common of approximately $60,000 and lower interest expense associated with capital leases that expired during the second half of 2003 of approximately $7,000, partially offset by lower officer loan repayments in 2004 of approximately $291,000, a decrease in interest income earned due to lower cash balances in the amount of approximately $115,000 and a loss on the disposal of capital assets of approximately $25,000.
Net Loss. As a result of the changes discussed above, the net loss for 2004 was approximately $5,330,000 which compares to a net loss in 2003 of approximately $8,618,000, a decrease of $3,288,000 or 38%.
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Liquidity and Capital Resources
| | | Year ended December 31, |
| | | 2005 | | 2004 | | 2003 |
| | | (in thousands) |
Cash and cash equivalents | | $ 13,890 | | $ 5,097 | | $ 8,909 |
Working capital | | 13,223 | | 4,213 | | 8,838 |
Cash provided by (used in) | | | | | | |
| Operating activities | | (8,832) | | (8,615) | | (7,701) |
| Investing activities | | 86 | | 4,650 | | (1,291) |
| Financing activities | | 17,540 | | (297) | | 35 |
Net decrease in cash and cash equivalents | | $ 8,794 | | $ (4,262) | | $ (8,957) |
Current ratio | | 6.4 | | 3.1 | | 4.7 |
Our cash requirements depend on many factors, including but not limited to, research and development activities, continued efforts to commercialize our products, facilities costs as well as general and administrative expenses. Since we are still in the development stage and have not yet begun our principal operations of providing frequency regulation services to the electricity grid, we do not generate enough cash from operations to satisfy our working capital requirements. We expect to make significant expenditures to fund our operations, develop technologies and explore opportunities to find and develop additional markets to sell our products. Over the last three years we have taken significant actions to reduce our cash expenditures for product development, infrastructure and production readiness by significantly reducing headcount, development spending and capital expenditures. We have focused our activity on market analysis in terms of size of markets, competitive aspects and advantages that our products could provide. We expect to use more cash resources during 2006 as we continue to work on our government research and development contracts and mobilize our engineering team to develop the 25kWh flywheel and the Smart Energy Matrix.
We must raise additional equity to execute our business plan. Based on our rate of expenditure of cash and the additional expenditures expected to support our business plan we have sufficient cash to fund operations through approximately the first quarter of 2007. We need to obtain additional investments during 2006 or 2007 to fund:
• | ongoing research and development of the 25kWh flywheel and the Smart Energy Matrix; |
• | ramp up of manufacturing capacity; | |
• | continuing as a going concern; | |
• | completion of the state demonstration contracts in California and New York; | |
• | working capital requirements; and | |
• | developing new business. | |
| | | | | | |
We have begun development of the 25kWh flywheel system, which is the core component of the Smart Energy Matrix. In order to complete development of the Smart Energy Matrix and field a full-scale one megawatt prototype we will need to raise $20 to $30 million of additional working capital.
Operating activities
Net cash used in operating activities was approximately ($8,832,000) and ($8,165,000) for the twelve months ended December 31, 2005 and 2004, respectively. The primary component to the negative cash flow from operations is from net losses. For 2005, we had a net loss of approximately ($9,312,000). This included facility related cash payments charged against restructuring reserves of approximately ($349,000), reductions to the asset impairment reserve for disposed fixed assets of approximately ($122,000), a reversal of a portion of the reserved note to our former CEO of approximately ($102,000), offset by non-cash employee stock compensation of approximately $646,000, a reduction in restricted cash related to the lease of our facility of approximately
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$90,000 and depreciation and amortization of approximately $83,000. Changes in operating assets and liabilities generated approximately $234,000 of cash during 2005.
For 2004, we had a net loss of approximately ($5,330,000). This included facility related cash payments charged against restructuring reserves of approximately ($343,000), gain on the sale of investments of approximately ($3,563,000), reductions to the asset impairment reserve for disposed fixed assets of approximately ($10,000), a reversal of a portion of the reserved note to our former CEO of approximately ($22,000) net of accrued interest reserved of $4,000, offset by employee stock compensation of approximately $701,000, compensation expense from stock options issued for consulting services of approximately $16,000, loss on the sale or disposal of fixed assets of approximately $25,000, a reduction in restricted cash related to (i) the lease of our facility of $45,000 and (ii) the expiration of a vendor contract of approximately $50,000, and depreciation and amortization of approximately $187,000. Changes in operating assets and liabilities generated approximately $75,000 of cash during 2004.
Investing Activities
Net cash generated in investing activities was approximately $86,000 and $4,650,000 for 2005 and 2004, respectively. The principal source of cash during 2005 was proceeds from the sale of property and equipment of approximately $127,000, partially offset by the purchase of capital equipment of approximately ($42,000). The principal source of cash during 2004 was proceeds from the sale of our investment in Evergreen Solar, Inc. of approximately $4,753,000 and the sale of capital equipment of approximately $18,000, partially offset by the receipt of dividends from the Evergreen investment, paid in stock, of approximately $(90,000) and the purchase of capital equipment of approximately ($31,000).
Financing Activities
Net cash generated/(used) by financing activities was approximately $17,540,000 and ($297,000) for 2005 and 2004, respectively. For 2005 the primary source of cash was proceeds from the issuance of our common stock in two separate PIPE transactions in the amount of approximately $17,108,000, exercise of stock options of approximately $713,000, and the expensing of capitalized deferred financing costs for a failed business combination and approximately $4,000 for shares issued under our employee stock purchase plan, offset by purchases of our common stock to treasury of ($613,000). For 2004, the cash used by financing activities included prepaid financing costs related to our financing activities of approximately $(328,000), offset by cash generated of approximately $27,000 related to the exercise of stock options and approximately $4,000 for shares issued under the employee stock purchase plan.
As part of our new business development, we may evaluate possible acquisitions of enterprises or technologies that we consider synergistic from a market, technology or product perspective. We may make investments in companies for strategic business reasons. Because our primary motivation in making these investments may not be to realize a profit on the investment itself, but rather to expand our business prospects, these investments may lack any financial return to the Company and may result in a loss of principal and may lack liquidity.
The following table summarizes our commitments at December 31, 2005:
| | Year ending December 31, | | |
Description of Commitment | | 2006 | | 2007 | | Thereafter | | Total |
Operating leases | | 529,413 | | 397,059 | | - | | 926,472 |
Purchase obligations | | 282,128 | | - | | - | | 282,128 |
Total Commitments | | 811,541 | | 397,059 | | - | | 1,208,600 |
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The amounts listed for operating leases represent payments for the occupancy of our principal executive offices, laboratory and manufacturing facilities located in Wilmington, Massachusetts. Our commitment on this lease is secured by an irrevocable letter of credit in the amount of $219,568. A cash deposit secures this letter of credit. We also have non-cancelable purchase obligations that include firm orders with vendors for materials relating to our research and development contracts.
Investments
On May 24, 2005 and July 26, 2005 Perseus 2000 Expansion, L.L.C., an affiliate of one of our then largest shareholders, invested an aggregate of $2.9 million and received 3,452,381 shares of our common stock, and a warrant to purchase 800,000 shares of our common stock at $1.008, and another affiliate, Perseus Capital, L.L.C., paid $0.1 million for an extension to an existing warrant extending its term for two additional years.
On November 8, 2005, we distributed 9,868,421 newly issued shares of common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended. The number of shares was determined by dividing the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date. We also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21. Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction. This transaction resulted in net proceeds of approximately $14 million net of expenses and commissions in the amount of approximately $1 million. We have agreed to use these proceeds for working capital purposes only. For further details, see the Securities Purchase Agreement which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2005.
On April 22, 2005, we entered into an agreement to acquire NxtPhase T&D Corporation (“NxtPhase”), a privately held Canadian corporation. Under terms of the agreement, we would acquire NxtPhase by issuing approximately 19 million new shares of Beacon’s common stock to NxtPhase stockholders and employees. On November 22, 2005, we agreed to terminate the proposed business combination with NxtPhase and to pay NxtPhase $150,000 as a release from any and all liabilities related to the agreement. We also expensed approximately $850,000 of related deferred professional fees in the 3rd quarter of 2005.
We must raise additional equity to execute our business plan. Based on our rate of expenditure of cash and the additional expenditures expected in support of our business plan, we have sufficient cash to fund operations through approximately the first quarter of 2007. We will seek further equity investment in 2006 to fund:
• | ongoing research and development, including costs to build a full scale prototype of the Smart Energy Matrix; |
• | anticipated production in 2007; | |
• | continuing as a going concern; | |
• | completion of the state demonstration contracts in California and New York; |
• | working capital requirements; and | |
• | developing new business. | |
| | | | | |
Inasmuch as we are not expecting to become cash flow positive until at least 2009, our ability to continue as a going concern will depend on our ability to raise additional capital. We may not be able to raise this capital at all, or if it we are able to do so, it may be on terms that are adverse to shareholders. We believe that debt financing will not be available to us to meet our cash requirements for 2006 or 2007.
Inflation
Our operations have not been materially affected by inflation.
- 29 -
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our cash equivalents and investments, all of which have maturities of less than ninety days, could expose us to interest rate risk. At December 31, 2005, we had approximately $80,000 of cash equivalents that were held in a non-interest bearing checking account. Also at December 31, 2005, we had approximately $13.8 million of cash equivalents that were held in interest-bearing money market accounts at high-quality financial institutions. 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 approximately $ 18,000, which we do not believe is material.
