UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (For the transition period from ___ to ___ ).
Commission File Number: 001-16171
Beacon Power Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3372365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Ballardvale Street
Wilmington, Massachusetts 01887-1032
(Address of principal executive offices) (Zip code)
(978) 694-9121
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes ____ No __X__
Indicate by check mark whether the registrant is a shell company (as defined
in rule 12-b2 of the Exchange Act.) Yes ____ No __X__
The number of shares of the Registrant's common stock, par value $.01 per share,
outstanding as of November 10, 2005 was 59,966,193.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Table of Contents
Page
PART I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets at September 30, 2005 (unaudited) and December 31, 2004 (audited). 1
Unaudited Consolidated Statements of Operations for the three months
ended September 30, 2005 and 2004, the nine months ended September
30, 2005 and 2004 and for the period from May 8, 1997 (date of
inception) to September 30, 2005. 2
Unaudited Consolidated Statements of Cash Flows for nine months ended September 30, 2005
and 2004 and for the period from May 8, 1997 (date of inception) to September 30, 2005. 3
Notes to Unaudited Consolidated Financial Statements. 5-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 11-31
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 32
Item 4. Controls and Procedures. 32
PART II. Other Information
Item 1. Legal Proceedings. 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 33
Item 3. Defaults Upon Senior Securities. 33
Item 4. Submission of Matters to a Vote of Security Holders. 33
Item 5. Other Information. 33
Item 6. Exhibits. 34
Signatures 37
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
September 30, December 31,
2005 (unaudited) 2004
----------------- ---------------
Assets
Current assets:
Cash and cash equivalents ................................... $ 3,384,515 $ 5,097,188
Accounts receivable, trade, net ............................. 144,496 52,105
Inventory ................................................... -- 222,593
Unbilled costs on government contracts ...................... 600,625 --
Prepaid expenses and other current assets ................... 257,138 817,396
------------- -------------
Total current assets ...................................... 4,386,774 6,189,282
Property and equipment, net ....................................... 231,846 258,647
Restricted cash ................................................... 219,568 310,011
Investments ....................................................... 1,000,000 --
Other assets and prepaid financing costs .......................... -- 327,646
------------- -------------
Total assets ...................................................... $ 5,838,188 $ 7,085,586
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ............................................ $ 119,820 $ 389,189
Accrued compensation and benefits ........................... 190,375 130,609
Other accrued expenses ...................................... 654,765 393,569
Accrued contract loss ....................................... 299,235 --
Restructuring reserve ....................................... 804,984 1,062,644
------------- -------------
Total current liabilities ................................ 2,069,179 1,976,011
------------- -------------
Commitments (Note 5)
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;
49,853,157 and 43,788,810 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively ...... 498,532 437,888
Deferred stock compensation ................................. (24,565) (707,167)
Additional paid-in-capital .................................. 138,901,286 134,411,911
Deficit accumulated during the development stage ............ (135,086,620) (128,933,397)
Treasury stock, 356,559 shares at cost ...................... (519,624) (99,660)
------------- -------------
Total stockholders' equity ............................... 3,769,009 5,109,575
------------- -------------
Total liabilities and stockholders' equity ........................ $ 5,838,188 $ 7,085,586
============= =============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
Cumulative from
May 8, 1997
(date of inception)
Three months ended September 30, Nine months ended September 30, through September 30,
2005 2004 2005 2004 2005
------------- ------------- ------------- ------------- -------------
Revenue .................................... $ 304,064 $ 80,902 $ 1,258,503 $ 264,793 $ 2,134,381
Cost of goods sold ......................... 347,554 979,704 1,352,018 1,363,570 2,809,887
------------- ------------- ------------- ------------- -------------
Gross profit ............................... (43,490) (898,802) (93,515) (1,098,777) (675,506)
Operating expenses:
Selling, general and administrative .. 1,849,322 1,033,406 4,130,271 3,328,117 36,386,245
Research and development ............. 357,703 779,179 994,234 2,742,665 54,869,779
Loss on sales and contract commitments -- -- 1,056,566 -- 1,432,540
Depreciation and amortization ........ 20,994 40,395 62,103 130,180 4,200,069
Restructuring charges ................ -- -- -- -- 2,159,280
Loss on impairment of assets ......... -- -- -- -- 4,663,916
------------- ------------- ------------- ------------- -------------
Total operating expenses ........ 2,228,019 1,852,980 6,243,174 6,200,962 103,711,829
------------- ------------- ------------- ------------- -------------
Loss from operations ....................... (2,271,509) (2,751,782) (6,336,689) (7,299,739) (104,387,335)
Other income (expense):
Interest income ............................ 27,423 16,962 59,433 88,792 3,942,308
Interest expense ........................... -- -- -- -- (1,093,703)
Gain on sale of investment ................. -- -- -- -- 3,562,582
Other income (expense) ..................... 100,644 880,025 124,033 941,219 (104,278)
------------- ------------- ------------- ------------- -------------
Total other income (expense), net .... 128,067 896,987 183,466 1,030,011 6,306,909
------------- ------------- ------------- ------------- -------------
Net loss ................................... (2,143,442) (1,854,795) (6,153,223) (6,269,728) (98,080,426)
Preferred stock dividends .................. -- -- -- -- (36,825,680)
Accretion of convertible preferred stock ... -- -- -- -- (113,014)
------------- ------------- ------------- ------------- -------------
Loss to common shareholders ................ $ (2,143,442) $ (1,854,795) $ (6,153,223) $ (6,269,728) $(135,019,120)
============= ============= ============= ============= =============
Loss per share, basic and diluted .......... $ (0.04) $ (0.04) $ (0.13) $ (0.14)
============= ============= ============= =============
Weighted-average common shares outstanding . 48,524,912 43,538,541 45,634,899 43,312,183
============= ============= ============= =============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Unaudited)
Cumulative from
May 8, 1997
(date of inception)
Nine months ended September 30, through September
2005 2004 30, 2005
--------------- -------------- ----------------
Cash flows from operating activities:
Net loss ............................................. $ (6,153,223) $ (6,269,728) $(98,080,426)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 62,103 130,179 4,200,070
Loss on sale of fixed assets ...................... 87,365 -- 283,534
Impairment of assets .............................. (111,754) (9,703) 4,542,459
Restricted cash ................................... 90,443 45,221 (219,568)
(Expenses paid) restructuring charge .............. (257,660) (257,660) 804,984
Reserve for officers note ......................... (102,044) -- --
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 ....... 621,153 697,363 2,612,011
Options and warrants issued for consulting services -- -- 1,585,654
Services and interest expense paid in preferred
stock ............................................. -- -- 11,485
Non cash dividend received ........................ -- (90,351) --
Gain on sale of investments ....................... -- (880,025) (3,562,582)
Changes in operating assets and liabilities:
Accounts receivable ............................... (92,391) 123,772 (144,496)
Inventory ......................................... 222,593 12,485 --
Unbilled costs under government contracts ......... (600,625) -- (600,625)
Prepaid expenses and other current assets ......... 561,758 334,537 (457,342)
Accounts payable .................................. (269,369) (97,684) 119,820
Accrued compensation and benefits ................. 59,766 27,807 190,375
Accrued interest .................................. -- -- 275,560
Dividend receivable ............................... -- 63,758 --
Accrued contract loss ............................. 299,235 -- 299,235
Other accrued expenses and current liabilities .... 261,196 340,026 663,435
------------ ------------ ------------
Net cash used in operating activities ........... (5,321,454) (5,830,003) (85,294,882)
Cash flows from investing activities:
Purchase of investments .............................. (1,000,000) -- (2,190,352)
Sale of investments .................................. -- 1,413,607 4,752,934
Increase in other assets ............................. -- -- (412,072)
Purchases of property and equipment .................. (39,713) (30,845) (8,492,266)
Sale of property and equipment ....................... 28,800 17,875 100,040
------------ ------------ ------------
Net cash used in investing activities ............. (1,010,913) 1,400,637 (6,241,716)
Cash flows from financing activities:
Initial public stock offering, net of expenses ....... -- -- 49,341,537
Payment of dividends ................................. -- -- (1,159,373)
Shares issued under employee stock purchase plan ..... 1,738 2,276 129,888
Exercise of employee stock options ................... 656,159 26,700 2,092,426
Cash paid for financing costs ........................ 327,646 -- --
Issuance of preferred stock .......................... -- -- 32,868,028
Stock issued for cash ................................ 3,953,571 -- 3,953,571
Repurchase company stock ............................. (319,420) -- (319,420)
Repayment of subscription receivable ................. -- -- 5,000,000
Proceeds from capital leases ......................... -- -- 495,851
Repayment of capital leases .......................... -- -- (1,031,395)
Proceeds from notes payable issued to investors ...... -- -- 3,550,000
------------ ------------ ------------
Net cash provided by financing activities ......... 4,619,694 28,976 94,921,113
(Decrease) increase in cash and cash equivalents ........... (1,712,673) (4,400,390) 3,384,515
Cash and cash equivalents, beginning of period ............. 5,097,188 8,909,261 --
------------ ------------ ------------
Cash and cash equivalents, end of period ................... $ 3,384,515 $ 4,508,871 $ 3,384,515
============ ============ ============
Supplemental disclosure of non--cash transactions:
Cash paid for interest ............................... $ -- $ -- $ 488,126
============ ============ ============
Cash paid for taxes .................................. $ -- $ 1,956 $ 32,000
============ ============ ============
Assets acquired through capital lease ................ $ -- $ -- $ 535,445
============ ============ ============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Business and Operations
Nature of Business. Beacon Power Corporation ("the Company") was incorporated on
May 8, 1997. Beacon Power Corporation and its subsidiaries design, develop,
configure and offer for sale advanced products and services to support more
stable and reliable electricity grid operation. The Company has a single
operating segment, developing alternative sustainable energy storage and power
conversion solutions. Its organizational structure has no divisions or
subsidiaries dictated by product lines, geography or customer type. Because the
Company has not yet generated a significant amount of revenue from its principal
operations, it is accounted for as a development stage company under Statement
of Financial Accounting Standards No. 7.
The Company has experienced net losses since its inception and, as of September
30, 2005, had an accumulated deficit of approximately $135 million. It does not
expect to become profitable or cash flow positive until at least 2008 and will
need to raise additional funds to fully execute its business plan.
Fundraising
Subsequent to the end of the quarter, on November 8, 2005, the Company
distributed 9,868,421 newly issued shares of its 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. The Company 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 to the Company of
$14,175,500 net of expenses and commissions in the amount of $824,500. The
Company has agreed to use these proceeds for working capital purposes only. For
further details, please see the Securities Purchase Agreement which was filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 7,
2005.
On May 24, 2005 and July 26, 2005 the Company received an investment of $2.9
million in the aggregate from Perseus 2000 Expansion, LLC, an affiliate of one
of the Company's largest shareholders, and in return issued to Perseus 3,452,380
shares of the Company's Common Stock and a warrant to purchase 800,000 shares of
the Company's Common Stock at $1.008 per share. Perseus also paid $0.1 million
for an extension by two years to an existing warrant already held by Perseus.
This warrant entitles Perseus to purchase 1,333,333 shares of the Company's
Common Stock, exercisable at $2.25 per share.
