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Evergreen Solar 10-K 2008 Documents found in this filing:
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 0-31687
EVERGREEN SOLAR, INC.
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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
þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the registrant’s voting and
non-voting common equity held by non-affiliates as of
June 30, 2007 was approximately $917 million.
As of February 15, 2008, there were 120,987,715 shares
of the registrant’s Common Stock, $.01 par value per
share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to
be filed with the Securities and Exchange Commission no later
than 120 days after the registrant’s fiscal year ended
December 31, 2007, and to be delivered to stockholders in
connection with the 2008 Annual Meeting of Stockholders, are
herein incorporated by reference in Part III.
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PART I
This Annual Report on
Form 10-K,
including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in
Item 7 of this report and the documents incorporated by
reference herein, contain forward-looking statements that
involve risks, uncertainties and assumptions, including those
discussed in “Risk Factors” in Item 1A of this
report. If the risks or uncertainties ever materialize or any of
the assumptions prove incorrect, our results will differ from
those expressed or implied by such forward-looking statements
and assumptions. All statements other than statements of
historical fact are statements that could be deemed
forward-looking statements, including but not limited to
statements regarding:
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These statements may be identified with such words as
“we expect,” “we believe,” “we
anticipate” or similar indications of future expectations.
These statements are neither promises nor guarantees and involve
risks and uncertainties, which could cause our actual results to
differ materially from such forward-looking statements. Such
risks and uncertainties may include, among other things,
macroeconomic and geopolitical trends and events, the execution
and performance of contracts by distribution partners, suppliers
and other partners, and other risks and uncertainties described
herein, including but not limited to the items discussed in
“Risk Factors.” We caution readers not to place undue
reliance on any forward-looking statements contained in this
Annual Report, which speak only as of the date of this Annual
Report. We disclaim any obligation to update publicly or revise
any such statements to reflect any change in our expectations,
or events, conditions, or circumstances on which any such
statements may be based, or that may affect the likelihood that
actual results will differ from those set forth in such
forward-looking statements.
We develop, manufacture and market solar panels utilizing our
proprietary String
Ribbontm
technology. String Ribbon technology is a cost effective process
for manufacturing ribbons of crystalline silicon that are then
cut into wafers. These wafers are the primary components of
photovoltaic, or PV, cells which, in turn, are used to produce
solar panels. We believe that our proprietary and patented
technologies, combined with our integrated manufacturing process
know-how, offer significant cost and manufacturing advantages
over competing polysilicon-based PV technologies. With silicon
consumption of less than five grams per watt, we believe we are
the industry leader in efficient polysilicon consumption and use
approximately 50% of the silicon used by conventional sawing
wafer production processes.
Through intensive research and design efforts we have
significantly enhanced our String Ribbon technology and our
ability to manufacture crystalline silicon wafers by developing
a quad ribbon wafer furnace, which enables us to grow four
silicon ribbons from one furnace compared to two silicon ribbons
grown with our dual ribbon furnace presently in use in our
prototype facility in Marlboro, Massachusetts. Our quad ribbon
furnace incorporates a state of the art automated ribbon cutting
technology that we expect will improve our manufacturing process
when it is used in future factories. We have used quad ribbon
furnaces to produce a limited quantity of solar panels in our
Marlboro facility which have been sold to our distribution
partners. We believe future enhancements to our technology will
enable us to gradually reduce our silicon consumption to
approximately
two-and-a-half
grams per watt by 2012.
Our String Ribbon technology is also used by EverQ, our joint
venture with Q-Cells AG, or Q-Cells, the world’s largest
independent manufacturer of solar cells, and Renewable Energy
Corporation ASA, or REC, one of the world’s largest
manufacturers of solar-grade silicon and crystalline wafers. REC
is also the main supplier of silicon to EverQ. EverQ began
operations in mid-2006 and has grown to approximately 100
megawatts, or MW, of annual production capacity as of
December 31, 2007. One MW of electricity is enough to power
approximately 250 homes per year on average. We believe our
proven success at our Marlboro facility and the successful scale
up of EverQ’s manufacturing capacity demonstrate our
ability to build and operate fully integrated wafer, cell and
panel facilities using String Ribbon technology in a
cost-effective manner.