Item 8. Financial Statements and Supplementary Data
Our financial statements required by this item are attached to this Report beginning on page 33, Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Effective August 27, 2004, our former independent registered public accounting firm, Deloitte & Touche LLP (“Deloitte”), resigned as the independent registered public accounting firm. Deloitte performed the review and audit of our books and accounts for the fiscal years ending December 31, 2003 and 2002 and the interim quarterly reviews through the quarter ended June 30, 2004. The resignation was the decision of Deloitte. There were no disagreements during the past two fiscal years and the subsequent interim periods ending June 30, 2004 and through August 27, 2004 between Deloitte and our management on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Deloitte, would have caused it to make reference thereto in its reports on the financial statements for such years.
On October 29, 2004, the audit committee of the board of directors of the Registrant approved the engagement of Miller Wachman LLP (“Miller Wachman”) as the Registrant’s new independent registered public accounting firm.
- 30 -
Item 9A. Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize, and report information required to be included in our periodic SEC filings within the required time period. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
In addition, our management, with the participation of the chief executive officer and chief financial officer, has evaluated whether any change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) occurred during the period covered by this Annual Report on Form 10-K. Based on that evaluation, the chief executive officer and chief financial officer have concluded that there has been no change in our internal control over financial reporting during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
- 31 -
Part III
Item 10. | Directors and Executive Officers of the Registrant |
The information required by this item is incorporated by reference to Beacon’s Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2005.
Item 11. | Executive Compensation |
The information required by this item is incorporated by reference to Beacon’s Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2005.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to Beacon’s Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2005.
Item 13. | Certain Relationships and Related Transactions |
The information required by this item is incorporated by reference to Beacon’s Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2005.
Item 14. | Principal Accounting Fees and Services |
The information required by this item is incorporated by reference to Beacon’s Proxy Statement for its 2006 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2005.
- 32 -
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) | 1. Financial Statements |
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Index to Consolidated Financial Statements
| Page |
Report of Independent Registered Public Accounting Firm | 34 |
Consolidated Balance Sheets at December 31, 2005 and 2004 | 35 |
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 and for the period May 8, 1997 (date of inception) to December 31, 2005 | 36 |
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003 and for the period May 8, 1997 (date of inception) to December 31, 2005 | 37 |
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 and for the period May 8, 1997 (date of inception) to December 31, 2005 | 40 |
Notes to Consolidated Financial Statements | 43 |
- 33 -
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Beacon Power Corporation:
We have audited the accompanying consolidated balance sheets of Beacon Power Corporation and Subsidiaries (the "Company") (a development stage company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2005 and for the period from May 8, 1997 (date of inception) through December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Beacon Power Corporation and subsidiaries as of December 31, 2005 and 2004 and the results of their operations and their cash flows for the three years in the period ended December 31, 2005 and the period from May 8, 1997 (date of inception) through December 31, 2005 in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's recurring losses from operations and negative cash flows raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Miller Wachman, LLP
Boston, Massachusetts
March 22, 2006
- 34 -
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
| | | | December 31, |
| | | | 2005 | | 2004 |
Assets | | | | |
Current assets: | | | | |
| Cash and cash equivalents | | $ 13,890,162 | | $ 5,097,188 |
| Accounts receivable, trade | | 588,440 | | 52,105 |
| Inventory | | -- | | 222,593 |
| Unbilled costs on contracts in progress | | 437,759 | | -- |
| Prepaid expenses and other current assets | | 777,385 | | 817,396 |
| | Total current assets | | 15,693,746 | | 6,189,282 |
| | | | | | |
Property and equipment, net | | 212,296 | | 258,647 |
Restricted cash | | 219,568 | | 310,011 |
Other assets and deferred financing costs | | -- | | 327,646 |
| | | | | | |
Total assets | | $ 16,125,610 | | $ 7,085,586 |
| | | | | | |
Liabilities and Stockholders' Equity | | | | |
Current liabilities: | | | | |
| Accounts payable | | $ 137,290 | | $ 389,189 |
| Accrued compensation and benefits | | 151,318 | | 130,609 |
| Other accrued expenses | | 844,742 | | 393,569 |
| Advance billings on contracts | | 74,820 | | -- |
| Accrued contract loss | | 548,614 | | -- |
| Restructuring reserve | | 713,469 | | 1,062,644 |
| | Total current liabilities | | 2,470,253 | | 1,976,011 |
| | | | | | |
Commitments and contingent liabilities (Note 4) | | | | |
| | | | | | |
Stockholders' equity: | | | | |
| Preferred Stock, $.01 par value; 10,000,000 shares authorized | | | | |
| no shares issued or outstanding | | -- | | -- |
| Common stock, $.01 par value; 110,000,000 shares authorized; | | | | |
| 58,700,036 and 43,788,810 shares issued and outstanding at | | | | |
| December 31, 2005 and 2004, respectively | | 587,000 | | 437,888 |
| Deferred stock compensation | | (1,063,145) | | (707,167) |
| Additional paid-in-capital | | 153,089,842 | | 134,411,911 |
| Deficit accumulated during the development stage | | (138,245,501) | | (128,933,397) |
| Treasury stock, 421,692 shares, at cost | | (712,839) | | (99,660) |
| | Total stockholders' equity | | 13,655,357 | | 5,109,575 |
| | | | | | |
Total liabilities and stockholders' equity | | $ 16,125,610 | | $ 7,085,586 |
See notes to consolidated financial statements.
- 35 -
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
| | | | | | | | | | | Cumulative from |
| | | | | | | | | | | May 8, 1997 |
| | | | | | | | | | | (date of inception) |
| | | | | | | | | | | through December 31, |
| | | | | 2005 | | 2004 | | 2003 | | 2005 |
Revenue | | $ 1,487,258 | | $ 324,694 | | $ - | | $ 2,363,136 |
Cost of goods sold | | 1,575,240 | | 1,457,869 | | - | | 3,033,109 |
Gross profit | | (87,982) | | (1,133,175) | | - | | (669,973) |
Operating expenses: | | | | | | | | |
| Selling, general and administrative | | 6,334,219 | | 4,196,371 | | 4,936,575 | | 38,590,193 |
| Research and development | | 1,408,233 | | 3,532,059 | | 3,549,592 | | 55,283,778 |
| Loss on contract commitments | | 1,534,298 | | - | | - | | 1,910,272 |
| Depreciation and amortization | | 83,031 | | 187,230 | | 284,733 | | 4,220,997 |
| Restructuring charges | | - | | - | | - | | 2,159,280 |
| Loss on impairment of assets | | - | | - | | 366,788 | | 4,663,916 |
| | | Total operating expenses | | 9,359,781 | | 7,915,660 | | 9,137,688 | | 106,828,436 |
Loss from operations | | (9,447,763) | | (9,048,835) | | (9,137,688) | | (107,498,409) |
Other income: | | | | | | | | |
Interest income | | 162,044 | | 102,908 | | 217,964 | | 4,044,919 |
Interest expense | | - | | - | | (6,713) | | (1,093,703) |
Gain on sale of investment | | - | | 3,562,582 | | - | | 3,562,582 |
Other income (expense) | | (26,385) | | 53,385 | | 308,424 | | (254,696) |
| Total other income (expense), net | | 135,659 | | 3,718,875 | | 519,675 | | 6,259,102 |
Net loss | | (9,312,104) | | (5,329,960) | | (8,618,013) | | (101,239,307) |
Preferred stock dividends | | - | | - | | - | | (36,825,680) |
Accretion of convertible preferred stock | | - | | - | | - | | (113,014) |
Loss to common shareholders | | $ (9,312,104) | | $ (5,329,960) | | $ (8,618,013) | | $ (138,178,001) |
Loss per share, basic and diluted | | $ (0.20) | | $ (0.12) | | $ (0.20) | | |
Weighted-average common shares outstanding | 47,665,868 | | 43,452,727 | | 42,885,675 | | |
See notes to consolidated financial statements.