On each of June 13, 2005 and July 21, 2005, the Company, NxtPhase and Perseus
2000 Expansion invested $500,000 in NxtPhase whereby (a) the Company purchased
111,111 Class A preferred shares of NxtPhase, (b) Perseus 2000 Expansion
purchased 595,238 shares of the Company's common stock and (c) the Company
issued to Perseus 2000 Expansion a warrant to purchase up to 138,636 shares of
its common stock, at an exercise price per share of $1.008. With respect to the
third tranche, Perseus 2000 Expansion did not exercise the NxtPhase Investment
Option and instead, purchased NxtPhase Class A preferred shares directly from
NxtPhase on August 29, 2005. The NxtPhase Investment Option required the Company
to purchase NxtPhase Class A preferred shares using the funds received from
Perseus 2000 Expansion. If the acquisition of NxtPhase is not consummated or
does not occur within a certain period, the Company will transfer its NxtPhase
Class A preferred shares to Perseus 2000 Expansion and Perseus 2000 Expansion
will transfer its Beacon Common Stock issued in connection with the NxtPhase
Investment Option back to the Company.
Based on the Company's planned cash usage rate, inclusive of its recent
investments in 2005, the Company believes it has adequate cash to fund its
operations into 2007. The Company will need to obtain additional financing to
fund:
o ongoing research and development of the Smart Energy Matrix;
o working capital requirements;
o new business development; and
o potential acquisitions.
Proposed Business Combination
On April 22, 2005, the Company entered into an agreement to acquire NxtPhase T&D
Corporation ("NxtPhase"), a privately held Canadian corporation. Under terms of
the agreement, the Company would acquire NxtPhase by issuing approximately 15.7
million new shares of common stock of the Company to NxtPhase stockholders and
immediately following closing, to grant restricted stock units for approximately
2.7 million new shares of common stock of the Company to certain of NxtPhase
employees. This agreement resulted from introductions made by Perseus, L.L.C.,
which is an affiliate of both the Company and NxtPhase.
The proposed acquisition is subject to, among other things, approval by the
stockholders of both the Company and NxtPhase and also requires regulatory and
court approvals. The agreement expires on December 31, 2005 unless the
acquisition of NxtPhase has occurred by that date. On September 29, 2005, the
Company filed with the SEC, a preliminary joint proxy statement for the purpose
of obtaining a shareholder vote on this proposed transaction. As of April 22,
2005, the closing bid price of the Company's common stock as reported on the
Nasdaq Capital Market was $0.84 per share which would translate into a purchase
price for NxtPhase of approximately $16 million. On November 8, 2005, the
closing bid price of the Company's common stock as reported on the Nasdaq
Capital Market was $1.85 per share which would translate into a purchase price
for NxtPhase of approximately $35 million. The change in market value of the
Company's common stock does not change the number of shares to be issued to
NxtPhase under the terms of the proposed business combination. Based on the
increase in the valuation of the Company's stock, the preliminary Proxy includes
a statement from the Company's Board of Directors to the Company's shareholders
indicating that at the current stock price, the Board of Directors is not able
to recommend a vote for the transaction.
NxtPhase develops, manufactures and markets products to improve the stability
and reliability of the generation, transmission and distribution of high voltage
electric power. NxtPhase sensors are protected by a portfolio of more than 20
owned or licensed patents. Headquartered in Vancouver, British Columbia,
NxtPhase has sales and manufacturing operations in the United States and Canada.
If it is acquired by the Company, NxtPhase will operate as a wholly owned
subsidiary and will retain the NxtPhase brand name. Many of NxtPhase's products
are in the early stages of development or production and, as such, NxtPhase does
not yet have revenues sufficient to offset its cost of sales and operating
costs. NxtPhase and its predecessor have incurred losses since their inception.
If the acquisition of NxtPhase does not occur by December 31, 2005, it will not
occur unless the Company and NxtPhase agree to extend their agreement on the
same or different terms than those discussed above. The Company believes it is
unlikely that this transaction will be completed by December 31, 2005, or at
all, and as such, has recorded an expense for its previously capitalized direct
merger costs in the amount of $690,984.
Products
The Company has the following products, which are in varying stages of
development, production readiness or low volume production:
Smart Energy Matrix - One of the more challenging aspects of today's electric
grid is the constant balancing of power demand and production to maintain a
stable grid frequency within a narrow band of the target frequency (60 Hz in the
US). This is referred to as frequency regulation. If the imbalances, (or
excursions from the target frequency), are too large, generators and equipment
attached to the grid suffer from a loss in performance and sometimes disconnect
from the grid as a defense mechanism. These unplanned events add to the existing
high level of imbalance and reduce the grid stability. In extreme cases, this
cycle of imbalance and dropping of loads and generators, can lead to blackouts.
The Company's Smart Energy Matrix is a flywheel-based energy storage system
combining high power flywheels with power electronics for the purpose of
supplying frequency regulation services to regional grid operators. These fast
acting systems are designed to instantly deliver electricity when demand exceeds
supply and absorb electricity when supply exceeds demand. It is a
high-performance, long-life, environmentally friendly solution for frequency
regulation, with no fuel consumed and no emissions generated.
In addition to providing frequency regulation services to the grid itself, the
Company also believes that the Smart Energy Matrix is well suited to provide
services to regulate the frequency and improve load following capability of
distributed generation facilities.
These smaller local grid systems, due to differences in scale, typically suffer
more sudden and dramatic imbalances between power supply and demand than do
regional grids.
Smart Energy 25 - The Company has a design for its 4th generation flywheel
product, the Smart Energy 25. This 25 kWh flywheel will become the basis of the
Company's Smart Energy Matrix and the Company believes this system, when
combined with existing power electronics, also has appeal as a stand-alone
application in markets that require always-on energy storage with the ability to
be charged and discharged hundreds of times per day. The 25kWh flywheel is a
scaling up of the Company's existing Smart Energy 6kWh flywheel system. The
Company will begin full-scale development of its Smart Energy 25 immediately
since it has obtained sufficient funds to begin development of this product.
Smart Energy system - The Company has produced in limited quantities high-energy
flywheel-based systems of 2kWh and 6kWh that store electricity for
telecommunications, cable systems, computer networks and Internet market
applications. The Company has sufficient capacity to return to production if
market demand occurs. These units have been providing energy storage since their
installation, a cumulative operating time of approximately 510,000 hours.
Smart Power(TM) M5 inverter system - The Company's Smart Power M5 inverter
system is an electronic system that converts direct current electricity produced
by photovoltaic panels into alternating current electricity for residential and
commercial use. Although it is continuing to sell and support this product, the
Company does not believe that inverters will be a significant portion of its
business going forward. During the 4th quarter of 2004 the Company recorded a
reserve against its entire inverter inventory of approximately $1,025,000 and
made a provision for future inverter warranty expenditures of approximately
$28,000.
Smart Energy Matrix
The Company's Smart Energy Matrix is designed to provide frequency regulation
services. Frequency regulation, traditionally a function provided by integrated
utilities, has been required by the power industry since the industry began.
With deregulation, it is one of the several ancillary services that have become
a separately identified service with its own established market price. Some of
the services are provided under long-term contracts whereas others are provided
in a spot market consisting of a daily auction run by some regional grid
operators. Today, suppliers of frequency regulation services include
fossil-fuel, hydro and other electricity generators that are willing and able,
at short notice, to vary the supply of electricity in a specified amount during
a specified period.
Participating generators sell both electricity in their capacities as generators
and sell frequency regulation services using some of their reserve generating
capacity. Providing regulation services is qualitatively different than
generating electricity, both because the generator's output constantly varies in
response to continual signals from the grid operator and because it is priced
differently and sold through a different market. Also, not all generators
provide frequency regulation services. Some, such as nuclear power plants, are
unable to vary their output in the manner needed to participate in the market.
If there is no local competitive market for regulation services, regulation must
be provided by local generators. The output of those generators must be adjusted
to provide sufficient reserves for regulation. This adjustment involves lost
potential revenue where output is reduced or additional cost where output must
be increased to operate in an acceptable power range of the generator. In
addition, the constant up and down of supplying frequency regulation services is
hard on equipment. Fossil fuel generators suffer more wear and tear from this
process than do hydro generators. These costs associated with wear and tear are
not optional for turbines that provide regulation and are simply counted as a
cost of generating power.
Where local competitive markets exist for frequency regulation, generators have
the option of operating at reduced power and providing regulation or operating
at a power level that maximizes revenue i.e. 100% power instead of reduced power
with reserves for regulation. Many generators prefer to sell electricity and not
provide frequency regulation services, because their net financial return from
such services is lower than for generating electricity, due to the higher
operating and maintenance costs that arise from frequency regulation as compared
to steady-state generation of electricity. Despite these disadvantages, many
generators sell such services both to obtain revenues from whatever portion of
their generating capacity is held in reserve and to offset the amount that that
the generator otherwise has to pay to its regional grid operator for frequency
regulation services that it has not itself provided to the grid.
Frequency regulation services are contracted through some competitive markets
organized by regional transmission organizations, the entities responsible for
organizing and maintaining the proper operation of the electric grid. Only part
of the U.S. electrical power market is open to competition. For example, there
are competitive markets at the PJM Interconnection (serving the Mid-Atlantic
States), New York Independent System Operator (NY ISO), New England Regional
Transmission Organization (NE RTO) and California Independent System Operator
(CAL ISO). The Electricity Reliability Council of Texas Independent System
Operator (ERCOT ISO) is only partially open, using competitive bidding for a
small fraction of its needs. Frequency Regulation within ERCOT is mostly self
provided and not managed through an open market. The Midwest Independent System
Operator (MISO), serving North and South Dakota, Michigan and Missouri, opened
to competitive bidding in 2005 and the Company understands that MISO will
operate in a manner and scope similar to PJM's frequency regulation auction. On
the other hand, for example, in the southeast United States, Georgia Power must
provide its own frequency regulation and does not obtain competitive bids
because there is no regional transmission organization in this area. The Company
intends to become credentialed and qualified to participate in the competitive
bidding procurement by PJM and other regional transmission operators. The key
qualification for the Company will be to operate a full-size commercial-grade
Smart Energy Matrix for evaluation by the regional transmission operators.
The Company believes the characteristics of its Smart Energy Matrix match the
requirements of the frequency regulation market very well, as it is designed to
quickly draw or absorb excess energy, on very short notice, when generated power
exceeds demand and deliver it when demand exceeds supply. The Company will be
able to provide a faster response than most service providers because the
Company's flywheel systems for supplying or absorbing electricity are inherently
faster acting than generators. The Company can perform either of these steps in
a fraction of the time it takes a fossil fuel generator to increase or reduce
its output. Flywheels actually recycle excess energy when generated power
exceeds load and deliver it when load increases. Using the Company's technology,
frequency regulation can be addressed for the first time as a primary
application - and with higher performance and lower operating costs. Use of the
Smart Energy Matrix also should result in significant environmental benefits,
both in that frequency regulation could be supplied without directly consuming
fuel or generating emissions and in that fossil fuel generators would be able to
operate more efficiently by reducing their frequency regulation services and
hence reducing the extra emissions that come from ramping a generating facility
up and down to provide those services. Similarly, widespread use of the
Company's Smart Energy Matrix may also mean that the most inefficient and
highest-cost generators, being the greatest producers of emissions, would reduce
their participation in the market to a greater degree than the more efficient
producers. The Smart Energy Matrix equipment can also be sited nearly anywhere
advantageous to the grid, even within distribution systems. If sited in the
distribution systems, additional benefits such as voltage regulation and
uninterruptible power can be offered to enhance the value of the product.