Our quad ribbon furnaces will be used in our new manufacturing
facility in Devens, Massachusetts, which we began constructing
in September 2007. We expect to begin production of solar panels
at the Devens facility upon completion of phase I of its
development, or Devens I, which is scheduled to occur in
mid-2008. Upon reaching full production capacity, which we
expect to take place in early 2009, Devens I is expected to
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increase our current manufacturing capacity of 15 MW by
approximately 80 MW. In addition, in March 2008 we
expect to substantially complete the planning and permitting and
begin construction of phase II of the Devens facility, or
Devens II, which will add a second production line. Upon
reaching full production capacity, which we expect to occur in
late 2009, Devens II is expected to increase our production
capacity at the Devens facility to approximately 160 MW.
We intend to use at least half of the net proceeds from our
recent public offering for the completion of Devens I and the
planning, construction and equipping of Devens II. The net
proceeds from that offering and cash on hand will not be
sufficient to fully construct and equip Devens II. We expect to
otherwise finance our construction of Devens II using cash
provided by our operating activities and proceeds from debt
financing.
In connection with our manufacturing expansion plans, we have
entered into multi-year polysilicon supply agreements with DC
Chemical Co., Ltd. (or DC Chemical), Wacker Chemie AG (or
Wacker), Solaricos Trading, LTD (or Nitol) and Silicium de
Provence S.A.S. (or Silpro). Including our second supply
agreement that we signed with DC Chemical on January 30,
2008, we have silicon under contract to reach annual production
levels of approximately 125 MW in 2009, 300 MW in
2010, 600 MW in 2011 and 850 MW in 2012, and we plan
to expand our manufacturing operations accordingly.
Our quad ribbon furnaces will also be used by EverQ as it
expands its own production capacity. On October 25, 2007,
we and our two EverQ partners approved the construction of
EverQ’s third manufacturing facility, EverQ 3, in Thalheim,
Germany, which is expected to increase EverQ’s annual
production capacity from approximately 100 MW to
approximately 180 MW by the second half of 2009. EverQ will
pay us a market-based royalty based on actual cost savings
realized using our quad ribbon furnaces in EverQ 3 as compared
to our dual ribbon furnaces, which are in use at EverQ’s
two current facilities. We and our partners have also agreed to
pursue an initial public offering, or IPO, of EverQ’s stock
and expand EverQ’s annual production capacity to
approximately 600 MW by 2012. Provided that EverQ becomes
publicly traded prior to December 31, 2009, REC has offered
EverQ an additional supply agreement for polysilicon to support
this planned capacity expansion.
Our revenues today are primarily derived from the sale of solar
panels, which are assemblies of PV cells that have been
electrically interconnected and laminated in a physically
durable and weather-tight package. We sell our products using
distributors, systems integrators and other value-added
resellers, who often add value through system design by
incorporating our panels with electronics, structures and wiring
systems. Applications for our products include on-grid
generation, in which supplemental electricity is provided to an
electric utility grid, and off-grid generation for markets where
access to conventional electric power is not economical or
physically feasible. Our products are currently sold primarily
in Europe and the United States.
On December 19, 2006, we became equal partners in EverQ
with Q-Cells and REC, with each sharing equally in its net
income or loss. As a result of our reduction in ownership to
one-third, we use the “equity method of accounting”
for our share of EverQ results, rather than consolidating those
results as we had in the past. Under the equity method of
accounting, we report our one-third share of EverQ’s net
income or loss as a single line item in our income statement.
We market and sell all solar panels manufactured by EverQ under
the Evergreen Solar brand, as well as manage customer
relationships and contracts. We receive fees from EverQ for
these services and do not report gross revenue or cost of goods
sold resulting from the sale of EverQ’s solar panel
production. During 2007, we received a fee of 1.7% of
gross EverQ revenue relating to the sales and marketing
fee. In addition, we received royalty payments for our ongoing
technology contributions to EverQ. Combined, the sales and
marketing fee and royalty payments totaled approximately 6.0% of
gross EverQ revenue..
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While these revenue streams are based on current expansion and
financial expectations of EverQ, as well as expected future
technology developments, they are subject to periodic review and
adjustment by the shareholders of EverQ and could vary widely
from these estimates.
On January 30, 2008, we entered into a multi-year
polysilicon supply agreement with DC Chemical. The supply
agreement provides the general terms and conditions pursuant to
which DC Chemical will supply us with specified annual
quantities of polysilicon at fixed prices beginning in 2009 and
continuing through 2015. Within one month of the signing of the
supply agreement, we are required to make an approximately
$11.0 million nonrefundable prepayment to DC Chemical.