- 36 -
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
| Class A | Class C | | | Deferred | Deferred |
| Preferred Stock | Preferred Stock | Common Stock | Consulting | Stock |
| Shares | Amount | Shares | Amount | Shares | Amount | Expense | Compensation |
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION) | -- | $ -- | -- | $ -- | -- | $ -- | $ -- | $ -- |
Issuance of Founder’s Shares | -- | -- | -- | -- | 6,750,000 | 67,500 | -- | -- |
Issuance of Class A preferred stock | 1,390,000 | 5,662,500 | -- | -- | -- | -- | (275,000) | -- |
Recapitalization | 3,373,313 | 67,466 | -- | -- | (6,746,626) | (67,466) | -- | -- |
Rounding for fractional shares | -- | -- | -- | -- | (2) | -- | -- | -- |
Issuance of Class C preferred and common stock | -- | -- | 6 | 29,866 | 13,476 | 134 | -- | -- |
Deferred Consulting | -- | -- | -- | -- | -- | -- | 773,284 | -- |
Series A Issuance for Consulting | -- | -- | -- | -- | 134,464 | 1,345 | (498,284) | -- |
Repayment of subscription receivable | -- | -- | -- | -- | -- | -- | -- | -- |
Issuance of Series A preferred stock for services and interest on loans | 4,594 | 11,485 | -- | -- | -- | -- | -- | -- |
Dividend on preferred stock | -- | -- | -- | -- | -- | -- | -- | -- |
Accretion of redeemable preferred stock to redemption value | -- | -- | -- | -- | -- | -- | -- | -- |
Deferred Stock Compensation | -- | -- | -- | -- | -- | -- | -- | (1,269,445) |
Issuance of stock options for consulting services | -- | -- | -- | -- | -- | -- | -- | (47,892) |
Issuance of Stock Options to settle lawsuit | -- | -- | -- | -- | -- | -- | -- | -- |
Amortization of Deferred Stock Compensation | -- | -- | -- | -- | -- | -- | -- | 1,298,924 |
Issuance of warrants | -- | -- | -- | -- | -- | -- | -- | -- |
Proceeds from stock offering, net of related expenses | -- | -- | -- | -- | 9,200,000 | 92,000 | -- | -- |
Conversion of Series A preferred stock | (4,767,907) | (5,741,451) | -- | -- | 9,535,814 | 95,358 | -- | -- |
Conversion of Series C preferred stock | -- | -- | (6) | (29,866) | 12 | -- | -- | -- |
Conversion of convertible preferred stock | -- | -- | -- | -- | 19,823,704 | 198,237 | -- | -- |
Payment of accrued dividend | -- | -- | -- | -- | 859,330 | 8,593 | -- | -- |
Cashless Warrant exercise | -- | -- | -- | -- | 1,982,876 | 19,829 | -- | -- |
Exercise of Stock Options | -- | -- | -- | -- | 1,162,852 | 11,629 | -- | -- |
Shares issued through ESPP | -- | -- | -- | -- | 96,997 | 970 | -- | -- |
Option extension for CEO | -- | -- | -- | -- | -- | -- | -- | -- |
Option extension for severed employees | -- | -- | -- | -- | -- | -- | -- | -- |
Purchase of Treasury Stock | -- | -- | -- | -- | -- | -- | -- | -- |
- 37 -
Net loss | -- | -- | -- | -- | -- | -- | -- | -- |
Balance, December 31, 2002 | -- | -- | -- | -- | 42,812,897 | 428,129 | -- | (18,413) |
Deferred Stock Compensation revaluation | -- | -- | -- | -- | -- | -- | -- | (87,031) |
Issuance of restricted stock units for bonus | -- | -- | -- | -- | -- | -- | -- | (727,195) |
Shares issued through ESPP | -- | -- | -- | -- | 5,494 | 54 | -- | -- |
Exercise of Stock Options | -- | -- | -- | -- | 289,135 | 2,892 | -- | -- |
Net loss | -- | -- | -- | -- | -- | -- | -- | -- |
Balance, December 31, 2003 | -- | -- | -- | -- | 43,107,526 | 431,075 | -- | (832,639) |
Deferred Stock Compensation revaluation | -- | -- | -- | -- | -- | -- | -- | 78,083 |
Issuance of restricted stock units for bonus | -- | -- | -- | -- | -- | -- | -- | (679,807) |
Amortize deferred stock compensation | -- | -- | -- | -- | 643,160 | 6,431 | -- | 727,196 |
Shares issued through ESPP | -- | -- | -- | -- | 8,124 | 82 | -- | -- |
Issuance of non-employee stock options | -- | -- | -- | -- | -- | -- | -- | -- |
Exercise of Stock Options | -- | -- | -- | -- | 30,000 | 300 | -- | -- |
Net loss | -- | -- | -- | -- | -- | -- | -- | -- |
Balance, December 31, 2004 | -- | -- | -- | -- | 43,788,810 | 437,888 | -- | (707,167) |
Deferred stock compensation revaluation | -- | -- | -- | -- | -- | -- | -- | 27,360 |
Issuance of restricted stock units for bonus | -- | -- | -- | -- | -- | -- | -- | (1,063,145) |
Amortize deferred stock compensation and issue RSUs | -- | -- | -- | -- | 593,080 | 5,931 | -- | 679,807 |
Shares issued through ESPP | -- | -- | -- | -- | 7,273 | 73 | -- | -- |
Issuance of non-employee stock options | -- | -- | -- | -- | -- | -- | -- | -- |
Cashless exercise of stock warrants | -- | -- | -- | -- | 24,215 | 242 | -- | -- |
Exercise of stock options | -- | -- | -- | -- | 965,856 | 9,658 | -- | -- |
Issuance of stock for cash | -- | -- | -- | -- | 13,320,802 | 133,208 | -- | -- |
Stock buyback to pay officer loan | -- | -- | -- | -- | -- | -- | -- | -- |
Net loss | -- | -- | -- | -- | -- | -- | -- | -- |
Balance, December 31, 2005 | -- | $ -- | -- | $ -- | 58,700,036 | $ 587,000 | $ -- | $ (1,063,145) |
- 38 -
| | | | | | Total |
| Additional | Stock | | | | Stockholders' |
| Paid-in | Subscription | Retained | Treasury Stock | (Deficiency) |
| Capital | Receivable | Deficit | Shares | Amount | Equity |
BALANCE AT MAY 8, 1997 (DATE OF INCEPTION) | $ -- | $ -- | $ -- | -- | $ -- | $ -- |
Issuance of Founder’s Shares | -- | -- | (67,500) | -- | -- | -- |
Issuance of Class A preferred stock | -- | (5,000,000) | -- | -- | -- | 387,500 |
Recapitalization | -- | -- | -- | -- | -- | -- |
Rounding for fractional shares | -- | -- | -- | -- | -- | -- |
Issuance of Class C preferred and common stock | -- | -- | -- | -- | -- | 30,000 |
Deferred Consulting | -- | -- | -- | -- | -- | 773,284 |
Series A Issuance for Consulting | 496,939 | -- | -- | -- | -- | -- |
Repayment of subscription receivable | -- | 5,000,000 | -- | -- | -- | 5,000,000 |
Issuance of Series A preferred stock for services and interest on loans | -- | -- | -- | -- | -- | 11,485 |
Dividend on preferred stock | -- | -- | (2,245,680) | -- | -- | (2,245,680) |
Accretion of redeemable preferred stock to redemption value | -- | -- | (113,014) | -- | -- | (113,014) |
Deferred Stock Compensation | 1,269,445 | -- | -- | -- | -- | -- |
Issuance of stock options for consulting services | 47,892 | -- | -- | -- | -- | -- |
Issuance of Stock Options to settle lawsuit | 303,160 | -- | -- | -- | -- | 303,160 |
Amortization of Deferred Stock Compensation | -- | -- | -- | -- | -- | 1,298,924 |
Issuance of warrants | 36,520,366 | -- | (34,580,000) | -- | -- | 1,940,366 |
Proceeds from stock offering, net of related expenses | 49,249,537 | -- | -- | -- | -- | 49,341,537 |
Conversion of Series A preferred stock | 5,646,093 | -- | -- | -- | -- | -- |
Conversion of Series C preferred stock | 29,866 | -- | -- | -- | -- | -- |
Conversion of convertible preferred stock | 36,496,431 | -- | -- | -- | -- | 36,694,668 |
Payment of accrued dividend | 1,077,714 | -- | -- | -- | -- | 1,086,307 |
Cashless Warrant exercise | (19,829) | -- | -- | -- | -- | -- |
Exercise of Stock Options | 1,164,041 | -- | -- | -- | -- | 1,175,670 |
Shares issued through ESPP | 122,279 | -- | -- | -- | -- | 123,249 |
Option extension for CEO | 315,394 | -- | -- | -- | -- | 315,394 |
Option extension for severed employees | 31,197 | -- | -- | -- | -- | 31,197 |
Purchase of Treasury Stock | -- | -- | -- | 132,000 | (99,660) | (99,660) |
Net loss | -- | -- | (77,979,230) | -- | -- | (77,979,230) |
Balance, December 31, 2002 | 132,750,525 | -- | (114,985,424) | 132,000 | (99,660) | 18,075,157 |
- 39 -
Deferred Stock Compensation revaluation | 87,031 | -- | -- | -- | -- | -- |
Issuance of restricted stock units for bonus | 727,195 | -- | -- | -- | -- | -- |
Shares issued through ESPP | 911 | -- | -- | -- | -- | 965 |
Exercise of Stock Options | 231,005 | -- | -- | -- | -- | 233,897 |
Net loss | -- | -- | (8,618,013) | -- | -- | (8,618,013) |
Balance, December 31, 2003 | 133,796,667 | -- | (123,603,437) | 132,000 | (99,660) | 9,692,006 |
Deferred Stock Compensation revaluation | (78,083) | -- | -- | -- | -- | -- |
Issuance of restricted stock units for bonus | 679,807 | -- | -- | -- | -- | -- |
Amortize deferred stock compensation | (33,022) | | | | | 700,605 |
Shares issued through ESPP | 3,854 | -- | -- | -- | -- | 3,936 |
Issuance of non-employee stock options | 16,288 | -- | -- | -- | -- | 16,288 |
Exercise of Stock Options | 26,400 | -- | -- | -- | -- | 26,700 |
Net loss | -- | -- | (5,329,960) | -- | -- | (5,329,960) |
Balance, December 31, 2004 | 134,411,911 | -- | (128,933,397) | 132,000 | (99,660) | 5,109,575 |
Deferred stock compensation revaluation | (27,360) | -- | -- | -- | -- | -- |
Issuance of restricted stock units for bonus | 1,063,145 | -- | -- | 212,940 | (455,838) | (455,838) |
Amortize deferred stock compensation and issue RSUs | (40,020) | -- | -- | -- | -- | 645,718 |
Shares issued through ESPP | 3,842 | -- | -- | -- | -- | 3,915 |
Issuance of non-employee stock options | -- | -- | -- | -- | -- | -- |
Cashless exercise of stock warrants | (242) | -- | -- | -- | -- | -- |
Exercise of stock options | 703,297 | -- | -- | -- | -- | 712,955 |
Issuance of stock for cash | 16,975,269 | -- | -- | -- | -- | 17,108,477 |
Stock buyback to pay officer loan | -- | -- | -- | 76,752 | (157,341) | (157,341) |
Net loss | -- | -- | (9,312,104) | -- | -- | (9,312,104) |
Balance, December 31, 2005 | $ 153,089,842 | $ -- | $ (138,245,501) | 421,692 | $ (712,839) | $13,655,357 |
See notes to consolidated financial statements.