Frequency regulation services are provided through a spot or auction market. In
these auctions, the regional power authority accepts bidders having the lowest
bids up through the highest bids necessary to provide the projected amount of
frequency regulation. All of these successful bidders then receive the same,
highest accepted bid price, known as the market clearing price. Because all
successful bidders receive the market clearing price, if that clearing price
provides a bidder with an adequate margin above its costs, a low cost provider
can be assured of being part of the successful bidders and having an adequate
return on investment by bidding zero. During the several years since the spot
market became open to competition, the market clearing price has been well above
the Company's anticipated cost to supply the service. Bidders in frequency
regulation auctions are typically fossil fuel generators that are constrained
from making low bids in the auctions. Fossil fuel generators have increasing
fuel costs, high operating and maintenance costs arising from ramping equipment
up and down to supply frequency regulation services and opportunity costs that
arise from having used generating capacity to provide frequency regulation
services rather than to sell electricity to the grid. Although hydro generators
have lower operating and maintenance costs than fossil fuel producers, they are
geographically limited. In contrast to the fossil fuel generators, the Smart
Energy Matrix has much lower operating and maintenance costs and minimal fuel
costs. Consequently, the Company believes that it will always be a successful
bidder of frequency regulation services to any regional grid operator that uses
an auction market.
The Company believes that the increasing trend towards renewable energy will
have an impact on the future of providing frequency regulation in two ways:
1. The variable output of these renewable assets, i.e. fluctuating wind or
sun exposure adds to the mismatch variability between generated power
and load demand. Additional frequency regulation will be required and
demand for regulation will increase.
2. Generator assets scheduled for retirement as a result of environmental
issues over the next several years tend to be the very assets that
provide the lowest cost frequency regulation, other than hydro
facilities.
The Company has identified additional applications for its Smart Energy Matrix
in the distributed generation market. A distributed generation facility is any
electrical power source other than the utilities' power grid, including advanced
generators such as fuel cells, natural gas engines, wind turbines, photovoltaic
arrays and microturbines which usually supply local power to facilities such as
hospitals or manufacturing plants. In distributed generation, demand
fluctuations are a much higher percentage of power production than is
experienced in the power grid, which adversely affects the distributed
generator's ability to match supply and demand. The Company's Smart Energy
Matrix can be used to regulate the frequency of the distributed generation
facility's power in the same way it regulates the frequency of the power grid as
described above. The Smart Energy Matrix, because of its extremely fast response
time, can respond to demand fluctuations better than the distributed generators
and thus provide stability to these micro-grid facilities.
Smart Energy 25
The Company has a design for its 4th generation flywheel product, the Smart
Energy 25. This 25 kWh flywheel system will become the basis of the Company's
Smart Energy Matrix and the Company believes this system, when combined with
existing power electronics, also has appeal as a stand-alone application in
markets that require always-on energy storage with the ability to be charged and
discharged hundreds of times per day. The 25kWh flywheel is a scaling up of the
Company's existing Smart Energy 6kWh flywheel system.
Smart Energy
The Company has offered for sale its Smart Energy flywheel products, which
deliver a low level of power for a long period of time (typically measured in
hours). These products include the 2kWh and 6kWh Smart Energy systems, which
have demonstrated quality performance and reliability at numerous sites. The
Smart Energy products are tailored to the telecommunications, cable systems,
computer networks and Internet markets. The Company believes that its Smart
Energy products offer life cycle cost advantages and significant performance
improvements over conventional, battery-based back-up power sources. The Company
is not actively marketing these products and does not have orders for its Smart
Energy products or any inventory of finished products and does not have purchase
orders in place with vendors for components. In the event that the Company
identifies potential customers and then receives significant customer orders for
these products, it will need to place orders for components with vendors and
hire and train manufacturing personnel to assemble, inspect and assist in the
installation of deliverable units.
Smart Power M5
The Smart Power M5 inverter system for the photovoltaic energy market converts
direct current generated by solar cells from sunlight into alternating current
required by residential and commercial users for operating electrical devices
and reducing the amount of purchased power when it is connected to a power grid.
Solar cells contain semi-conducting material that converts sunlight into direct
current electricity. The Company's Smart Power M5 inverter system has the
capacity to convert direct current electricity into up to 5,000 watts of
alternating current. The Company has not been successful in selling a
significant number of units of its Smart Power M5 and has shifted virtually all
of its development and sales activities from the Smart Power M5 to its Smart
Energy Matrix. The Company does not believe that inverters will be a significant
portion of its business going forward and is uncertain as to when or at what
price it will be able to sell its inventories. In 2004, the Company established
a reserve for its entire Smart Power M5 inventory in its financial statements.
Revenues, Cost of Goods Sold and Operations
Revenue. Although the Company has shipped a limited number of commercial
products and recorded revenues from its development contracts its operations
have not yet reached a level that would qualify it to emerge from the
development stage. It continues to be accounted for as a development stage
company under Statement of Financial Accounting Standards No. 7 "Accounting and
Reporting by Development Stage Enterprises."
The Company recognizes revenues in accordance with accounting principles
generally accepted in the United States of America. Revenues on its flywheel
development contracts are recognized on the percentage of completion basis. The
Company has been awarded contracts by the California State Energy Resources
Conservation and Development Commission and the New York State Energy Research
and Development Authority for programs demonstrating the viability of the
Company's flywheel based system for frequency regulation of electricity on the
power grid. Revenue on commercial product sales is recognized when products are
delivered to end users.
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 a one-tenth
power prototype of 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.
Through September 30, 2005, the Company has recorded revenue from this project
of $128,302 and determined this project to be approximately 20% complete.
CEC - On February 14, 2005 the Company executed 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.
Construction of the prototype is complete and it shipped on September 15, 2005
and testing is ongoing in California. The contract is expected to cost
approximately $1.8 million and this expected cost will be partially offset by
approximately $1.2 million of revenue, with the majority of it in 2005. On
September 15, 2005 the Company shipped its system under this contract and the
system is being tested at the CEC's test facility in San Ramon, California.
Through September 30, 2005, the Company has recorded revenue from this contract
of $974,763 and determined it to be approximately 79% complete. The CEC will
retain approximately $57,000 under this contract until all work has been
completed and CEC accepts the Company's final report. Through September 30,
2005, they have retained approximately $25,000, which is included in accounts
receivable on the Company's consolidated balance sheets.
For the Company's inverter products, which are sold to distributors, the Company
recognizes revenues when and if its distributors ship to their customers.
The Company may enter into other contracts to research and develop or
manufacture products with a loss anticipated at the date the contract is signed.
These contracts are entered into in anticipation that profits will be obtained
from future contracts for the same or similar products. These loss contracts may
provide the Company with intellectual property rights that, in effect, establish
it as the sole producer of these products. Anticipated losses on these contracts
are recognized at the date the Company becomes contractually obligated. Future
losses on contracts are charged to earnings as soon as these losses are known.
Estimated costs in excess of revenues are classified under current liabilities
as "Accrued contract loss." The Company accounts for its long-term government
contracts using the percentage of completion method. Under this method,
percentage of completion 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. Costs incurred in excess of amounts billed are
classified as current assets under "Unbilled costs under government contracts."
Cost of goods sold. The Company costs its products at the lower of cost or
market. Any cost in excess of this measurement is expensed in the period in
which it is incurred. In addition, the Company continuously evaluates inventory
and purchase commitments to insure that levels do not exceed the expected
deliveries for the next twelve months. As the Company is still in the
development stage, its actual manufacturing costs incurred exceed the fair
market value of its products. The Company provides a five-year limited product
warranty for its Smart Power M5 product line and accrues for estimated future
warranty costs in the period in which the revenue is recognized.
Operations. The Company has experienced net losses since its inception and, as
of September 30, 2005, had an accumulated deficit of approximately $134 million.
The Company's business strategy is to continue to seek government contracts to
demonstrate the application of its flywheel technologies and identify and review
possible acquisitions or mergers of companies with complementary technologies or
markets. The Company expects to use the results of its government contracts to
validate its technologies and expand relationships it is developing to gain
market access for the Company's future products for the renewable energy
industry. Subsequent to the end of the quarter, the Company obtained the
required funding to begin development of its Smart Energy 25 flywheel, the base
component of its Smart Energy Matrix. However, for other contemplated
flywheel-based systems the Company will continue to evaluate market size, growth
potential and competitive advantages that its products could provide and the
probable market penetration that could be achieved. If markets are identified in
which the Company believes its flywheel products will be successful, and those
markets express a tangible interest in the Company's products, the Company will
seek to obtain additional funds to complete prototype development and production
of identified products. The Company does not expect to become profitable or
obtain positive operating cash flow before 2008 and may not achieve positive
cash flow even at that point or beyond.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared
using accounting principles generally accepted in the United States of America
except that certain information and footnote disclosure normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q. It is
suggested that these consolidated financial statements presented herein be read
in conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K, for the year ended
December 31, 2004. In the opinion of the Company's management, all adjustments,
consisting of normal recurring accruals considered necessary for a fair
presentation, have been included in the accompanying unaudited financial
statements. Operating results for the nine months ended September 30, 2005 are
not necessarily indicative of the results that may be expected for the full year
ending December 31, 2005.
Going Concern.
The accompanying unaudited 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. The Company has
had minimal revenues and incurred losses of approximately $135 million since its
inception including losses in the nine months ending September 30, 2005 of
approximately $ 6.2 million. At September 30, 2005, the Company had
approximately $3,384,000 of cash and cash equivalents on hand. Subsequent to the
end of the quarter, on November 8, 2005, the Company distributed 9,868,421 newly
issued shares of its 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. The Company 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 to the Company of $14,175,500 net of expenses and commissions in
the amount of $824,500. The Company has agreed to use these proceeds for working
capital purposes only. For further details, please see the Securities Purchase
Agreement which was filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on November 7, 2005.
On May 24, 2005 and July 26, 2005, the Company received an investment of $2.9
million in the aggregate from Perseus 2000 Expansion, LLC, an affiliate of one
of the Company's largest shareholders, and in return issued to Perseus 3,452,380
shares of the Company's Common Stock and a warrant to purchase 800,000 shares of
the Company's Common Stock at $1.008 per share. Perseus also paid $0.1 million
for an extension by two years to an existing warrant already held by Perseus.
This warrant entitles Perseus to purchase 1,333,333 shares of the Company's
Common Stock, exercisable at $2.25 per share.
Based on the Company's planned cash usage rate, inclusive of its recent
investments in 2005, the Company believes it has adequate cash to fund its
operations into 2007. Even with these investments, the Company will require
additional equity to fully develop its Smart Energy Matrix and to execute its
long-term business plan. There have been no significant additions to or changes
in accounting policies of the Company since December 31, 2004. For a complete
description of the Company's accounting policies, see Note 2 to Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.
Note 3. Inventory
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 include the following amounts:
September 30, 2005 December 31, 2004
------------ -----------
Raw materials .. $ -- $ 176,349
Work in progress -- 46,244
Finished goods . -- --
------------ -----------
Inventories, net $ -- $ 222,593
============ ===========
As of September 30, 2005, all inventory is included as part of "Unbilled costs
on government contracts" in the Company's consolidated balance sheet. Any
inventories not associated with the Company's government contracts were
previously reserved.
