September 9, 2005
United States
Securities and Exchange Commission
Washington, D.C. 20549
Attn: Mr. George F. Ohsiek, Jr.
Dear Mr. Ohsiek,
Pursuant to your letter dated August 29, 2005 to the attention of Mr. James
Spiezio regarding the Beacon Power Corporation ("The Company") Form 10-K for
Fiscal Year Ended December 31, 2004, filed March 31, 2005 and Forms 10-Q for
Fiscal Quarters Ended March 31 and June 30, 2005, File No. 1-16171, please find
our responses outlined below.
Form 10-K for the year ended December 31, 2004:
Report of Independent Registered Public Accounting Firm (Miller Wachman LLP)
SEC comment No. 1: Please file an amended Form 10-K to include a revised
auditor's report, which refers to "the standards of the Public Company
Accounting Oversight Board (United States)," instead of "the auditing standards
of ...." See paragraph B2 of Auditing Standard No. 1.
Company response: We have met and discussed the issue regarding revision of the
auditors report to include language specifically relating to "the standards of
the Public Company Accounting Oversight Board (United States)" with our
accountants, Miller Wachman.
We believe the above item is not of a material nature and does not warrant
restatement. We propose that adjustments will be made prospectively. The
adjusted audit report follows.
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 sheet of Beacon Power
Corporation and Subsidiaries (the "Company") (a development stage company) as of
December 31, 2004, and the related consolidated statements of operations,
stockholders' equity and cash flows for year then ended and the cumulative
statements of operation, stockholders' equity and cash flows from May 8, 1997
(date of inception) through December 31, 2004. 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 audit. We did not audit the Company's financial
statements before 2004. Those statements were audited by other auditors whose
report has been furnished to us and, our opinion, insofar as it relates to the
cumulative amounts included from May 8, 1997 (the date of inception), through
December 31, 2003 is based solely on the report of other auditors.
We conducted our audit 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 audit provides 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, 2004 and the results of their
operations and their cash flows for the year ended December 31, 2004, 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
February 18, 2005
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Stock Based Compensation
SEC comment No. 2: Please tell us what caused the increase in expected life of
stock options from 1-3 years to 10 years. We assume that the 36 month vesting
period for stock options remains unchanged.
Company response: The inconsistency derives from the fair value assumptions used
in the Black-Scholes pricing model. For the years 2001, 2002 and 2003 we
recorded the expected life as 1-3 years. In our 2004 annual report, we used an
expected life of ten years based on the Black Scholes valuation methodology
which uses the expiration date as the measurement period. Based on consideration
of this question, we have concluded that it is more appropriate to follow the
guidance of FAS 123, which requires basing the expected life on actual historic
option lives. Based on this analysis, we conclude that an expected life of 1-3
years is still appropriate.
Since we used an expected life of 10 years in the Black Scholes models used to
calculate pro-forma compensation expense for 2004, the figures in this pro forma
table will need to be restated to reflect expected lives of 1-3 years (the
vesting period.)
We believe the above item is not of a material nature and does not warrant
restatement. We propose that adjustments will be made prospectively.
General
SEC comment No. 3: Please either revise to include Schedule II - Valuation and
Qualifying Accounts or tell us why you believe this schedule is properly
omitted. We would expect your reserves for warranties and inventory to be
reported on this schedule. See Rules 5-04 and 12-09 of Regulation S-X.
Company response: We did not include a supplemental schedule of reserve
accounts. It was our view that textual disclosure was sufficient to meet the
requirements of Regulation S-X. Based on our review of Rules 5-04 and 12-09 of
Regulation S-X, we will provide the information in a tabular format. This will
include the following valuation and qualifying accounts: accounts receivable
reserve, warranty reserve, inventory reserve and purchase commitments reserve.
We believe the above item is not of a material nature and does not warrant
restatement. We propose that adjustments will be made prospectively. A table
reflecting the reserves is listed below.
- -------------------------------- --- ------------ -- ------------- -- ------------- -- -------------- -- -------------
Charged to Charged to
Balance at costs and other Balance at
Description 1/1/2004 expenses accounts Deductions 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
- -------------------------------- --- ------------ -- ------------- -- ------------- -- -------------- -- -------------
Item 9A. Controls and Procedures
SEC comment No 4: We note the disclosure that your CEO and CFO "have concluded
that the Company had in place on that date [December 31, 2004] controls and
other procedures that are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the SEC's rules and forms." It is not clear
whether or not management has made any conclusions on the effectiveness of the
controls. Please revise disclosures in an amended Form 10-K to state explicitly
if the actual controls and procedures were effective of not. See item 308(a) (3)
of Regulation S-K and paragraph 4(c) of your exhibits 31.1 and 31.2.