- 40 -
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statement of Cash Flows
| | | | | | Cumulative from |
| | | | | | May 8, 1997 |
| | | | | | (date of inception) |
| | | | | through December |
| | | 2005 | 2004 | 2003 | 31, 2005 |
Cash flows from operating activities: | | | | |
| Net loss | $ (9,312,104) | $ (5,329,960) | $ (8,618,013) | $ (101,239,307) |
| Adjustments to reconcile net loss to net cash used in | | | | |
operating activities: | | | | |
| | Depreciation and amortization | 83,031 | 187,230 | 284,734 | 4,220,998 |
| | Loss on sale of fixed assets | -- | 25,301 | -- | 196,169 |
| | Impairment of assets | (122,186) | (9,703) | 366,788 | 4,532,027 |
| | Restricted cash | 90,443 | 95,221 | (50,000) | (219,568) |
| | (Expenses paid) restructuring charge | (349,175) | (343,547) | (343,547) | 713,469 |
| | Reserve for officers note | (102,044) | (17,931) | (308,423) | -- |
| | Interest expense relating to issuance of warrants | -- | -- | -- | 371,000 |
| | Non-cash charge for change in option terms | -- | -- | -- | 346,591 |
| | Non-cash charge for settlement of lawsuit | -- | -- | -- | 303,160 |
| | Amortization of deferred consulting expense, net | -- | -- | -- | 1,160,784 |
| | Amortization of deferred stock compensation | 645,718 | 700,605 | -- | 2,636,576 |
| | Options and warrants issued for consulting services | -- | 16,288 | -- | 1,585,654 |
| | Services and interest expense paid in preferred stock | -- | -- | -- | 11,485 |
| | Gain on sale of investments | -- | (3,562,582) | -- | (3,562,582) |
| Changes in operating assets and liabilities: | | | | |
| | Accounts receivable | (536,335) | 76,028 | (128,133) | (588,440) |
| | Inventory | 222,593 | 16,091 | (238,684) | -- |
| | Unbilled costs on government contracts | (437,759) | -- | -- | (437,759) |
| | Prepaid expenses and other current assets | 142,055 | (26,239) | 1,310,652 | (877,045) |
| | Accounts payable | (251,899) | 241,114 | 70,749 | 137,290 |
| | Accrued compensation and benefits | 20,709 | (25,391) | (70,623) | 151,318 |
| | Advance billings on contracts | 74,820 | -- | -- | 74,820 |
| | Accrued interest | -- | -- | -- | 275,560 |
- 41 -
| | Dividend receivable | -- | 63,758 | (63,758) | -- |
| | Accrued loss on contract commitments | 548,614 | -- | -- | 548,614 |
| | Other accrued expenses and current liabilities | 451,173 | (270,958) | 87,646 | 853,412 |
| | Net cash used in operating activities | (8,832,346) | (8,164,675) | (7,700,612) | (88,805,774) |
Cash flows from investing activities: | | | | |
| Purchase of investments | -- | (90,352) | (1,100,000) | (1,190,352) |
| Sale of investments | -- | 4,752,934 | -- | 4,752,934 |
| Increase in other assets | -- | -- | (236,854) | (412,072) |
| Purchases of property and equipment | (41,851) | (30,845) | (7,993) | (8,494,404) |
| Sale of property and equipment | 127,357 | 17,875 | 53,365 | 198,597 |
| | Net cash used in investing activities | 85,506 | 4,649,612 | (1,291,482) | (5,145,297) |
Cash flows from financing activities: | | | | |
| Initial public stock offering, net of expenses | -- | -- | -- | 49,341,537 |
| Private stock offering, net of expenses | 17,108,477 | -- | -- | 17,108,477 |
| Payment of dividends | -- | -- | -- | (1,159,373) |
| Shares issued under employee stock purchase plan | 3,915 | 3,936 | 965 | 132,065 |
| Exercise of employee stock options | 712,955 | 26,700 | 233,897 | 2,149,222 |
| Issuance of preferred stock | -- | -- | -- | 32,868,028 |
| Repayment of subscription receivable | -- | -- | -- | 5,000,000 |
| Proceeds from capital leases | -- | -- | -- | 495,851 |
| Repayment of capital leases | -- | -- | (200,041) | (1,031,395) |
| Prepaid financing costs | 327,646 | (327,646) | -- | -- |
| Repurchase company stock | (613,179) | -- | -- | (613,179) |
| Proceeds from notes payable issued to investors | -- | -- | -- | 3,550,000 |
| | Net cash provided by (used in) financing activities | 17,539,814 | (297,010) | 34,821 | 107,841,233 |
(Decrease)increase in cash and cash equivalents | 8,792,974 | (3,812,073) | (8,957,273) | 13,890,162 |
Cash and cash equivalents, beginning of period | 5,097,188 | 8,909,261 | 17,866,534 | -- |
Cash and cash equivalents, end of period | $ 13,890,162 | $ 5,097,188 | $ 8,909,261 | $ 13,890,162 |
Supplemental disclosure of cash flow information: | | | | |
| Cash paid for interest | $ - | $ - | $ 6,700 | $ 488,126 |
| Cash paid for taxes | $ - | $ 1,500 | $ 4,700 | $ 32,000 |
| Assets acquired through capital lease | $ - | $ - | $ - | $ 535,445 |
See notes to consolidated financial statements.
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BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Operations
Nature of Business. Beacon Power Corporation (collectively the "Company", "Beacon", “we”, “our”, or “us”) (a development stage company) was incorporated on May 8, 1997 as a wholly owned subsidiary of SatCon Technology Corporation ("SatCon"). Since our inception, we have been primarily engaged in the development of flywheel devices for storing and transmitting kinetic energy. As discussed in Note 6, during the fourth quarter of 2000, we completed an initial public offering of our common stock and raised approximately $49.3 million net of offering expenses. Because we have not yet generated a significant amount of revenue from our principal operations, we are accounted for as a development stage company under Statement of Financial Accounting Standards No. 7.
We have a single operating segment, developing alternative power sources. Our organizational structure has no divisions or subsidiaries dictated by product lines, geography or customer type. In 2005 we derived approximately 91% of our revenue from our research and development contracts; two of those contracts accounted for 85% of our total revenue. Although the loss of any single contract may have a material impact on our financial statements, it would not have a material impact on our business since we derive most of our working capital from equity offerings in order to develop our flywheel systems.
We do not expect to become profitable or cash flow positive until at least 2009 and must raise additional equity to execute our business plan and continue as a going concern. On November 8, 2005, we distributed 9,868,421 newly issued shares of our common stock at a discount to market of $1.52. We also issued five-year warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21. This transaction resulted in net proceeds of approximately $14 million net of expenses and commissions in the amount of approximately $1 million. We have agreed to use these proceeds for working capital purposes only. For further details, see the Securities Purchase Agreement which was filed as Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2005.
On May 24, 2005 and July 26, 2005 Perseus made investments of $1.5 million for a total of $3 million in exchange for 1,666,667 and 1,785,714 shares of common stock, respectively and the extension for two years of an existing warrant already owned by Perseus. Based on our current cash usage rates and additional expenditures expected in support of our business plan, we have only enough cash to fund operations through approximately the first quarter of 2007. We will seek to obtain an equity investment during 2006 to cover expenses relating to continuing operations, working capital, 25kWh flywheel prototype development and new business development.
Operations. We have experienced net losses since our inception and, as of December 31, 2005, had an accumulated deficit of approximately $138.2 million. We are focused on the commercialization of our Smart Energy Matrix flywheel system for frequency regulation and completion of our government research and development contracts. This ongoing research and development will require substantial additional outlays of capital. We have taken significant actions over the last three years to reduce our cash expenditures for product development, infrastructure and production readiness. However, our efforts going forward will be expanded as we have now identified a sizeable market for our flywheel products. Expenditures under two state government contracts for the development of a one-tenth-power prototype of our Smart Energy Matrix will continue. We have continued, on a reduced level, production of our inverter product for solar energy applications. Although we are continuing to support the product, we do not believe that inverters will be a significant portion of our business going forward. Inverter inventory valuation write-downs were recorded during 2004 in the amount of approximately $1,025,000, and a provision for future inverter warranty expenditures of approximately $28,000 was also recorded.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
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 had minimal revenues, and incurred significant
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losses of approximately $9,312,000, $5,330,000, and $8,618,000 and cash decreases from operations of approximately $8,832,000, $8,165,000, and $7,701,000, during the years ended December 31, 2005, 2004 and 2003, respectively. We have approximately $13,890,000 of cash and cash equivalents on hand at December 31, 2005 which is adequate to fund operations through approximately the first quarter of 2007. Since our operating cash requirements far exceed the cash generated from operations, we may be unable to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern.
We recognize that our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to allow us to satisfy our obligations on a timely basis. The generation of sufficient cash flow is dependent, in the short term, on our ability to obtain adequate equity investments, and in the long term, on the successful expansion of our share of the market for our current products and the establishment of new markets for products under development. We believe that the successful achievement of these initiatives should provide us with sufficient resources to meet our cash requirements. In addition we are also considering a number of other strategic financing alternatives, and have incurred substantial costs in these efforts; however, no assurance can be made with respect to the success of these efforts or the viability of our company.
Accounting Principles. The accompanying consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America.
Consolidation. The accompanying consolidated financial statements include the accounts of Beacon Power Corporation and our subsidiary Beacon Power Securities Corporation. Our other subsidiary, Beacon Acquisition Co. was inactive in 2005 and was dissolved in 2006. All significant inter-company accounts and transactions have been eliminated in consolidation.
Recapitalization. The accompanying financial statements reflect a recapitalization of the Company in 1997 when one shareholder exchanged shares of common stock for Class A preferred stock.