Note 4. Property and Equipment
Property and equipment are stated at cost and consist of the following:
Estimated
Useful September 30, December 31,
Lives 2005 2004
----------- ------------ ------------
Machinery and equipment ...................... 5 years $ 575,663 $ 571,198
Service vehicles ............................. 5 years 16,762 16,762
Furniture and fixtures ....................... 7 years 255,939 296,652
Office equipment ............................. 3 years 1,431,809 1,396,562
Leasehold improvements ....................... Lease term 533,352 533,352
Equipment under capital lease obligations .... Lease term 918,285 918,285
----------- -----------
Total .................................. $ 3,731,810 $ 3,732,811
Less accumulated depreciation and amortization (3,499,964) (3,474,164)
----------- -----------
Property and equipment, net ............ $ 231,846 $ 258,647
=========== ===========
Note 5. Commitments
The Company's principal contractual obligations as of September 30, 2005 are as
follows:
Three months Cash payments due during the
ending year ended December 31,
------------------------------
Description of commitment December 31, 2005 2006 2007 Thereafter Total
- ------------------------------ ------------------ ------------- ------------- ----------- --------------
Operating leases $ 132,353 $ 529,413 $ 397,059 $ - $ 1,058,825
Non-cancelable purchase
orders 202,671 - - - 202,671
------------------ ------------- ------------- ----------- --------------
Total commitments $ 335,024 $ 529,413 $ 397,059 $ - $ 1,261,496
================== ============= ============= =========== ==============
The Company leases office and light manufacturing space under an operating lease
with a term through September 30, 2007. At September 30, 2005, the Company has
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.
The Company has firm non-cancelable purchase commitments with its suppliers to
satisfy contractual obligations for its research and development programs in the
amount of approximately $202,671. In the fourth quarter of 2004, the Company
fully reserved all contractual obligations related to its Smart Power M5
purchase commitments.
Legal Proceedings. The Company may be subject to various legal proceedings, many
involving routine litigation incidental to its business. The outcome of any
legal proceeding is not within the complete control of the Company, is often
difficult to predict and may be 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 (1) probable and known that a liability has been
incurred and (2) 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.
On August 16, 2004, Ricardo and Gladys Farnes and TLER Associates, Ltd., a
Bahamas corporation ("TLER," and together with Ricardo and Gladys Farnes, the
"Plaintiffs"), delivered a complaint to the Company naming as defendants the
Company, John Doherty, Richard Lane and unidentified individuals and
corporations. The Plaintiffs and the Company settled this dispute on July 31,
2005. The Company paid the Plaintiffs a sum of $5,000 and the parties agreed to
file a stipulation stating, among other things, that the litigation is dismissed
with prejudice. The settlement did not constitute an admission of liability by
the Company.
Note 6. Investments
On April 22, 2005 the Company entered into an Investment Agreement with Perseus
Capital, L.L.C. and Perseus 2000 Expansion, L.L.C. ("Perseus 2000 Expansion"),
and Perseus 2000 Expansion separately entered into a term sheet with NxtPhase.
On the same day, the Company entered into an agreement to acquire 100% of
NxtPhase. See Note 1 for more information. In each of the Investment Agreement
and the NxtPhase term sheet, the respective companies have the right to require
Perseus 2000 Expansion to purchase shares of such company's capital stock at a
price per share as specified in the Investment Agreement and NxtPhase term
sheet, respectively. Perseus 2000 Expansion has purchased $1.0 million in the
aggregate. The Investment Agreement also provides that if NxtPhase requires
Perseus 2000 Expansion to purchase NxtPhase Class A preferred shares, Perseus
2000 Expansion may assign its obligation to the Company to purchase such
NxtPhase Class A preferred shares, so long as Perseus 2000 Expansion purchases
an equivalent dollar amount of the Company's common stock, on the terms set
forth in the Investment Agreement. The agreement between the Company and Perseus
on the NxtPhase related investment contains unwind language in the event that
the proposed acquisition of NxtPhase does not occur. This would result in the
Company exchanging its NxtPhase Class A preferred stock for shares of its common
stock issued to Perseus.
On each of June 13, 2005 and July 21, 2005, the Company invested $500,000 in
NxtPhase whereby (a) the Company purchased 111,111 Class A preferred shares of
NxtPhase for $500,000, (b) Perseus 2000 Expansion purchased 595,238 shares of
the Company's common stock for $500,000and (c) the Company issued to Perseus
2000 Expansion a warrant to purchase up to 138,636 shares of its common stock,
at an exercise price per share of $1.008. With respect to the third tranche,
Perseus 2000 Expansion did not exercise the NxtPhase Investment Option and
instead, purchased NxtPhase Class A preferred shares directly from NxtPhase on
August 29, 2005. The NxtPhase Investment Option required the Company to purchase
NxtPhase Class A preferred shares using the funds received from Perseus 2000
Expansion. If the acquisition of NxtPhase does not occur by December 31, 2005,
the Company will transfer its NxtPhase Class A preferred shares to Perseus 2000
Expansion and Perseus 2000 Expansion will transfer its Beacon common stock
issued in connection with the NxtPhase Investment Option back to the Company.
This investment in the equity securities of NxtPhase is classified as held to
maturity and is carried on the balance sheet at cost.
Note 7. Common Stock
Shareholder Rights Agreement. In September 2002, and amended as of December 27,
2002, the Company'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 the Company's 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 the Company is 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).
Treasury Stock. In May 2005, and again in August 2005, the board of directors
authorized the Company to purchase 99,146 and 48,841 shares, respectively, of
the Company's common stock from its three executive officers at an average
market price of $0.89 and $4.74 per share, respectively. These shares were
originally issued to the officers under the Company's restricted stock unit
deferred compensation program described in Note 10. This decision was driven by
the Company's policies restricting open market trading by senior personnel who
have access to material nonpublic information. As those policies prevent
management from selling shares to the market to generate cash to fund the
withholding tax obligations that arise from the compensation income which is
generated by the restricted stock units, the Company has withheld shares in
sufficient quantity to pay the tax liability in connection with these
installments of restricted stock.
Reserved Shares. At September 30, 2005 and December 31, 2004, 8,051,681 and
11,601,803 shares of common stock were reserved for issuance under the Company's
stock option plan and for outstanding warrants, respectively. The following
schedule shows warrants outstanding as of September 30, 2005:
Warrantholder Grant Date Expiration Strike Issued and
Date Price Outstanding
- --------------------------------- ------------ ------------ ---------- -------------
Perseus Capital, L.L.C. 5/23/2000 5/23/2007 $ 2.25 1,333,333
GE Capital (CR&D) 10/24/2000 10/24/2005 $ 2.10 120,000
Perseus 2000 Expansion, L.L.C. 5/24/2005 5/24/2010 $ 1.01 800,000
Perseus 2000 Expansion, L.L.C. 6/10/2005 6/10/2010 $ 1.01 138,636
Perseus 2000 Expansion, L.L.C. 6/10/2005 6/10/2010 $ 1.01 138,636
------------ ------------ ---------- -------------
Total Warrants 2,530,605
On October 21, 2005, GE Capital instructed the Company to execute a cashless
exercise of its warrant and as a result, the Company issued 24,215 shares of its
common stock to GE Capital.
Note 8. Related Party Transactions
Loan to Officer. During 2001, the Company advanced approximately $565,000 to an
officer of the Company, Mr. William Stanton, its former CEO and President and
currently a director of and consultant to the Company. This advance was interest
bearing and secured by Mr. Stanton's holdings of the Company's common stock and
was provided to him to allow the exercise of stock options and the payment of
related taxes. On August 5, 2005, Mr. Stanton surrendered vested options to
purchase 76,752 shares of common stock of the Company which were granted to him
on October 13, 2004. The Company 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 the Company's 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 advanced by the Company to Mr. Stanton as
described above. The Company considers these shares treasury stock, recorded at
its cost.
Perseus Investment. On April 22, 2005, a fund affiliated with Perseus, L.L.C.
committed to invest a maximum of $3.0 million in the Company and was granted the
option to assign to the Company its right to make a maximum investment of
$1,500,000 in NxtPhase T&D Corporation, to be made in three tranches. The option
was granted in connection with a Preferred Stock Purchase Agreement among
NxtPhase and certain of its existing Class A preferred shareholders. The option
was granted as part of a proposed acquisition of NxtPhase by the Company and, if
exercised by Perseus, required the Company to purchase Class A preferred shares
of NxtPhase in exchange for Perseus purchasing shares of the Company's common
stock. The $3.0 million investment in the Company by Perseus is to be made in
exchange for approximately 3.6 million shares of the Company's common stock,
warrants covering up to 0.8 million shares of the Company's common stock,
exercisable at $1.008 per share and a two year extension of a 1,333,333 warrant,
exercisable at $2.25 per share, already held by Perseus. The $1.5 million
investment by Perseus to fund NxtPhase is to be made in exchange for the receipt
by Perseus of approximately 1.8 million shares of the Company's common stock and
warrants covering up to 0.4 million shares of the Company's common stock,
exercisable at $1.008 per share, and in exchange for the receipt by the Company
of approximately 0.3 million shares of NxtPhase Class A preferred stock. The
agreement between the Company and Perseus on the NxtPhase related investment
contains unwind language in the event that the proposed acquisition of NxtPhase
does not occur. This would result in the Company exchanging its NxtPhase Class A
preferred stock for shares of its common stock issued to Perseus. On May 24,
2005 Perseus invested $1.4 million in the Company and also paid $100,000 for the
warrant extension. Then on July 26, 2005 Perseus invested the remaining $1.5
million of the $2.9 million commitment. On the NxtPhase investment, Perseus
invested $1 million that was then invested by the Company into NxtPhase in
exchange for approximately .2 million shares of NxtPhase Class A preferred
stock. See Note 6 for more information.
Treasury Stock. In May and August 2005 the board of directors authorized the
Company to purchase 99,146 and 48,841 shares, respectively of the Company's
common stock from its executive officers at market price of $0.89 and $4.74 per
share, respectively. These purchases were driven by the Company's policies
restricting open market trading by senior personnel who have access to material
nonpublic information. As those policies prevent management from selling shares
to the market to generate cash to fund the withholding tax obligations that
arise from the compensation income which is generated by the restricted stock
units. The Company records its treasury stock at cost.
Note 9. Restructuring Charges
Restructuring and asset impairment charges. The Company's initial products were
focused on the telecommunications industry. As a result of the overall economic
downturn and in particular the significant decline in capital and maintenance
spending in telecommunications as well as the low price of lead-acid batteries,
products competing with those of the Company, the Company has not been
successful in selling products into this market. In December, 2003, the Company
recorded a non-cash asset impairment charge of $0.4 million in order to reduce
the carrying amount of its flywheel related patents and patents pending as the
estimated future cash flows anticipated from these assets were substantially in
doubt. Also, in July, 2002, in an effort to reduce its monthly cash-spending
rate, the Company implemented a number of cost-cutting measures to ensure the
availability of resources necessary to pursue its business strategy for a
reasonable period but at a significantly lower cash expenditure rate. As a
result, a substantial portion of the Company's long-term assets were idled,
including machinery and equipment, tooling, office furniture, equipment and
leasehold improvements. The Company evaluated all of its property and equipment
as required by Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" and, in 2002, 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.