SEC comment No. 5: Your principal executive and financial officers have only
concluded that your disclosure controls and procedures were effective in
"enabling the Company to record, process, summarize, and report information
required to be included in its periodic SEC filings within the requested time
period." Please also state, if true, whether the same officers concluded the
controls and procedures were effective in "alerting them on a timely basis to
material information relating to the Company, including its consolidated
subsidiaries, required to be included in the Company's reports filed or
submitted under the Act" and were effective in "ensuring that information
required to be disclosed by an issuer in the reports that it files or submits
under the Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure." See the definition or disclosure controls and procedures a
t the Exchange Act Rule 13a-15(e). Please also revise the Form 10-Q for the
quarter ended March 31, 2005.
Company response: We feel the above items are not of a material nature and do
not warrant restatement. We propose that adjustments will be made prospectively.
The updated disclosure follows.
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of its disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this Annual Report
on Form 10-K [Quarterly Report on Form 10-Q]. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures are effective in enabling the
Company to record, process, summarize, and report information required to be
included in its periodic SEC filings within the required time period. 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 the Company's management, including its 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 the Company's disclosure controls and procedures as
of December 31, 2004 [March 31, 2005], the Company's chief executive officer and
chief financial officer concluded that, as of such date, the Company's
disclosure controls and procedures were effective at the reasonable assurance
level.
In addition, the Company's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, has evaluated whether any change
in the Company's internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) occurred during the period
covered by this Annual Report on Form 10-K [Quarterly Report on Form 10-Q].
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that there has been no change in the Company's internal
control over financial reporting during the period covered by this Annual Report
on Form 10-K [Quarterly Report on Form 10-Q] that has materially affected, or is
reasonably likely to materially affect, its internal control over financial
reporting.
Form 10-Q for the Quarter Ended June 30, 2005:
Consolidated Statement of Cash Flows
SEC comment No. 6: Please revise your filing to reflect repurchases of treasury
stock as a cash flow used in financing activities, rather than investing
activities, in accordance with paragraph 20(a) of SFAS 95.
Company response: We agree with your suggested revision but we believe the above
item is not of a material nature and does not warrant restatement. We propose
that the above adjustments will be made prospectively.
Note 1. Nature of Business and Operation
SEC comment No. 7: Tell us and revise your filing to indicate the specific
reasons why Deloitte and Touche has refused to consent to the inclusion of its
audit report on the Company's financial statements for 2002 and 2003 in your
planned registration statement. If Deloitte and Touche has communicated to you
that you many no longer place reliance on their audit reports covering fiscal
years 2002 and 2003 you must immediately file and Item 4.02 Form 8-K.
Company response: Deloitte has not communicated to us either verbally or in
writing that we may no longer place reliance on their audit reports or that
investors may no longer rely on our previously issued financial statements.
Deloitte has not provided a written explanation as to why they would not consent
to future filings.
Jim Spiezio had a discussion with Mr. Oshiek on Wednesday September 7, 2005, and
we are awaiting his response on how to handle this issue.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
Government Contract Revenue Recognized on the Percentage-of-Completion Method
SEC comment No. 8: Please clarify your specific method for recognizing revenue
under SOP 81-1. In this disclosure you suggest that you utilize an input method
based purely on costs incurred relative to total budgeted contract costs, while
in Note 1 you indicate that percentage-of-completion is calculated using "the
percentage of labor hours incurred to date for each contract to the estimated
total labor hours for each contract at completion." Since application of a
strict cost-to-cost approach usually differs from application of a labor
hours-to-labor hours approach, please reconcile these two disclosures for us.
Tell us how you determined that the use of an input method, rather than an
output method, such as milestones achieved, was appropriate under SOP 81-1.
Company response: We use the input measure, based on labor hours, to determine
the percentage of completion.
We do not use contract milestones (output measures) as they may not be
reflective of the earnings process due to the fact that most milestones relate
to development and design work and are not true output measures such as units
produced or units delivered.
Additionally, the Company has historically used labor hours as the primary input
measure on prior contracts.
To eliminate inconsistency in our footnotes, we will revise the language in Note
1 and Item 2 to read as follows:
The Company 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 of 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 the Company performs an estimate-to-complete analysis, and any
changes to its original estimates are recognized in the period in which they are
determined.