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.
Cash and Cash Equivalents. Cash and cash equivalents include demand deposits and highly liquid investments with maturity of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value.
Accounts Receivable and Allowance for Doubtful Accounts. We evaluate the collectibility of our open receivables on an ongoing basis. Specific reserves for bad debt are recorded based on the age of receivables, and when we are notified of a customer's inability to satisfy its debt obligations, such as in the event of a bankruptcy filing. We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts due from our customers. Our estimate is based on limited historical collection experience and a review of the current status of trade accounts receivable. Accounts receivable are presented in our balance sheets net of an allowance for doubtful accounts of $13,230 and $22,850 at December 31, 2005 and 2004, respectively.
Two of our contracts contain holdback provisions that allow our customers to withhold 10% from each invoice payment. As of December 31, 2005, approximately $49,000 of our accounts receivable balance represented holdbacks. This holdback is payable once work has been satisfactorily completed and the final report has been received and approved. We believe these holdbacks will be collected upon completion of the contract, and therefore have not recorded any reserve against these amounts.
Inventories. Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in process and finished goods held for resale. Inventory balances are comprised of the following amounts as of December 31, 2005 and 2004:
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| | December 31, 2005 | | December 31, 2004 |
Raw materials | | $ - | | $ 176,349 |
Work in progress | | - | | 46,244 |
Finished goods | | - | | - |
Inventories, net | | $ - | | $ 222,593 |
Unbilled costs on contracts in process. Contract costs that we incur, such as material purchases, direct labor and overheads, in advance of billings to customers, is recorded as a current asset in our balance sheet as “Unbilled costs on contracts in process.”
Prepaid Expenses and Other Current Assets. Included in prepaid expenses at December 31, 2005 and 2004 are primarily prepaid insurance premiums of approximately $654,000 and $681,000, respectively, primarily relating to directors and officers liability insurance and other prepaid items including patent retainers and advances to vendors for long-lead orders.
Property and Equipment. Property and equipment, including leasehold improvements, are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets.
Other Assets. Other assets consist primarily of deferred financing costs relating to our equity raising activities and due diligence of possible acquisitions and includes expenditures for legal, business valuation and consulting services.
Loss on Contract Commitments. When we have contract commitments that are firm, have fixed-prices, and the direct costs to manufacture products covered by our firm contract commitments are in excess of the fixed selling prices, revenue and cost of revenue on such contract commitments are recorded as deliveries are made. Direct costs consist of materials and direct labor costs. Estimates of costs to manufacture products are reviewed and revised periodically and changes in estimated losses from such revisions are recorded in the accounting period in which the revisions are made. At December 31, 2005 we have made an evaluation and accrued for losses expected on all of our research and development contracts. At December 31, 2004 we had no contract commitments that required establishing a loss on contract commitment reserve.
Long-Lived Assets. In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets to be held and used are reviewed to determine whether any events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The conditions considered include whether or not the asset is in service, has become obsolete, or whether external market circumstances indicate that the carrying amount may not be recoverable. We recognize a loss for the difference between the estimated fair value of the asset and the carrying amount. The fair value of the asset is measured using either available market prices or estimated discounted cash flows.
Other assets and deferred financing costs. We will capitalize our direct costs incurred to raise capital or to acquire an entity in a business combination. 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.
Advance billings on contracts – We may receive performance-based payments and progress payments from customers which may exceed costs incurred on certain contracts, including contracts with agencies of the U.S. Government. Such advances are classified as current liabilities.
Restructuring and asset impairment charges. We periodically evaluate all of our property and equipment as required by Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” In 2002, we incurred a restructuring and impairment charge of $6.5 million of which $4.3 million represents impaired capital equipment and leasehold improvements, $.3 million relates to severance costs and $1.9 million relates to a reserve against future lease payments and related facility costs. The reserve against future lease payments is classified as “Restructuring Reserve” in the current liabilities section of the balance sheet.
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The restructuring reserves are as follows:
| | December 31, |
| | 2005 | | 2004 |
Beginning balance | | $ 1,062,644 | | $ 1,406,191 |
Charges for the period | | - | | - |
Payments | | (349,175) | | (343,547) |
Ending balance | | $ 713,469 | | $ 1,062,644 |
Revenue Recognition. Although we have shipped products, and recorded contract revenues, our operations have not yet reached a level that would qualify it to emerge from the development stage. Therefore we continue to be accounted for as a development stage company under Statement of Financial Accounting Standards No. 7 “Accounting and Reporting by Development Stage Enterprises.”
We recognize shipped product revenues in accordance with accounting principles generally accepted in the United States of America. Generally, revenue is recognized on transfer of title, typically when products are shipped and all related costs are estimable. For sales to distributors, we make an adjustment to defer revenue until the products are subsequently sold by distributors to their customers. We have determined that this treatment will ensure that the recognition of revenue cannot be impacted by any disputes between us and our distributors on product or possible issues resulting from technology risk as new products are introduced that may have enhanced functionality to product in distributor inventory.
Government Contract Revenue Recognized on the Percentage-of-Completion Method. Beacon recognizes contract revenues using the percentage-of-completion method. Under SOP 81-1, an acceptable methodology is the efforts-expended method based on a measure of the work performed. We use labor hours as the basis for the percentage of completion calculation. It 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.
Each quarter we perform an estimate-to-complete analysis, and any changes to our original estimates are recognized in the period in which they are determined. Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to construction contract costs and revenue. During 2005 we recorded contract losses of $1,534,000. Our contract loss reserves are as follows:
| | December 31, |
| | 2005 | | 2004 |
Beginning balance | | $ -- | | $ -- |
Charges for the period | | 1,534,298 | | -- |
Payments | | (985,684) | | -- |
Ending balance | | $ 548,614 | | $ -- |
Cost of Goods Sold. We cost 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. In addition, we continuously evaluate inventory and purchase commitments to insure that levels do not exceed the expected deliveries for the next twelve months. As we are in the early stages of production, our actual manufacturing costs incurred currently exceed the fair market value of our products. We provide a five-year limited product warranty for our Smart Power M5 product line and accrue for estimated future warranty costs in the period in which the revenue is recognized. In 2004, we established a reserve for our Smart Power M5 inventory as a result of lower than anticipated sales volumes. Although we are continuing to support our inverter product, we do not believe that inverters will be a significant portion of our business going forward and are uncertain as to when or at what price we will be able to sell our inventories. In 2004, the inventory reserve charge to Cost of Goods Sold for inverter inventory obsolescence was approximately $1,025,000, which includes accrued purchase commitments of approximately $45,000.
Stock-Based Compensation. We account for stock based employee compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees) and related interpretations. On January 1, 2006 we will record all share-based payments to employees, including grants of employee stock options, in the statement of operations based on their fair values.
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Deferred compensation expense associated with stock awards to non-employees is measured using the fair-value method and is amortized over the vesting period using a calculation under FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."
No stock-based compensation is reflected in net earnings for stock options granted to employees as all options granted under the plan had an exercise price equal to or greater than the market price of the underlying stock at the date of the grant. The following table illustrates the effect on net earnings and earnings per share if we had applied the fair value recognition provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation” to stock-based employee compensation.
| | Year ended December 31, |
| | 2005 | | 2004 | | 2003 |
Net loss to common shareholders as reported | | $ (9,312,104) | | $ (5,329,960) | | $ (8,618,013) |
Pro-Forma compensation expense | | $ 246,733 | | $ 1,255,094 | | $ 400,148 |
Net loss--pro forma | | $ (9,558,837) | | $ (6,585,054) | | $ (9,018,161) |
Loss per share--as reported | | $ (0.20) | | $ (0.12) | | $ (0.20) |
Loss per share--pro forma | | $ (0.20) | | $ (0.15) | | $ (0.21) |
The fair value of the options on their grant date was measured using the Black-Scholes option-pricing model. Key assumptions used to apply this option-pricing model are as follows:
| | 2005 | | 2004 | | 2003 |
Risk-free interest rate | | 3.8% - 4.39% | | 4.32% - 4.49% | | 1.22% - 3.56% |
Expected life of option | | 1-3 years | | 1-3 years | | 1-3 years |
Expected dividend payment rate, as a percentage of the stock price on the date of grant | 0% | | 0% | | 0% |
Assumed volatility | | 103% - 129% | | 95% - 115% | | 109% - 137% |
Our management believes that the assumptions used to value the options and the model applied yield a reasonable estimate of the fair value of the grants made under the circumstances (see also Note 8).
We granted Restricted Stock Units to employees for services performed in 2005, 2004 and 2003 that vest quarterly during the subsequent year. Our Restricted Stock Unit Deferred Compensation Plan is described in more detail in Note 10.
Income Taxes. Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and tax loss and credit carry forwards using the currently enacted tax rates and laws. A valuation allowance has been provided because realization of deferred tax assets is unlikely in the near future (see Note 11).
Advertising. Advertising expense was approximately $14,000, $15,000 and $3,000 in 2005, 2004 and 2003 respectively, and is expensed as incurred.
Research and Development. Research and development costs are expensed as incurred, except costs that relate to our government contracts. Those expenses are capitalized as inventories and charged to Cost of Goods Sold once the revenue is recognized under the percentage of completion method.
Fair Value of Financial Instruments. The carrying amount of cash and cash equivalents, accounts receivable, inventory, accounts payable, accrued expenses, and other current assets and liabilities approximate their fair values.
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. At December 31, 2005 substantially all of our cash and cash equivalents were held in interest bearing accounts at financial institutions earning interest at varying rates from 3.8% to 4.4%. At
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December 31, 2005 and 2004, we had cash balances at a financial institution in excess of federally insured limits. However, we do not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Comprehensive Loss. Comprehensive loss is the same as net loss for all periods presented.