A summary of the restructuring reserves is as follows:
Nine months ended September 30,
------------------------------------
2005 2004
---------------- ---------------
Beginning balance $ 1,062,644 $ 1,406,191
Charges for the period - -
Payments (257,660) (257,660)
---------------- ---------------
Ending balance $ 804,984 $ 1,148,531
================ ===============
Note 10. Stock-Based Compensation
The Company's Second Amended and Restated 1998 Stock Incentive Plan provides for
the granting of stock options to purchase up to 9,000,000 shares of the
Company's common stock. Options with terms of up to 10 years may be granted to
employees, officers, directors and consultants of the Company. Under the terms
of the plan, incentive stock options ("ISOs") are to be granted at fair market
value of the Company's 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.
The Company accounts 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. In 2002,
the Company implemented FASB Statement of Financial Accounting Standards No. 148
("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure." SFAS 148 amends current disclosure requirements and requires
prominent disclosures on both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This statement is effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. SFAS 148 also provides alternative methods of transition for
a voluntary change to fair-value based methods of accounting, which the Company
has not adopted at this time.
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 the Company had applied the fair value recognition
provisions of FASB Statement No. 123 "Accounting for Stock-Based Compensation"
to stock-based employee compensation using the Black Scholes stock option
valuation formula.
Three months ended September 30, Nine months ended September 30,
2005 2004 2005 2004
----------------- -- ---------------- ----------------- -- -----------------
Net loss to common shareholders as reported $ (2,143,442) $ (1,854,795) $ (6,153,223) $ (6,269,728)
Pro forma compensation expense 22,626 82,686 105,312 267,073
----------------- ---------------- ----------------- -----------------
Net loss--pro forma $ (2,166,068) $ (1,937,481) $ (6,258,535) $ (6,536,801)
Loss per share--as reported $ (0.04) $ (0.04) $ (0.13) $ (0.14)
Loss per share--pro forma $ (0.04) $ (0.04) $ (0.14) $ (0.15)
Restricted Stock Units
In 2003, the Company put into place a long-term incentive plan (LTIP) for all
executives and employees for 2003 and 2004. Based on the Company's need to
conserve cash and the desire to retain its professional staff, the Company
determined that it would be in the best interest of it, its employees and its
stockholders to implement a stock-based Deferred Compensation Plan.
The LTIP eliminated the previous cash bonus structure for successful performance
and replaced it with a program whereby the Company establishes 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 Company's 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 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. The Company's employees earned 738,921 and 667,151
RSUs for the fiscal years ended December 31, 2004 and 2003, respectively, which
are not available for exercise until satisfaction of the quarterly vesting
period 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 the
Company's Income Statement. Compensation expense recorded for the nine months
ending September 30 was $621,153 and $717,079 for 2005 and 2004, respectively.
Note 11. Income Taxes
At December 31, 2004 the Company had approximately $81 million of net operating
loss carry forwards which begin to expire in 2012 and additional research and
development tax credits. Valuation allowances have reduced the potential
benefits from the use of these carry forwards to zero as their future
utilization is not assured.
Under the provisions of the Internal Revenue Code, certain substantial changes
in the Company's ownership may limit, in the future, the amount of net operating
loss carry forwards which could be utilized annually to offset future taxable
income and income tax liabilities. The amount of any annual limitation is
determined based upon the Company's value prior to an ownership change. The
Company's agreement to effect a business combination with NxtPhase T&D
Corporation (see Note 6) may limit the value of these tax loss carry-forwards if
that combination occurs, but the Company has not yet made an assessment of this
limitation.
Note 12. Subsequent Events
Fundraising
On November 8, 2005, the Company distributed 9,868,421 newly issued shares of
its 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. The Company 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 to the Company of $14,175,500 net of expenses and commissions in
the amount of $824,500. The Company has agreed to use these proceeds for working
capital purposes only. For further details, please see the Securities Purchase
Agreement which was filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K filed on November 7, 2005.
Air Force Research Laboratory Contract
On October 10, 2005 the Company was awarded a contract through the Air Force
Research Laboratory and co-funded by the Defense Advanced Research Projects
Agency (DARPA) of the U.S. Department of Defense. The contract is a firm
fixed-price contract expected to cost approximately $750,000 and produce revenue
of approximately $750,000. As specified in the contract, the Company will
provide the preliminary design of a space-based flywheel energy storage system
for satellite applications. The contract is a Phase II award under the Small
Business Innovation Research (SBIR) program of the U.S. Small Business
Administration's Office of Technology. The Company completed an associated Phase
I project earlier this year in the amount of approximately $98,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Note Regarding Forward Looking Statements:
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning, among other things, the Company's expected future revenues,
operations and expenditures and estimates of the potential markets for the
Company's services. Such statements made by the Company fall within the meaning
of the Private Securities Litigation Reform Act of 1995, as amended. All such
forward-looking statements are necessarily only estimates of future results and
the actual results achieved by the Company may differ materially from these
projections due to a number of factors as discussed in the section entitled
"Certain Factors Affecting Future Operating Results" of this Form 10-Q.
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 the
Company's estimates and assumptions including but not limited to those related
to revenue recognition, asset impairments, inventory valuation, warranty
reserves, contract losses 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 the Company has shipped products and recorded
contract revenues its operations have not yet reached a level that would qualify
it to emerge from the development stage. It continues to be accounted for as a
development stage company under Statement of Financial Accounting Standards No.
7 "Accounting and Reporting by Development Stage Enterprises."
The Company recognizes 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, the Company
makes an adjustment to defer revenue until the products are subsequently sold by
distributors to their customers.
Government Contract Revenue Recognized on the Percentage-of-Completion Method.
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. The Company uses 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.
Revenues recognized and/or costs incurred in excess of amounts billed are
classified as current assets and included in "Unbilled costs on government
contracts" and amounts billed to clients in excess of revenues recognized to
date are classified as current liabilities under "Advance billings on contracts"
in the Company's consolidated balance sheets. Provisions for contract losses are
included in current liabilities as "Accrued contract loss." Changes in project
performance and conditions, estimated profitability and final contract
settlements may result in future revisions to construction contract costs and
revenue.
Inventory Valuation. The Company values its inventory at the lower of actual
cost or the current estimated market value. It regularly reviews inventory
quantities on hand and records a provision for excess and obsolete inventory
based primarily on historical usage for the prior twelve month period and future
sales forecasts. Although the Company makes every effort to ensure the accuracy
of its forecasts of future product demand, any significant unanticipated changes
in demand or technological developments could have a significant impact on the
value of its inventory and its reported operating results.
Warranty Reserves. The Company's warranties require it to repair or replace
defective products returned to it during the applicable warranty period at no
cost to the customer. It records 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 the Company's estimates of taxable income and the period over which its
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or the Company adjusts these estimates in future periods it
may need to establish an additional valuation allowance or reduce its current
valuation allowance which could materially impact its 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 to be held and used by the Company 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 the Company recognizes 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.
Investments. Marketable equity securities not classified as held-to-maturity or
as trading are classified as available-for-sale and are carried at fair market
value with the unrealized gains and losses, net of tax, included in the
determination of comprehensive income and reported in shareholders' equity. The
fair value of substantially all securities is determined by quoted market
prices. The estimated fair value of securities for which there are no quoted
market prices is based on similar types of securities that are traded in the
market.
Overview
The Company's initial product strategy was to develop high energy, composite
flywheels for back-up powering of telecommunications applications. With the
weakening of the telecommunications market the Company recognized that its Smart
Energy flywheel products as alternative backup solutions to the
telecommunications industry were not on a path to produce meaningful revenues.
With that recognition, the Company initiated a series of cost cutting measures
throughout 2002 and 2003. The focus of these efforts was to reduce cash usage,
preserve the Company's intellectual properties and maintain the integrity of its
public company requirements while evaluating all potential product markets for
the Company's technologies and considering acquisitions or mergers that could
lead to increased shareholder value. The Company has:
o identified promising applications for its Smart Energy Matrix design in
the electric utility power grid marketplace. In the first quarter of
2005 the Company was awarded development contracts by CEC and NYSERDA
to demonstrate the viability of the Company's flywheel technologies for
frequency regulation by grid operators. The demonstrations will be a
one-tenth-power prototype of the Smart Energy Matrix;
o pursued additional development and design contracts for a variety of
applications by government agencies. The Company received in October,
2005 a $750,000 contract from the Air Force Research Laboratory to
provide preliminary designs for "Extreme Energy Density Flywheel Energy
Storage System" for Space Applications and has been successful in
obtaining other small contracts and is continuing its efforts to obtain
additional research and development funding; and
o entered into an agreement on April 22, 2005 to acquire NxtPhase T&D
Corporation ("NxtPhase"), a privately held Canadian supplier of digital
and fiber optic products for electric power and grid monitoring and
control.
The Company has been successful in raising additional working capital. On
November 8, 2004 the Company issued 9,868,421 shares of its common stock and
warrants representing 2,960,527 shares of common stock to certain investors in
exchange for an investment of $15 million, less expenses and commissions, for
net proceeds of $14,175,500. Also, on May 24, 2005 and July 26, 2005 Perseus
2000 Expansion, LLC, an affiliate of one of the Company's largest shareholders,
invested $2.9 million and received 3,452,380 shares of the Company's Common
Stock and a warrant to purchase 800,000 shares of the Company's Common Stock at
$1.008 per share and paid $0.1 million for an extension to an existing warrant
extending its life two additional years. See Note 1 for more information.
Even with these investments, the Company expects it will require additional
financing to fund:
o ongoing research and development primarily related to the Smart Energy Matrix;
o working capital requirements; o new business development; and o potential
acquisitions.
From inception through September 30, 2005, the Company has incurred losses of
approximately $135 million. The Company expects to continue to incur losses as
it expands its product development, commercialization program and establishes
manufacturing capabilities for the Smart Energy Matrix.
The Company recognized an asset impairment charge in 2003 and restructuring and
asset impairment charges in 2002. The Company, as required by Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," periodically evaluates all of its property and
equipment in light of facts and circumstances and the outlook for future cash
flows. As a result of its ongoing evaluations, in 2003 the Company took 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 the Company's flywheel
technology. In 2002 the Company 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 the Company's 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.
Results of operations:
Comparison of nine months ended September 30, 2005 and 2004
Nine months ended September 30,
2005 2004 $ Change % Change
-------- --------- --------- -----------
(in thousands)
Revenues ............................. $ 1,259 $ 265 $ 994 375%
Cost of goods sold ................... 1,352 1,364 (12) 1%
Selling, general and administrative .. 4,130 3,328 802 24%
Research and development ............. 994 2,743 (1,749) 64%
Loss on sales and contract commitments 1,057 -- 1,057 0%
Depreciation and amortization ........ 62 130 (68) 52%
Interest and other income, net ....... 183 1,030 (847) 82%
Revenues. For the nine months ending September 30, 2005, the Company's revenues
were as follows:
Percent Revenue (in
Source complete thousands)
- ----------------------------- --------------- -----------------
CEC Contract 79.00% $ 975
NYSERDA Contract 20.00% 128
Bechtel Bettis Contract 100.00% 71
PON 800 Contract 18.00% 14
M5 and accessories n/a 71
-----------------
Total $ 1,259
=================
The Company recorded revenue from its development contracts of approximately
$1,188,000 and revenue from the sale of its Smart Power M5 power conditioning
systems of approximately $71,000. Revenues for the nine months ending September
30, 2004 were primarily generated from sales of the Company's Smart Power M5 in
the amount of $169,000 and also from a research and development contract with
DARPA of approximately $96,000.