The above will eliminate any inconsistency in our footnote disclosure. We
believe the above item is not of a material nature and does not warrant
restatement. We propose that adjustments will be made prospectively.
Results of Operations
Loss on Sale and Contract Commitments
SEC comment No. 9: Tell us why you did not accrue contract losses in 2004 if the
cost sharing mechanism that appears to be the primary reason for the contract
losses was a component of the original contract proposal as you indicate in your
Form 10-Q for the quarter ended March 31, 2005. Please restate your financial
statements, as necessary, or tell us why no restatement is necessary.
Company response: We do not believe that a restatement is required as the event
occurred subsequent to the end of the fiscal year and was appropriately reported
as a subsequent event in our footnotes.
FAS 5 pp 8 states "An estimated loss from a loss contingency... shall be accrued
by a charge to income if both of the following conditions are met: a.
Information available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability had been
incurred at the date of the financial statements. It is implicit in this
condition that it must be probable that one or more future events will occur
confirming the fact of the loss. b. The amount of the loss can be reasonably
estimated.
FAS 5 pp 59 states "...requires that a loss contingency be accrued if the two
specified conditions are met. The purpose of those conditions is to require
accrual of losses when they are reasonably estimable, and relate to the current
or a prior period."
FAS 5 pp 71 further emphasizes this point by "The condition in paragraph 8(a) -
that a loss contingency shall be accrued if it is probable that a liability has
been incurred - is intended to proscribe recognition of losses that relate to
future periods but to require accrual of losses that relate to the current or a
prior period."
As these contracts were not awarded until February 10th and 14th, 2005,
respectively, the liability did not exist as of December 31, 2004, nor was the
award of these contracts probable at that time.
We have also evaluated SAS 1 "Subsequent Events," which identifies two types of
subsequent events. The first type consists of events that provide additional
evidence about conditions that existed at the date of the balance sheet and
which affect the estimates inherent in the process of preparing financial
statements. The second type consists of events that provide evidence with
respect to conditions that did not exist at the date of the balance sheet but
arose subsequent to that date. While the first type would result in an accrued
liability in the financial statements, it is the Company's position that these
contracts were not this type of subsequent event and therefore financial
statement disclosure is not required.
The Company believes these contracts are of the second type. While this does not
require adjustment to the financial statements, we believe additional disclosure
may be appropriate as below.
NYSERDA - On February 10, 2005, the Company was awarded a research and
development contract from the New York State Energy Research and Development
Authority (NYSERDA) under a joint initiative between the U.S. Department of
Energy (DOE) Energy Storage Research Program and NYSERDA, entitled "Grid
Frequency Regulation by Recycling Energy in Flywheels," to demonstrate an
advanced energy storage solution for frequency regulation and grid stability in
New York State. Under the contract, the Company will demonstrate a
one-tenth-power prototype of the Company's planned megawatt-level system, known
as the Smart Energy Matrix. The demonstration will integrate the Company's
flywheels and associated power electronics into the distribution power grid. The
contract requires the Company's Smart Energy Matrix to be delivered and
installed during the second half of 2005. The contract is expected to cost
approximately $1.4 million, of which approximately $385,000 consists of
inventories the Company had previously expensed, and this expected cost will be
partially offset by approximately $645,000 of revenue, nearly all of it in 2005.
CEC - On February 14, 2005, the Company was awarded a contract with the
California State Energy Resources Conservation and Development Commission (CEC)
entitled "Flywheel Energy Storage System for Grid Frequency Regulation," to
demonstrate a one-tenth power prototype version of its Smart Energy Matrix
advanced energy storage solution for frequency regulation and grid stability. A
successful demonstration of frequency regulation will also serve to demonstrate
the system's technical and market feasibility in the grid stabilization market.
The contract requires the Company's flywheel based system to be delivered and
installed during the second half of 2005. The contract is expected to cost
approximately $1.4 million, and this expected cost will be partially offset by
approximately $1.2 million of revenue, with the majority of it in 2005.
We believe the above item is not of a material nature and does not warrant
restatement. We propose that adjustments will be made prospectively.
Per your request, we acknowledge that:
|X| The Company is responsible for the adequacy and accuracy of the
disclosure in the filing.
|X| Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing.
|X| The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Sincerely,
/s/ James M. Spiezio
- -------------------------------
James M. Spiezio
Chief Financial Officer
Beacon Power Corporation