Loss Per Share – Basic and Diluted. Basic loss per share has been computed using the weighted-average number of shares of common stock outstanding during each period. Diluted loss per share was computed in the same manner. The calculation of diluted net loss per common share for the years ended December 31, 2005, 2004 and 2003 does not include 8,048,616, 10,779,498 and 9,732,929 of potential shares of common stock equivalents outstanding at December 31, 2004, 2003 and 2002, respectively, as their inclusion would be antidilutive or their exercise price exceeded the average market price of the our common stock.
Note 3. Property and Equipment
Property and equipment consisted of the following at December 31:
| | Estimated | | | | |
| | Useful | | December 31, | | December 31, |
| | Lives | | 2005 | | 2004 |
Machinery and equipment | 5 years | | $ 570,424 | | $ 571,198 |
Service vehicles | 5 years | | 16,762 | | 16,762 |
Furniture and fixtures | 7 years | | 255,940 | | 296,652 |
Office equipment | 3 years | | 1,433,947 | | 1,396,562 |
Leasehold improvements | Lease term | | 533,352 | | 533,352 |
Equipment under capital lease obligations | Lease term | | 918,285 | | 918,285 |
| Total | | | $ 3,728,710 | | $ 3,732,811 |
Less accumulated depreciation and amortization | | | (3,516,414) | | (3,474,164) |
| Property and equipment, net | | | $ 212,296 | | $ 258,647 |
Note 4. Commitments and Contingencies
We lease office and light manufacturing space under an operating lease through September 30, 2007. At December 31, 2005, we had provided the lessor with an irrevocable letter of credit with a balance of $219,568 which is reduced annually during the lease term. This letter of credit is secured by a cash deposit, which is included in restricted cash in the accompanying consolidated balance sheets.
Future minimum annual lease payments under non-cancelable operating leases as of December 31, 2005 are as follows:
Rent expense was $231,188, $223,031, and $215,415, during 2005, 2004 and 2003, respectively net of restructuring reserves applied of $321,103, $315,474, and $315,474, respectively.
We have firm non-cancelable purchase commitments with our suppliers to satisfy contractual obligations for our research and development programs for 2006 in the amount of approximately $282,128.
Legal Proceedings. We may be subject to various legal proceedings, many involving routine litigation incidental to our business. The outcome of any legal proceeding is not within our complete control, is often difficult to predict and is resolved over very long periods of time. Estimating probable losses associated with any legal proceedings or other loss contingencies are very complex and require the analysis of many factors including assumptions about potential actions by third parties. Loss contingencies are recorded as liabilities in the consolidated financial statements when it is both, (i) probable or known that a liability has been incurred and (ii)
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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 5. Preferred Stock
As a result of the initial public offering of our common stock and the conversion of all outstanding shares of all classes of the preferred stock, we amended our charter and cancelled all our classes of preferred stock. We then added a new class of preferred stock that can be issued in the future by filing a Certificate of Designations with the specific terms as set by our Board of Directors. At December 31, 2005 and 2004, there are 10 million shares of $.01 par value preferred stock authorized with none outstanding.
Note 6. Common Stock
Private Placement. On November 8, 2005 we completed the private placement of 9,868,421 shares of our common stock at a price of $1.52 per share, for an aggregate offering price of approximately $15 million to certain institutional investors. We also offered these investors warrants to purchase 2,960,527 shares of our common stock at an exercise price of $2.21 per share. In connection with this transaction we paid placement agent fees and expenses of approximately $1 million. We agreed to register for resale under the Securities Act all the shares issued in this offering as well as the shares issuable upon exercise of the warrants. Subsequent to the end of 2005, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (File No.333-130207) that was declared effective on March 7, 2006. These proceeds will be used for working capital purposes.
On May 24, 2005 and July 26, 2005 we issued 1,666,667 and 1,785,714 shares of common stock, respectively pursuant to an investment agreement dated April 22, 2005. In exchange, we received $3 million in the aggregate from Perseus 2000 Expansion, L.L.C. We also issued a warrant for the purchase of 800,000 shares of our common stock at an exercise price of $1.008 and an extension for two years of an existing warrant already owned by Perseus. We agreed to register for resale under the Securities Act all the shares issued in this offering as well as the shares issuable upon exercise of the warrants. Subsequent to the end of 2005, we filed a registration statement on Form S-3 with the Securities and Exchange Commission (File No.333-130208) that was declared effective on March 7, 2006. These proceeds will be used for working capital purposes.
Initial Public Offering. During the fourth quarter of 2000, we sold 9,200,000 shares of our common stock, inclusive of the underwriters' over allotment, at an initial public offering price of $6 per share. Net proceeds as a result of the stock offering totaled approximately $49.3 million reflecting gross proceeds of $55.2 million net of underwriter commissions of approximately $3.9 million and other estimated offering costs of approximately $2.0 million.
Shareholder Rights Agreement. In September 2002, and amended as of December 27, 2002, Beacon’s Board of Directors approved a Rights Agreement, under which, each holder of common stock on October 7, 2002 automatically received a distribution of one Right for each share of common stock held. Each Right entitles the holder to purchase 1/100th of a share of our newly issued preferred stock for $22.50 in the event that any person not approved by the board of directors acquires more than 15% (35% in the case of one large shareholder that already owned more than 15%) of the outstanding common stock, or in the event that we are acquired by another company, $22.50 worth of the common stock of the other company at half its market value (in each case any rights held by the acquiring person are not exercisable and become void).
Reserved Shares. At December 31, 2005, 10,915,663 shares of common stock were reserved for issuance under our stock option plan and outstanding warrants.
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Note 7. Redeemable Convertible Preferred Stock and Stock Warrants
Warrants outstanding as of December 31, 2005:
Description | | Grant Date | | Expiration Date | | Strike Price | | Issued and Outstanding |
Class F extended | | 5/23/2000 | | 5/23/2007 | | $ 2.25 | | 1,333,333 |
April, 2005 Financing | | 5/24/2005 | | 5/24/2010 | | $ 1.008 | | 800,000 |
November, 2005 Financing | | 11/8/2005 | | 11/8/2010 | | $ 2.21 | | 2,960,527 |
Total warrants outstanding | | | | | | 5,093,860 |
We have outstanding three series of warrants to purchase Beacon common stock. The exercise price and the number of shares of Beacon common stock to be issued upon exercise of the warrants will be adjusted under certain circumstances, including:
• | subdivisions, stock dividends or combinations of our common stock; |
• | reclassifications, exchanges, substitutions, or in-kind distributions that result in a change in the number and/or class of the securities issuable upon exercise of the warrants; |
• | reorganizations, mergers and similar transactions; and |
• | the issuance of additional shares of our common stock or securities convertible into our common stock at a price per share less than the exercise price in effect immediately prior to the issuance of the additional securities. |
Holders of the warrants are not entitled to receive dividends, vote, receive notice of any meetings of stockholders or otherwise have any right as stockholders.
Class F Preferred Stock Financing Warrant. The warrant, originally issued in connection with our Class F Preferred Stock financing, is exercisable for 1,333,333 shares of Beacon common stock at an exercise price of $2.25 per share. In connection with the Investment Agreement among us, Perseus Capital, L.L.C. and Perseus 2000 Expansion, L.L.C. dated April 22, 2005, we extended, by two years, the term of the warrant. The holder of this warrant, Perseus Capital, L.L.C., may exercise the warrant at any time prior to its expiration on May 23, 2007.
April 2005 Financing Warrant. In connection with the investment by Perseus 2000 Expansion, L.L.C., we issued a warrant for 800,000 shares of Beacon common stock, at an exercise price of $1.008.
November 2005 Financing Warrants. As part of a financing transaction, we issued warrants to purchase an aggregate of 2,960,527 shares of Beacon common stock to ten “accredited investors.” Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after November 8, 2005, the date of the closing of the financing transaction. The per share exercise price for the warrant shares is $2.21.
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Note 8. Stock Options
Our stock option plans provide for the granting of stock options to purchase up to 23,000,000 shares of our common stock. Options may be granted to our employees, officers, directors and consultants with terms of up to 10 years. Under the terms of the option plans, incentive stock options ("ISOs") are to be granted at fair market value of our common stock at the date of grant, and nonqualified stock options (“NSOs”) are to be granted at a price determined by the Board of Directors. ISOs and NSOs generally vest ratably over 36 months from the grant date and have contractual lives of up to 10 years.