In the first quarter of 2005, the Company was awarded development contracts with
the California State Energy Resources Conservation and Development Commission
(CEC) and the New York State Energy Research and Development Authority (NYSERDA)
to demonstrate the viability of the Company's flywheel technologies for
frequency regulation. The demonstrations will be conducted using one-tenth-power
prototypes of the Company's planned megawatt-level system known as the Smart
Energy Matrix. Under these contracts, the Company expects to develop and install
a system in both California and New York during 2005 to demonstrate the benefits
of using flywheel energy storage to provide frequency regulation of the grid; a
service required by all grid operators. Successful demonstrations of frequency
regulation with CEC and NYSERDA may also demonstrate the system's technical and
market feasibility in other large, important, growing markets related to the
North American grid. The CEC prototype was shipped on September 15, 2005 and is
currently being tested in California.
Cost of Goods Sold. Cost of goods sold for the nine months ending September 30,
2005 includes costs incurred to date for the Company's flywheel development
contracts in the amount of approximately $1,307,000, sell-through adjustment and
warranty accruals for Smart Power M5 inverter product sold of approximately
$45,000. Cost of goods sold, for the nine months ending September 30, 2004,
includes costs associated with both Smart Power M5 inverters and a
flywheel-related government contract. The costs associated with the Smart Power
M5 include materials and direct labor. In addition to these costs, the Company
recognized an inventory reserve of approximately $778,000 for inventories that
had become obsolete due to design changes and reductions in expected sales
volumes over the next twelve months. Additionally, the Company recorded a charge
for its non-cancelable purchase commitments in excess of requirements related to
the M5 inverter in the amount of approximately $236,000. On the government
contract, the Company recorded all costs incurred to date of approximately
$143,000.
Selling, General and Administrative Expenses. The Company's sales and marketing
expenses consist primarily of compensation and benefits for its sales and
marketing personnel and related business development expenses. The Company's
general and administrative expenses consist primarily of compensation and
benefits related to its corporate staff, professional fees, insurance and travel
costs. Selling, general and administrative expenses totaled approximately
$4,130,000 and $3,328,000 for the nine months ended September 30, 2005 and 2004,
respectively. The increase of approximately $802,000 or 24% is primarily the
result of the expensing of the prepaid financing costs due to the uncertainty of
the NxtPhase acquisition of $690,000 and increases in the cost of personnel and
benefits and higher professional fees of $112,000.
Research and Development. The Company's 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 process exclusive of the Company's development contracts.
These costs decreased for the nine months ending September 30, 2005 over the
same period during 2004 due primarily to the allocation of resources from
research and development departments to the Company's flywheel development
contracts presented in cost of goods sold. As a result, the Company expects its
cost of research and development for the duration of these contracts to continue
to be lower compared to 2004. The Company expects its research and development
costs will be more significant once its flywheel development contracts are
substantially complete and it begins development of a full scale prototype of
the Smart Energy Matrix and it has obtained funding to complete this work.
Research and development expenses totaled approximately $994,000 and $2,743,000
for the nine months ended September 30, 2005 and 2004, respectively. The
decrease of $1,749,000 or 64% is primarily the result of accounting allocations
from research and development expense to its development contracts.
Loss on Sales and Contract Commitments. The Company has established reserves for
anticipated losses on its government contracts with CEC and NYSERDA. Expected
losses are approximately $1,057,000 ($642,000 for CEC, $341,000 for NYSERDA and
$74,000 for others). The Company agreed, in its government contracts, to provide
cost sharing dollars. The expected losses increased over the second quarter of
2005 due primarily to additional labor costs associated with the contracts. The
Company did not accrue such losses during 2004. The Company is continuously
evaluating its loss reserve and will make any necessary adjustments as
appropriate.
Depreciation and Amortization. The Company's depreciation and amortization is
primarily related to depreciation on capital expenditures and the amortization
of lease and leasehold costs related to its facilities. The Company also
amortized the Smart Power M5 intellectual property it acquired from Advanced
Energy Systems in 2004. Depreciation and amortization totaled approximately
$62,000 and $130,000 for the nine months ended September 30, 2005 and 2004,
respectively. The decrease of $68,000 or 52% is attributable to the decrease in
the remaining net book values of the Company's assets.
Interest and Other Income/Expense, net. The Company's non-operating income and
expenses are primarily attributable to interest income resulting from cash on
hand, accrued dividends on the Company's holdings in the Series A Preferred
stock of Evergreen Solar, Inc. and proceeds from the sale of certain capital
equipment no longer used. Interest and Other Income/Expense, net for the nine
months ended September 30, 2005 was approximately $183,000, compared to
approximately $1,030,000 for the same period in 2004. The decrease of
approximately $847,000 (82%) in 2005 compared to the prior year is the result of
lower interest due to lower cash balances, lower dividends received and lower
capital gains since the Company sold its Evergreen investment in 2004.
Liquidity and Capital Resources
Nine months ended September 30,
--------------------
2005 2004
------- -------
(in thousands)
Cash and cash equivalents ............... $ 3,385 $ 4,509
Working capital ......................... 2,318 4,313
Cash provided by (used in)
Operating activities .............. (5,321) (5,830)
Investing activities .............. (1,011) 1,401
Financing activities .............. 4,620 29
------- -------
Net decrease in cash and cash equivalents $(1,712) $(4,400)
======= =======
Current ratio ........................... 2.1 2.8
======= =======
The Company's cash requirements depend on many factors, including but not
limited to research and development activities, executing its development
contracts, continued efforts to commercialize products, facilities costs,
general and administrative expenses, costs related to raising additional funding
and costs related to its mergers and acquisitions. Subsequent to the end of the
quarter, the Company obtained the required funding to begin development of its
Smart Energy 25 flywheel, the base component of its Smart Energy Matrix. The
Company will begin full-scale development of its Smart Energy 25 immediately.
For other contemplated flywheel-based systems, the Company will continue to
evaluate market size, growth potential and competitive advantages that its
products could provide and the probable market penetration that could be
achieved. If markets are identified in which the Company believes its flywheel
products will be successful, and those markets express a tangible interest in
the Company's products, the Company will seek to obtain additional funds to
complete prototype development and production of identified products.
The Company does not expect to become profitable or obtain positive operating
cash flow before 2008 and may not achieve positive cash flow even at that point
or beyond.
Based on the Company's rate of expenditure of cash and the additional
expenditures expected in support of its business plan, the Company will require
additional financing to fund:
o ongoing research and development primarily related to the Smart Energy
Matrix;
o working capital requirements;
o new business development; and
o potential acquisitions.
Net cash used in operating activities was approximately ($5,321,000) and
($5,779,000) for the nine months ended September 30, 2005 and 2004,
respectively. The primary component to the negative cash flow from operations is
from net losses. For the first nine months of 2005, the Company had a net loss
of approximately ($6,153,000). This included employee stock compensation of
approximately $621,000, facility related cash payments charged against
restructuring reserves of approximately ($258,000), write back of a reserve for
an officer's note that was repaid of approximately ($102,000), proceeds from the
sale of fixed assets, net of reserve of ($24,000), reduction of the amount of
restricted cash of $90,443 and depreciation and amortization of approximately
$62,000. Changes in operating assets and liabilities generated approximately
$442,000 of cash during the first nine months of 2005. For the first nine months
of 2004, the Company had a net loss of approximately ($6,270,000). This included
employee stock compensation of approximately $697,000, facility related cash
payments charged against restructuring reserves of approximately ($258,000),
non-cash dividends received in stock of Evergreen Solar, Inc. of approximately
($90,000), gain on the sale of investments of approximately ($880,000), a
reduction in restricted cash related to the lease of the Company's facility of
approximately $45,000, reductions to the asset impairment reserve for disposed
fixed assets of approximately ($10,000) and depreciation and amortization of
approximately $130,000.
Net cash used in investing activities was approximately ($1,011,000) and
($14,000) for the nine months ended September 30, 2005 and 2004, respectively.
For the first nine months of 2005 the principal uses of cash in investing
activities include ($1,000,000) to invest in NxtPhase, approximately ($40,000)
to purchase capital equipment and sources of investing activities include
$29,000 from the sale of capital equipment. For the first nine months of 2004,
cash used in investing activities was approximately ($14,000) for the purchase
of capital equipment.
Net cash provided by financing activities was approximately $4,620,000 and
$29,000 for the nine months ended September 30, 2005 and 2004, respectively. For
the first nine months of 2005, cash provided by financing activities included
approximately $3,954,000 from the issuance of common stock pursuant to an
investment agreement with Perseus 2000 Expansion, $656,000 related to the
exercise of stock options, expensing of cash paid for financing costs of
approximately 328,000 and approximately $2,000 from the employee stock purchase
plan, offset by approximately ($319,000) to repurchase the Company's stock. For
the first nine months of 2004, the cash provided by financing activities of
approximately $29,000 related to the exercise of stock options in the amount of
approximately $27,000 and shares issued under the employee stock purchase plan
of approximately $2,000.
Based on the Company's planned cash usage rate, inclusive of its recent
investments in 2005, the Company believes it has adequate cash to fund its
operations into 2007. If the Company is successful in completing the acquisition
of NxtPhase its cash needs will increase. Many of NxtPhase's products are in the
early stages of development or production and, as such, NxtPhase does not yet
have revenues sufficient to offset its cost of sales and operating costs.
NxtPhase and its predecessor have incurred losses since their inception. The
Company may not be able to raise these funds, or if it is able to do so, it may
be on terms that are adverse to existing stockholders.
Subsequent to the end of the quarter, on November 8, 2005, the Company
distributed 9,868,421 newly issued shares of its 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. The Company 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 to the Company of
$14,175,500 net of expenses and commissions in the amount of $824,500. The
Company has agreed to use these proceeds for working capital purposes only. For
further details, please see the Securities Purchase Agreement which was filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 7,
2005.
On May 24, 2005 and July 26, 2005, the Company received an investment of $2.9
million in the aggregate from Perseus 2000 Expansion, LLC, an affiliate of one
of the Company's largest shareholders, and in return issued to Perseus 3,452,380
shares of the Company's Common Stock and a warrant to purchase 800,000 shares of
the Company's Common Stock at $1.008 per share. Perseus also paid $0.1 million
for an extension by two years to an existing warrant already held by Perseus.
See Note 1 for more information on this investment. The Company and Perseus
agreed that, due to the proposed acquisition of NxtPhase by the Company, Perseus
would make an investment in NxtPhase and be able to assign its investment
commitment to the Company so that Perseus invests $1 million in the Company and
the Company used such funds to purchase shares of NxtPhase Class A preferred
stock. Perseus invested $1 million in the Company that was then invested by the
Company into NxtPhase in exchange for .2 million shares of NxtPhase Class A
preferred stock. See Note 1 for more information on this investment.
Certain Factors Affecting Future Operating Results
The following factors, as well as others mentioned in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004, could cause actual
results to differ materially from those indicated by forward-looking statements
made in this Quarterly Report on Form 10-Q:
For the Company's business strategy to be effectively implemented,
demonstrations of its Smart Energy Matrix to NYSERDA and CEC need to be
successful.