Stock option activity since inception is as follows:
| | | | | Weighted- | | Weighted- |
| | | | | Average | | Average |
| | | Number of | | Exercise | | Fair |
| | | Shares | | Price | | Value |
Outstanding at inception | | -- | | | | |
| Granted | | 10,881,761 | | $ 2.06 | | $ 1.06 |
| Exercised | | (1,138,852) | | 0.99 | | |
| Canceled, forfeited or expired | | (4,395,566) | | 2.71 | | |
Outstanding, December 31, 2002 | | 5,347,343 | | 1.78 | | |
| Granted | | 367,099 | | 1.26 | | 0.07 |
| Exercised | | (289,135) | | 0.81 | | |
| Canceled, forfeited or expired | | (2,649,378) | | 1.95 | | |
Outstanding, December 31, 2003 | | 2,775,929 | | 1.59 | | |
| Granted | | 3,847,639 | | 0.74 | | 0.43 |
| Exercised | | (30,000) | | 0.89 | | |
| Canceled, forfeited or expired | | (395,993) | | 1.72 | | |
Outstanding, December 31, 2004 | | 6,197,575 | | 1.06 | | |
| Granted | | 429,168 | | 1.88 | | 1.33 |
| Exercised | | (965,856) | | 0.74 | | |
| Canceled, forfeited or expired | | (79,084) | | 1.74 | | |
Outstanding, December 31, 2005 | | 5,581,803 | | 1.18 | | |
The following table summarizes information about stock options outstanding at December 31, 2005:
| | | | Weighted- | | | | Vested |
| | | | Average | | Weighted- | | | | Weighted- |
| | Number | | Remaining | | Average | | | | Average |
| | Of Options | | Contractual | | Exercise | | Number | | Exercise |
Exercise Price | | Outstanding | | Life (years) | | Price | | of Options | | Price |
$.255-$.74 | | 3,339,886 | | 8.59 | | $0.70 | | 3,339,886 | | $0.70 |
$.87 - $1.24 | | 1,284,896 | | 5.85 | | $0.92 | | 1,284,896 | | $0.92 |
$2.10-$2.50 | | 599,771 | | 7.14 | | $2.21 | | 324,767 | | $2.23 |
$3.10-$4.10 | | 190,000 | | 5.12 | | $3.94 | | 190,000 | | $3.94 |
$5.10-$6.00 | | 122,250 | | 4.90 | | $5.57 | | 122,250 | | $5.57 |
$6.10 - $9.31 | | 45,000 | | 4.79 | | $6.93 | | 45,000 | | $6.93 |
Included in the above schedules are grants of 0, 25,000 and 0 options made to non-employee consultants in 2005, 2004 and 2003, respectively.
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Note 9. Employee Stock Purchase Plan
On October 15, 2000 we adopted an Employee Stock Purchase Plan (the "Plan") under which eligible employees are able to purchase shares of our Common Stock at 85% of the market value at the date of the start of each six month option period or the end of such period, whichever is lower. Under the provisions of the Plan, as amended, up to 2,000,000 shares are authorized. Shares purchased under the Plan in 2005, 2004, and 2003 totaled 7,273, 8,124 and 5,494, respectively and the weighted average grant date fair value of the shares purchased was $1.03, in 2005, $0.48 in 2004, and $0.18 in 2003. There are 1,877,853 shares available under the Plan at December 31, 2005.
Note 10. Restricted Stock Units
During 2003 we put into place a long-term incentive plan (LTIP) for all executives and employees for 2003 through 2005. Based on our need to conserve cash and the desire to retain our professional staff, we determined that it would be in the best interest of our company, our employees, and our stockholders to implement a stock-based Deferred Compensation Plan.
The LTIP has eliminated the previous cash bonus structure for successful performance and replaced it with a program whereby we established goals that are strategically aligned to the Company’s performance and, therefore, shareholder value. The LTIP agreement is intended to provide employees deferred compensation in the form of restricted stock units (or “RSUs”) at no cost to the recipient, that can be converted into shares of our common stock through establishing and evaluating quarterly, or in some cases yearly, targets for the employee and, following each quarter, determining the number of RSUs to accrue and to be granted in four equal installments in the fiscal year following the fiscal year with respect to which the employee accrued the RSUs. Employees have the right to convert their RSUs into shares at any time after such grant, subject to a quarterly vesting schedule. Our employees earned 587,374 and 738,921 RSUs for the fiscal years ended December 31, 2005 and 2004, respectively, which are not available for exercise until satisfaction of the quarterly vesting periods during the following calendar year. The grants are recorded as deferred stock compensation until they are earned over the vesting schedule, at which time, the value of the RSUs will be recorded as compensation expense in our income statement. RSU compensation expense recorded in 2005 and 2004 was $645,718 and $700,605, respectively.
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Note 11. Income Taxes
The components of the provision (benefit) for income taxes consisted of the following:
| | | | | | | | Cumulative from |
| | | | | | | | May 8, 1997 |
| | | | | | | | (Date of |
| | Year ended | | Year ended | | Year ended | | Inception) to |
| | December 31, | | December 31, | | December 31, | | December 31, |
| | 2005 | | 2004 | | 2003 | | 2005 |
State – current | | $ 750 | | $ 750 | | $ 1,956 | | $ 20,612 |
Federal—deferred | | (3,901,616) | | (1,974,627) | | (5,807,539) | | (38,724,017) |
State—deferred | | (35,387) | | (325,553) | | (1,169,696) | | (5,844,423) |
Increase in valuation allowance | | 3,937,003 | | 2,300,180 | | 6,977,235 | | 44,568,439 |
Provision (benefit) for income taxes | | $ 750 | | $ 750 | | $ 1,956 | | $ 20,611 |
A reconciliation of the statutory federal rate to the effective rate for all periods is as follows:
Statutory federal rate benefit | (34) % |
State, net of federal effect | (6) | |
Valuation allowance provided | 40 | |
Effective rate | --% | |
| | | | | |
The components of the Beacon’s deferred tax assets and liabilities consisted of the following at December 31:
| | 2005 | | 2004 |
Long-term assets: | | | | |
Net operating loss carryforwards | | $ 36,480,176 | | $ 31,862,096 |
Research and development credits | | 2,799,435 | | 2,701,000 |
Restructuring reserves | | 1,822,757 | | 2,232,298 |
Other | | (799,330) | | 557,174 |
Net deferred tax assets before valuation allowance | 40,303,038 | | 37,352,568 |
Less valuation allowance | | (40,303,038) | | (37,352,568) |
Net deferred tax assets | | $ - | | $ - |
The valuation allowance increased by $3,937,003 in 2005 and $2,300,179 in 2004, primarily due to the generation of net operating loss carry forwards and credits for which realization is not reasonably assured.
We have available for future periods net operating loss carry forwards for federal and state tax purposes of approximately $92,731,000 and $80,484,000, respectively, as of December 31, 2005. In addition, we have business credits of approximately $1,870,000 and $929,700 for federal and state purposes, respectively as of December 31, 2005. The net operating loss carry forwards begin to expire in 2012 for federal and 2002 for state tax purposes. The federal research and development credits begin to expire in 2012. We did not pay any income taxes from inception to December 31, 2005.
Under the provisions of the Internal Revenue Code, certain substantial changes in our ownership may have limited, or may limit in the future, the amount of net operating loss carry forwards and tax credits which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based upon our value prior to an ownership change.
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Note 12. Retirement Savings Plan
In 1998, we created a 401(k) Retirement Savings Plan (the "Plan") for our full-time employees. Each participant in the Plan may elect to contribute a percentage of his or her annual compensation to the Plan on a pre-tax basis up to the annual limit established by the Internal Revenue Service. We match employee contributions at a rate of 50% up to the first 6% of the employee's contributions. We may also elect to make a profit-sharing contribution at the discretion of the Board of Directors. Employee contributions are fully vested. Company matching and profit sharing contributions vest 20% after two years of service consisting of at least 1,000 hours per calendar year and 20% annually thereafter. Company matching contributions were $51,778, $61,213 and $63,671 during 2005, 2004 and 2003 respectively. We have not made any profit sharing contributions since the plan’s inception.
Note 13. Related Party Transactions
Loan to Officer. During 2001, we advanced approximately $565,000 to an officer of the Company, Mr. William Stanton, our former CEO and President and currently a member of our board of directors. This advance was interest bearing and secured by Mr. Stanton’s holdings of Beacon common stock and was provided to him to allow the exercise of stock options and the payment of related taxes. We capitalized approximately $36,000 of interest over the life of the debt. Up to August 5, 2005, Mr. Stanton made payments on this outstanding debt of approximately $500,000. On August 5, 2005, Mr. Stanton surrendered vested stock options to purchase 76,752 shares of our common stock which were granted to him on October 13, 2004. We gave Mr. Stanton credit for $100,544 as a result of such surrender, which equaled the excess of the value of the shares issuable upon exercise of the options, based on the mid-point of the high and the low trading prices per share of our common stock on August 5, 2005, over the exercise price of the options, to repay in full the outstanding principal of and interest on the loan we advanced to Mr. Stanton as described above. The surrendered stock was added to our treasury, at cost.
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Note 14. Quarterly Results (Unaudited)
In management's opinion, this unaudited information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future quarters.
| 2005 |
| First | Second | Third | Fourth |
| Quarter | Quarter | Quarter | Quarter |
Revenue | $ 626,134 | $ 318,304 | $ 304,064 | $ 238,756 |
Gross profit (loss) | $ (34,373) | $ (15,652) | $ (43,490) | $ 5,533 |
Loss from operations | $ (2,258,888) | $ (1,806,293) | $ (2,271,509) | $ (3,111,073) |
Net (loss) income | $ (2,245,000) | $ (1,764,781) | $ (2,143,442) | $ (3,158,881) |
Loss per share - basic and diluted | $ (0.05) | $ (0.04) | $ (0.04) | $ (0.07) |
Weighted-average common shares outstanding | 43,792,791 | 44,801,287 | 48,524,912 | 54,364,893 |
| | | | |
| | | | |
| 2004 |
| First | Second | Third | Fourth |
| Quarter | Quarter | Quarter | Quarter |
Revenue | $ 57,408 | $ 126,484 | $ 80,902 | $ 59,900 |
Gross profit (loss) | $ (18,371) | $ (181,604) | $ (898,802) | $ (34,398) |
Loss from operations | $ (2,189,460) | $ (2,358,497) | $ (2,751,782) | $ (1,749,096) |
Net (loss) income | $ (2,148,727) | $ (2,266,205) | $ (1,854,795) | $ 939,767 |
Loss per share - basic and diluted | $ (0.05) | $ (0.05) | $ (0.04) | $ 0.02 |
Weighted-average common shares outstanding | 43,121,702 | 43,273,817 | 43,538,541 | 43,702,485 |
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Note 15. Schedule II Valuation and Qualifying Accounts
2005 |
Description | | Balance at 1/1/2005 | | Charged to costs and expenses | | Charged to other accounts | | Deductions | | Balance at 12/31/2005 |
Product warranty | | $ 24,512 | | $ 7,763 | | $ - | | $ (2,194) | | $ 30,081 |
Commitment reserve | | 48,265 | | - | | - | | (48,265) | | - |
Accounts receivable reserve | | 22,850 | | (9,620) | | - | | - | | 13,230 |
Inventory reserve | | 2,887,688 | | - | | (508,608) | | (34,043) | | 2,345,037 |
Asset impairment reserve | | 3,843,893 | | - | | - | | (122,186) | | 3,721,707 |
| | | | | | | | | | |
2004 |
Description | | Balance at 1/1/2004 | | Charged to costs and expenses | | Charged to other accounts | | Deductions | | Balance at 12/31/2004 |
Product warranty | | $ - | | $ 30,017 | | $ - | | $ (5,504) | | $ 24,512 |
Commitment reserve | | - | | 235,927 | | - | | (187,662) | | 48,265 |
Accounts receivable reserve | | - | | 22,850 | | - | | - | | 22,850 |
Inventory reserve | | 1,991,414 | | 1,027,386 | | - | | (131,112) | | 2,887,688 |
Asset impairment reserve | | 4,161,017 | | - | | - | | (317,124) | | 3,843,893 |
Product warranty – Deductions include amounts paid for consultants, travel and freight costs to repair/replace our inverter systems under our five-year warranty.