The Company's business plan focuses on completing the development of its
energy storage solution, the Smart Energy Matrix. As part of this strategy,
the Company has entered into agreements with the New York State Energy
Research and Development Authority (NYSERDA) and the California State
Energy Resources Conservation and Development Commission (CEC) to
demonstrate the Smart Energy Matrix using a one-tenth-power prototype for
the provision of frequency regulation services to the electric grid. These
agreements allow the Company to demonstrate its highly responsive and
cost-effective frequency regulation prototype for the electricity grid
which is the first application specifically designed to provide grid
frequency regulation. The Company has shifted virtually all of its
development spending towards meeting the requirements of these two
programs. If the Company is not successful in demonstrating the anticipated
benefits, completing development of the Smart Energy Matrix may be
significantly delayed and its business strategy may be materially adversely
affected.
The Company's ability to successfully complete development of its Smart Energy
Matrix will require substantial funds. Its stockholders may be adversely
affected if the Company issues debt securities or additional equity securities
to obtain financing.
The Company will require substantial funds to conduct research and
development activities, market its products and services and increase its
revenues. The Company anticipates that such funds will be obtained from
external sources and intends to seek additional equity or debt to fund
future operations. The Company raised $15 million in funding through an
equity offering dated as of November 8, 2005. Further equity or debt
funding of approximately $15 million will be required to complete
development of the Smart Energy Matrix.
The Company's actual capital requirements will depend on many factors. If
the Company experiences unanticipated cash requirements, it may need to
seek additional sources of funding sooner than anticipated. Such additional
funding, if available, may only be available on terms that may, for
example, cause dilution to common stockholders and/or have liquidation
preferences and/or pre-emptive rights. If the Company raises 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 the Company does not succeed in raising additional funds on acceptable
terms, it may be unable to complete planned development for its products
and services. In addition, the Company could be forced to take unattractive
steps, such as discontinuing product development, limiting the services it
may offer, reducing or foregoing sales and marketing efforts and attractive
business opportunities, or discontinuing operations entirely.
The Company expects that it will be several years before it will recognize
significant revenues from the products it intends to offer and the services
it intends to provide. A large portion of its expenses are fixed, including
expenses related to facilities, equipment and personnel. In addition, it
expects to spend significant amounts to fund product development based on
its core technologies. The Company also expects to incur substantial
expenses to manufacture its Smart Energy Matrix product in the future. As a
result, operating expenses may increase significantly over the next several
years and, consequently, the Company will need to generate substantial
commercial revenue to achieve profitability. Even if it does achieve
profitability, the Company may not be able to sustain or increase
profitability on a consistent basis.
The Company faces significant technical challenges in completing the development
of its Smart Energy Matrix. The Company may fail to develop its 25kWh generation
flywheel system, which is a critical requirement for the development of the
Smart Energy Matrix, and even if it is able to develop the 25kWh system, it may
fail to develop the Smart Energy Matrix.
The successful development of the Company's new Smart Energy 25 flywheel
system, which is the flywheel system that will be used in the Smart Energy
Matrix, involves significant technological and cost challenges. There can
be no assurance that the Company will be successful in meeting these
challenges. In addition, even if the Company is able to develop the Smart
Energy 25 flywheel system, it plans to integrate multiple 25kWh flywheels
into a common building or container to produce its Smart Energy Matrix.
This effort will pose significant technological and cost challenges
including, among others:
o it may take longer to develop cost effective designs for key
components of the Smart Energy Matrix such as the rim, motor, power
electronics and bearing system, and the master controller software;
o development and production delays and/or cost increases may occur
because the Company relies on single-source suppliers to supply
several key components to meet its engineering requirements, cost
objectives and development and production schedules and the Company
does not have contracts with all of these suppliers;
o The Company's ability to develop cost effective designs on schedule
that will meet system performance requirements such as:
o a rotor-cooling scheme to avoid overheating during operation;
o cost effective bearings to ensure acceptable vibration levels at
all speeds; and
o a touchdown bearing system to stabilize the rotor during abnormal
conditions such as an earthquake;
o the ability to ramp up and maintain production rates; and
o quality and cost control from key suppliers.
The Company has a history of losses and anticipates future losses and will have
limited revenues in the near term. Unless it raises additional capital to
operate its business, it may not be able to continue as a going concern.
The Company has incurred significant losses from operations since its
inception. As shown in its consolidated financial statements, it incurred
significant losses from operations of $9,049,000, $9,138,000 and
$20,867,000 and cash decreases of $3,812,000, $8,957,000 and $16,335,000,
during the years ended December 31, 2004, 2003 and 2002, respectively.
Additionally, the Company reported losses of $ 6,153,223 through the nine
months ending September 30, 2005 and a decrease in cash of $ 1,713,000
through September 30, 2005. The Company is unsure if or when it will become
profitable.
The Company had $3,384,515 of cash and cash equivalents on hand at
September 30, 2005. Based on the Company's planned cash usage rate,
inclusive of its recent investments in 2005, the Company believes it has
adequate cash to fund its operations into 2007.
Miller Wachman, LLP, the Company's independent auditors, has included an
explanatory paragraph related to a going concern uncertainty in their audit
report on the Company's consolidated financial statements for the fiscal
year ended December 31, 2004, which states that "Beacon's recurring losses
from operations and negative cash flows raise substantial doubt about its
ability to continue as a going concern."
The Company's 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. The Company
has not made any adjustments to its financial statements as a result of the
going concern uncertainty. If the Company cannot continue as a going
concern, it may have to liquidate its assets and may receive significantly
less than the values at which they are carried on its financial statements.
Any shortfall in the proceeds from the liquidation of its assets would
directly reduce the amounts that holders of the Company's common stock
could receive in liquidation.
The Company's lack of profits and positive cash flows may negatively impact its
ability to obtain customers.
Although the Company intends to provide frequency regulation services
directly, it may also sell its Smart Energy Matrix product to customers. In
that event, the Company's history of losses and negative cash flows may
adversely impact its ability to successfully attract customers for its
products because of potential customer's perception that the Company may
not be able to provide product support and warranty coverage in the future.
Competitors in the frequency regulation market include established utilities and
independent service providers with far greater resources than the Company.
The Company believes that it will be able to provide frequency regulation
services using its Smart Energy Matrix at lower cost than other providers.
However, this market is being served by well-known utilities and
independent service providers that use conventional generators. The Company
will be competing with these established generators that have far greater
resources than it does. Companies that are currently providing frequency
regulation include Allegheny Energy Supply Company, Commonwealth Chesapeake
Company, Dominion Virginia Power, Ingenco Wholesale Power, NRG Power
Marketing and Reliant Energy Services.
Although the market for frequency regulation services is large and growing, the
Company has not demonstrated its ability to sell into that market.
The Company intends to provide frequency regulation services using its
Smart Energy Matrix in the spot or auction markets of regional grid
operators. In order to bid in these markets, one must be qualified to do
so. The Company expects to receive the necessary approvals, but there is no
assurance it will be successful.
The Company's financial performance could be adversely affected if it is unable
to retain key executive officers.
Because its future success depends to a large degree on the management
provided by the executive officers, the Company's competitiveness will
depend significantly on whether it can retain members of its executive
team. There can be no assurance that it will be successful in retaining its
executive officers. The Company has employment agreements with Messrs.
Spiezio, Vice President of Finance, Chief Financial Officer, Treasurer and
Secretary; and Lazarewicz, Vice President and Chief Technical Officer. The
employment agreement between the Company and Mr. Capp, CEO and President,
expired on December 31, 2004. Negotiations between Mr. Capp and the Company
are ongoing. There can be no assurance that an agreement will be reached
with Mr. Capp.
Market volatility may affect the Company's stock price and the value of an
investment in its common stock may be subject to sudden decreases.
The trading price for the Company's common stock has been and is expected
to continue to be volatile. The price at which the Company's common stock
trades depends upon a number of factors, including its historical and
anticipated operating results, market perception of the prospects for
companies in its industry and general market and economic conditions, some
of which are beyond the Company's control. The high and low closing prices
per share of the Company's common stock on the NASDAQ Capital Market were
$1.50 and $0.14, respectively, in 2002, $1.54 and $0.16, respectively, in
2003, $1.72 and $0.25, respectively, in 2004 and $4.74 and $0.62,
respectively, in this year through September 30, 2005. The average daily
trading volume of its common stock on the NASDAQ Capital Market was 135,300
shares in 2002, 1,295,400 shares in 2003, 1,259,700 shares in 2004 and
1,580,500 shares this year through September 30, 2005. During August 2005
the daily trading volume was significantly higher; on August 8, 2005, more
than 29 million shares were traded. During periods of stock market price
volatility, share prices of many companies in the Company's industry have
often fluctuated in a manner not necessarily related to their individual
operating performance. The Company's common stock may be subject to greater
price volatility than the stock market as a whole.
The Company has anti-takeover defenses that could delay or prevent an
acquisition and changes in control in its board of directors and management and
could adversely affect the price of its common stock.
Provisions of the Company's Sixth Amended and Restated Certificate of
Incorporation, the Company's amended and restated by-laws, the Company's
Rights Agreement, adopted in September 2002 and subsequently amended, and
Delaware law may have the effect of deterring unsolicited takeovers or
delaying or preventing changes in control of its management, including
transactions in which its 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.
The Company's Sixth Amended and Restated Certificate of Incorporation
permits its 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 the Company's 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 Company's Sixth Amended and Restated 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 the
Company's 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 the Company's board
of directors.
In addition, the Company's Sixth Amended and Restated Certificate of
Incorporation and its amended and restated by-laws provide that:
o its directors may only be removed for cause by a majority of the
outstanding capital stock entitled to vote in the election of
directors;
o its stockholders do not have the power to call special meetings of
stockholders; and
o 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 the Company's 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 adopted in September 2002 and subsequently
amended, the Company 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
already owned more than 15%) of the Company'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).
The Company's common stock may be removed from The NASDAQ Capital Market, which
could cause the price to fall further and decrease its liquidity.
The Company's common stock trades on The NASDAQ Capital Market. To continue
trading on The NASDAQ Capital Market, it must comply with The NASDAQ
Capital Market's continued listing requirements set forth in Rule 4310(c),
which require, among other things, that the Company maintain a minimum
closing bid price of $1.00 per share.
If the Company does not continue to satisfy NASDAQ's continued listing
requirements, its common stock may be delisted. The delisting of its common
stock may result in the trading of the stock on the over-the-counter
markets in the so-called "pink sheets" or the NASD's electronic bulletin
board. Consequently, a delisting of the Company's common stock from NASDAQ
would materially reduce the liquidity of its common stock, not only in the
number of shares that could be bought and sold, but also through delays in
the timing of the transaction and reductions in securities analysts and
media coverage. This may reduce the demand for the Company's stock and
significantly destabilize the price of its stock. In addition, a delisting
would materially adversely affect the Company's ability to raise additional
necessary capital.
Failure to protect the Company's intellectual property could impair its
competitive position.
Although it is unaware of any challenges to its intellectual property, the
Company cannot provide assurance that it has or will be able to maintain a
significant proprietary position on the basic technologies used in its
flywheel systems. The Company's ability to compete effectively against
alternative technologies will be affected by its ability to protect
proprietary technology, systems designs and manufacturing processes. The
Company does not know whether any of its pending or future patent
applications under which it has 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 its technology or processes from competitors.