Commitment reserve – In 2004 we placed a reserve on our entire inverter inventory and additionally recorded a reserve for future non-cancelable vendor commitments. During 2005 we settled all commitments relating to this reserve.
Accounts receivable reserve – In 2004 we recorded a reserve for certain accounts which we deemed to be doubtful. In 2005, we received payments against these accounts.
Inventory reserve – Our inventory, containing both flywheel components and inverter components, is fully reserved. We disposed of inventory that no longer had value to us and we utilized components from our inventory in our research and development contracts during 2005.
Asset impairment reserve – In 2002, we recorded an asset impairment reserve for underutilized plant and equipment. In 2005 and 2004, we sold or disposed of certain assets and reduced the associated reserve.
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2. Financial Statement Schedules |
Schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or not applicable.
The exhibits are listed below under Part IV, Item 15(c) of this report.
Exhibit | | | |
Number | Ref | Description of Document | |
| | | |
3.1 | (1) | Sixth Amended and Restated Certificate of Incorporation. | |
| | | |
3.2 | (1) | Amended and Restated Bylaws. | |
| | | |
3.3 | + | Certificate of Designation of Series A Junior Participating Preferred Stock, filed with the Secretary of State of Delaware on October 4, 2002. | |
| | | |
4.1 | (2) | Rights Agreement dated as of September 25, 2002 between Beacon and Equiserve Trust Company, NA. | |
| | | |
4.2 | (3) | Amendment No. 1 to Rights Agreement dated as of December 27, 2002. | |
| | | |
4.3 | (4) | Form of specimen stock certificate. | |
| | | |
10.1.1 | (1) | Securities Purchase Agreement dated May 23, 2000 among the Company, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro-Generation Technology Fund, L.L.C., Mechanical Technology Incorporated, GE Capital Equity Investments, Inc., The Beacon Group Energy Investment Fund II, L.P. and Penske Corporation. | |
| | | |
10.1.2 | (15) | Third Amended and Restated 1998 Stock Incentive Plan of the Company. | |
| | | |
10.1.3 | + | Form of Incentive Stock Option Agreement of the Company. | |
| | | |
10.1.4 | + | Form of Non-Qualified Stock Option Agreement of the Company. | |
| | | |
10.1.5 | (1) | Form of Non-Qualified Stock Option Agreement of the Company issued to certain consultants on July 24, 2000 and list of holders thereof. | |
| | | |
10.1.6 | (15) | Employee Stock Purchase Plan of the Company. | |
| | | |
10.1.7 | (1) | Amended and Restated License Agreement dated October 23, 1998 between the Company and SatCon Technology Corporation. | |
| | | |
10.1.8 | (1) | Lease dated July 14, 2000 between the Company and BCIA New England Holdings LLC. | |
| | | |
10.1.9 | (5) | Form of Director and Officer Indemnification Agreement of the Company. | |
| | | |
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10.1.10 | (10) | Employment Agreement dated October 25, 2002 between the Company and James M. Spiezio. | |
| | | |
10.1.11 | + | Form of Restricted Stock Unit Agreement of the Company. | |
| | | |
10.1.12 | (6) | Agreement dated January 31, 2005 between the Company and the New York State Energy Research and Development Authority. | |
| | | |
10.1.13 | (7) | Agreement dated January 31, 2005 between the Company and California State Energy Resources Conservation and Development Commission. | |
| | | |
10.1.14 | (8) | Investment Agreement dated April 22, 2005 among the Company, Perseus 2000 Expansion, L.L.C. and Perseus Capital, L.L.C. | |
| | | |
10.1.15 | (9) | Common Stock Purchase Warrant dated May 24, 2005 issued by the Company to Perseus 2000 Expansion, L.L.C. | |
| | | |
10.1.16 | (9) | Amended and Restated Common Stock Purchase Warrant dated May 24, 2005 issued by the Company to Perseus Capital, L.L.C. | |
| | | |
10.1.17 | (9) | Registration Rights Agreement dated May 24, 2005 among the Company, Perseus 2000 Expansion, L.L.C. and Perseus Capital L.L.C. | |
| | | |
10.1.18 | (10) | Option Agreement dated July 25, 2005 between the Company and Lisa W. Zappala. | |
| | | |
10.1.19 | (11) | Agreement dated October 7, 2005 between the Company and the Air Force Research Laboratory. | |
| | | |
10.1.20 | (12) | Securities Purchase Agreement dated November 4, 2005 among the Company and Iroquois Master Fund Ltd., Gryphon Master Fund, LP, GSSF Master Fund, LP, Nite Capital LP, Enable Growth Partners, LP, Enable Opportunity Partners, LP, Truk Opportunity Fund, LLC, Truk International Fund, LP, Capital Ventures International and UBS O'Connor LLC FBO O'Connor PIPES Corporate Strategies Master Limited. | |
| | | |
10.1.21 | (12) | Form of Warrant of the Company issued pursuant to the November 2005 financing. | |
| | | |
14.1 | (13) | Corporate Code of Conduct dated October 15, 2001. | |
| | | |
16.1 | (14) | Letter dated October 20, 2004 from Deloitte & Touche LLP to the Company. | |
| | | |
21.1 | + | Subsidiaries of the Company. | |
| | | |
23.1 | + | Consent of Miller Wachman LLP. | |
| | | |
31.1 | + | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| | | |
31.2 | + | Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| | | |
32.1 | + | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 | |
| | | |
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32.1 | + | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 | |
|
(1) Incorporated by reference from the Form S-1 filed on November 16, 2000 (File No. 333-43386). |
(2) Incorporated by reference from the Form 8-K filed on October 4, 2002 (File No. 001-16171). |
(3) Incorporated by reference from the Form 10-K filed on March 31, 2003 (File No. 001-16171). |
(4) Incorporated by reference from the Form S-3 filed on December 8, 2005 (File No. 333-130207). |
(5) Incorporated by reference from the Form 8-K filed on May 10, 2005 (File No. 001-16171). |
(6) Incorporated by reference from the Form 8-K filed on February 14, 2005 (File No. 001-16171). |
(7) Incorporated by reference from the Form 8-K filed on February 16, 2005 (File No. 001-16171). |
(8) Incorporated by reference from the Form 8-K filed on April 25, 2005 (File No. 001-16171). |
(9) Incorporated by reference from the Form 8-K filed on April 25, 2005 (File No. 001-16171). |
(10) Incorporated by reference from the Form 8-K filed on July 29, 2005 (File No. 001-16171). |
(11) Incorporated by reference from the Form 8-K filed on October 13, 2005 (File No. 001-16171). |
(12) Incorporated by reference from the Form 8-K filed on November 7, 2005 (File No. 001-16171). |
(13) Incorporated by reference from the Form 10-K filed on March 31, 2005 (File No. 001-16171). |
(14) Incorporated by reference from the Form 8-K filed on November 2, 2004 (File No. 001-16171). |
(15) Incorporated by reference from the Form S-8 filed on March 22, 2006 (File No. 333-132638). |
+ Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BEACON POWER CORPORATION
By: _/s/ F. William Capp
F. William Capp
President and Chief Executive Officer
Date: March 29, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
_/s/ F. William Capp __ | President and Chief Executive Officer, and Director | |
F. William Capp | (Principal Executive Officer) | March 29, 2006 |
| | | |
/s/ James M. Spiezio __ | Vice President of Finance, Chief Financial Officer, Treasurer and | |
James M. Spiezio | Secretary (Principal Financial Officer) | March 29, 2006 |
| | | |
/s/ Stephen P. Adik __ | |
Stephen P. Adik | Director | March 29, 2006 |
| | | |
/s/ John C. Fox __ | |
John C. Fox | Director | March 29, 2006 |
| | | |
/s/ Jack P. Smith ____ | |
Jack P. Smith | Director | March 29, 2006 |
| | | |
/s/ Kenneth M. Socha __ | |
Kenneth M. Socha | Director | March 29, 2006 |
| | | |
/s/ William E. Stanton __ | |
William E. Stanton | Director | March 29, 2006 |
| | | |
/s/ Lisa W. Zappala __ | |
Lisa W. Zappala | Director | March 29, 2006 |
| | | |
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