Even if all of its patent applications are issued and are sufficiently
broad, they may be challenged or invalidated. The Company could incur
substantial costs in prosecuting or defending patent infringement suits and
such suits would divert funds and resources that could be used in its
business. Further, its competitors or others may independently develop or
patent technologies or processes that are substantially equivalent or
superior to those of the Company.
Ongoing compliance with the Sarbanes-Oxley Act of 2002 may require additional
personnel or systems changes. Any weaknesses identified in its internal controls
could have an adverse effect on the Company's business.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies
evaluate and report on their systems of internal control over financial
reporting. The Company is in the process of documenting and testing its
system of internal control over financial reporting to provide the basis
for its report. At this time, the Company is aware that its financial
reporting information systems and point-of-sale information systems require
a significant level of manual controls to ensure the accurate reporting of
its results of operations and financial position. Upon the completion of
its review, certain deficiencies may be discovered that will require
remediation. This remediation may require the implementation of certain
information systems operating protocols and/or additional manual controls,
the costs of which could have a material adverse effect on its business,
financial condition and results of operations. Due to the ongoing
evaluation and testing of the Company's internal controls, there can be no
assurance that there may not be significant deficiencies or material
weaknesses that would be required to be reported.
Government regulation may impair the Company's ability to market its products.
Government regulation of the Company's products, whether at the federal,
state or local level may increase the cost and price of its systems and may
have a negative impact on the Company's revenue and profitability. The
Company cannot provide assurance that its products will not be subject to
existing or future federal and state regulations governing traditional
electric utilities and other regulated entities. The Company does not know
the extent to which any existing or new regulations may impact its ability
to distribute, install and service its products.
Product liability claims against the Company could result in substantial
expenses and negative publicity that could impair successful marketing of
products.
The Company's business exposes it to potential product liability claims
that are inherent in the manufacture, marketing and sale of
electro-mechanical products and, as such, it may face substantial liability
for damages resulting from the faulty design or manufacture of products or
improper use of products by end users. The Company cannot provide assurance
that its product liability insurance will provide sufficient coverage in
the event of a claim. Also, it cannot predict whether it will be able to
maintain such coverage on acceptable terms, if at all, or that a product
liability claim would not materially adversely affect its business,
financial condition or the price of its common stock. In addition, negative
publicity in connection with the faulty design or manufacture of the
Company's products would adversely affect its ability to market and sell
its products.
Safety failures by the Company's flywheel products or those of its competitors
could reduce market demand or acceptance for flywheel services or products in
general.
A serious accident involving either the Company's flywheels or competitors'
similar products could be a significant deterrent to market acceptance and
adversely affect the Company's financial performance. There is the
possibility of accident with any form of energy storage. In particular, if
a metal flywheel fails and the stored energy is released, the flywheel
could break into fragments that could be ejected at a high rate of speed.
However, the Company's flywheels are based on a composite design so that in
the event of a failure, its flywheel is expected to fail in a more benign
manner.
If it acquires NxtPhase, the Company will issue a fixed number of shares of its
common stock in the plan of arrangement, regardless of the stock's market
fluctuations prior to the effective date of the plan of arrangement. The value
of Beacon common stock and of NxtPhase shares will fluctuate and may decline or
increase, each independent of movements of value of the other company.
Pursuant to the terms of the arrangement agreement, the number of shares of
the Company's common stock to be issued is fixed. There is no mechanism to
adjust the exchange ratio based on changes in the market price of the
Company's common stock or in the value of NxtPhase. Furthermore, neither
NxtPhase nor the Company is permitted to withdraw from the plan of
arrangement solely because of changes in the market price of Beacon common
stock or the value of NxtPhase shares.
The Company and NxtPhase expect to incur significant costs associated with the
plan of arrangement.
If it acquires NxtPhase, the Company estimates that it will incur direct
transaction costs of approximately $1,170,000, of which $938,000 will be
capitalized for accounting purposes and $232,000 will be expensed as
incurred. The combined company may also incur charges to operations, which
they cannot currently reasonably estimate, in the quarter in which the plan
of arrangement is completed or the following quarters, to reflect costs
associated with integrating the two companies. There can be no assurance
that the combined company will not incur additional charges in subsequent
periods due to the combination.
The Company may not realize all of the benefits it expects from acquiring
NxtPhase.
If it acquires NxtPhase, the benefits realized by the Company will depend,
in part, on the Company's ability to take advantage of the anticipated
opportunities resulting from offering a diversified set of products and
services for a more reliable and stable grid, from utilizing broader
technological and product engineering skills and from being better
positioned to raise capital. It is possible that the Company will be unable
realize all of these benefits.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's cash equivalents and investments, all of which have maturities of
less than one year, may expose the Company to interest rate risk but not to
market risk of principal. At September 30, 2005, the Company had approximately
$60,000 of cash equivalents that were held in non-interest bearing accounts.
Also at September 30, 2005, the Company had approximately $765,000 of cash
equivalents that were held in interest bearing checking accounts and $2,559,000
invested in interest-bearing money market accounts. The Company's exposure to
market risk through financial instruments is not material.
Item 4. Controls and Procedures
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) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this 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 September 30, 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 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 Quarterly Report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
PART II
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
Number Description of Document
2.1 (1) Arrangement Agreement and Plan of Arrangement, dated April
22, 2005, by and among the Company, Beacon Acquisition Co.
and NxtPhase T&D Corporation.
3.1 (2) Sixth Amended and Restated Certificate of Incorporation of
the Company.
3.2 (2) Amended and Restated Bylaws of the Company.
4.1 (2) Rights Agreement dated September 25, 2002 between the Company
and EquiServe Trust Company, N.A.
4.2 (4) Amendment No. 1 to Rights Agreement dated December 27,
2002 between the Company and EquiServe Trust Company, N.A.
10.1.1(2) 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(2) Warrant of the Company dated October 24, 2000 issued to GE
Capital Equity Investments, Inc.
10.1.3(2) Second Amended and Restated 1998 Stock Incentive Plan of the
Company.
10.1.4(2) Form of Incentive Stock Option Agreement of the Company.
10.1.5(2) Form of Non-Qualified Stock Option Agreement of the Company.
10.1.6(2) Form of Non-Qualified Stock Option Agreement of the Company
issued to certain consultants on July 24, 2000 and list of
holders thereof.
10.1.7(2) Amended and Restated License Agreement dated October 23, 1998
between the Company and SatCon Technology Corporation.
10.1.8(2) Lease dated July 14, 2000 between the Company and BCIA New
England Holdings LLC.
10.1.9(2) Letter Agreement dated October 24, 2000 among the Company, GE
Capital Equity Investments, Inc. and GE Corporate Research
and Development.
10.1.10(12) Form of Director and Officer Indemnification Agreement of the
Company.
10.1.11(5) Employment Agreement dated April 25, 2004 between the Company
and Matthew L. Lazarewicz.
10.1.12(4) Employment Agreement dated October 25, 2002 between the
Company and James M. Spiezio.
10.1.13(6) Form of Restricted Stock Unit Agreement of the Company.
10.1.14(7) Agreement dated January 31, 2005 between the Company and the
New York State Energy Research and Development Authority.
10.1.15(8) Agreement dated January 31, 2005 between the Company and
California State Energy Resources Conservation and
Development Commission.
10.1.16(5) Amendment to Employment Agreement dated March 30, 2005
between the Company and Matthew L. Lazarewicz.
10.1.17 (1) Form of NxtPhase Shareholder Agreement.
10.1.18 (1) Investment Agreement dated as of April 22, 2005 among the
Company, Perseus Capital, L.L.C. and Perseus 2000 Expansion
Fund, L.L.C.
10.1.19 (9) Warrant of the Company dated May 24, 2005 issued to Perseus
2000 Expansion Fund, L.L.C.
10.1.20 (9) Amended and Restated Warrant of the Company dated May 24,
2005 issued to Perseus Capital, L.L.C.
10.1.21 (9) Registration Rights Agreement dated May 24, 2005 between the
Company and Perseus 2000 Expansion Fund, L.L.C.
10.1.22(10) Securities Purchase Agreement between NxtPhase T&D
Corporation, the Company and Perseus 2000 Expansion, L.L.C.,
dated as of June 13, 2005
10.1.23(10) Joinder Agreement for the Investor Rights Agreement executed
by the Company on June 13, 2005
10.1.24(10) Warrant issued by the Company to Perseus 2000 Expansion,
L.L.C. on June 13, 2005
10.1.25 (11) Securities Purchase Agreement between NxtPhase T&D
Corporation, the Company and Perseus 2000 Expansion, L.L.C.,
dated as of July 21, 2005
10.1.26(11) Warrant issued by the Company to Perseus 2000 Expansion,
L.L.C. on July 21, 2005.
10.1.27 (13) First Amendment to Arrangement Agreement dated as of
September 27, 2005 among the Company, Beacon Acquisition Co.
and NxtPhase T&D Corporation.
10.1.28 (14) Agreement between the Company and the Air Force Research
Laboratory, dated October 7, 2005.
10.1.29 (15) Securities Purchase Agreement among the Company and various
purchasers dated November 4, 2005.
10.1.30 (15) Form of Warrant among the Company and various purchasers
dated November 4, 2005.
31.1 + Principal Executive Officer--Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 + Principal Financial Officer--Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 + Principal Executive Officer--Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 + Principal Financial Officer--Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference from the Form 8-K filed on April 25, 2005
(File No. 001-16171).
(2) Incorporated by reference from the Form S-1 filed on November 16, 2000
(File No. 333-43386).
(3) Incorporated by reference from the Form 8-K filed on October 4, 2002
(File No. 001-16171).
(4) Incorporated by reference from the Form 10-K filed on June 30, 2003
(File No. 001-16171).
(5) Incorporated by reference from the Form 10-K filed on March 31, 2005
(File No. 001-16171).
(6) Incorporated by reference from the Form 10-K/A filed on May 17, 2004
(File No. 001-16171).
(7) Incorporated by reference from the Form 8-K filed on February 14, 2005
(File No. 001-16171).
(8) Incorporated by reference from the Form 8-K filed on February 16, 2005
(File No. 001-16171).
(9) Incorporated by reference from the Form 8-K filed on May 26, 2005
(File No. 001-16171).
(10) Incorporated by reference from the Form 8-K filed on June 17, 2005
(File No. 001-16171).
(11) Incorporated by reference from the Form 8-K filed on July 26, 2005
(File No. 001-16171).
(12) Incorporated by reference from the Form 10-Q filed on August 12, 2005
(File No. 001-16171).
(13) Incorporated by reference from the Form 8-K filed on October 3, 2005
(File No. 001-16171).
(14) Incorporated by reference from the Form 8-K filed on October 13, 2005
(File No. 001-16171).
(15) Incorporated by reference from the Form 8-K filed on November 7, 2005
(File No. 001-16171).
+ Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 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
Date: November 14, 2005 By: /s/ F. William Capp
-------------------
F. William Capp
President and Chief
Executive Officer
Principal Executive Officer
November 14, 2005 By: /s/ James M. Spiezio
-------------------
James M. Spiezio
Vice President of Finance,
Chief Financial Officer,
Treasurer and Secretary
Principal Financial Officer