Additional nonrefundable prepayments totaling approximately
$25.5 million will be required at various times prior to
the end of 2008. With this additional supply agreement, we have
sufficient silicon under contract to reach annual production
levels of approximately 125 MW in 2009, 300 MW in
2010, 600 MW in 2011 and 850 MW in 2012.
On February 1, 2008, Dr. Gerald Wilson resigned from
our Board of Directors. Dr. Wilson served as a director
since July 2005, and at the time of his resignation served on
our Nominating and Corporate Governance Committee and our Audit
Committee.
On February 15, 2008, we closed a public offering of
18.4 million shares of our common stock, which included the
exercise of an underwriters’ option to purchase
2.4 million additional shares. We received net proceeds of
approximately $166.9 million (net of underwriting
discounts). The shares of common stock were sold at a per share
price of $9.50.
INDUSTRY
BACKGROUND
With approximately $1 trillion in annual global revenues during
2006, the electric power industry is one of the world’s
largest industries. Furthermore, electric power accounts for a
growing share of overall energy use. While a majority of the
world’s current electricity supply is generated from fossil
fuels such as coal, oil and natural gas, these traditional
energy sources face a number of challenges including rising
prices, security concerns over dependence on imports from a
limited number of countries, which have significant fossil fuel
supplies and growing environmental concerns over the climate
change risks associated with power generation using fossil
fuels. As a result of these and other challenges facing
traditional energy sources, governments, businesses and
consumers are increasingly supporting the development of
alternative energy sources, including solar energy.
The solar power market has grown significantly in the past
decade. According to Solarbuzz, the global solar power market,
as measured by annual solar power system installations,
increased from 427 MW in 2002 to 1,744 MW in 2006,
representing a CAGR 42.2%, while solar power industry revenues
grew to approximately $10.6 billion in 2006. Despite the
rapid growth, solar energy constitutes only a small fraction of
the world’s energy output and therefore may have
significant growth potential. Solarbuzz projects that annual
solar power industry revenue could reach between
$18.7 billion and $31.4 billion by 2011.
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Solar power generation has emerged as one of the most rapidly
growing renewable sources of electricity. Solar power generation
has several advantages over other forms of electricity
generation that have driven and will continue to drive the
growth of the solar power industry:
As a result of solar power’s benefits and government
support, the solar power market has seen sustained and rapid
growth. PV panel shipments have increased over 20% per year on
average for the past 20 years and over 40% per year for the
past five years.
Crystalline silicon-based technologies and thin-film
technologies are the two primary technologies currently used in
the solar power industry.
The crystalline silicon-based solar power manufacturing value
chain starts with the processing of quartz sand to produce
metallurgical-grade silicon. This material is further purified
to semiconductor-grade or solargrade polysilicon feedstock. In
the conventional crystalline silicon-based process, the silicon
feedstock is then processed into ingots, which are sliced into
solar wafers.
Wafers are manufactured into solar cells through a multiple step
manufacturing process that entails etching, doping, coating and
applying electrical contacts. Solar cells are then
interconnected and packaged to
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form solar panels, which together with system components such as
batteries and inverters, are installed as solar power systems.
The conventional crystalline silicon-based wafer manufacturing
process differs substantially from our proprietary String Ribbon
technology. Our String Ribbon technology is a cost-effective
process for manufacturing ribbons of crystalline silicon that
are cut into wafers. These wafers are the primary components of
PV cells which, in turn, are used to produce solar panels. With
silicon consumption of less than five grams per watt, we believe
we are the industry leader in efficient polysilicon consumption
and use about half of the silicon used by conventional sawing
wafer production processes. We believe that enhancements to our
String Ribbon technology and our quad ribbon furnace design will
enable us to reduce our silicon consumption to approximately
two-and-a-half
grams per watt by 2012.
In contrast to the crystalline silicon-based wafer manufacturing
process, thin film technology involves depositing several thin
layers of complex materials such as Copper Indium Gallium
Diselenide, or CIGS, or Cadmium Telluride, or CdTe, on a
substrate, such as glass, to make a solar cell. According to
Solarbuzz, thin-film-based solar cells represented approximately
7% of solar cell production in 2006. There will continue to be
significant efforts to develop alternate solar technologies,
such as Amorphous Silicon, CIGS, CdTe, crystalline silicon on
glass and polymer and nano technologies. Certain thin film
technologies are gaining commercial acceptance and are important
to broadening the demand for solar energy products for diverse
energy generation applications.
Although solar power can provide a cost-effective alternative
for off-grid applications, we believe the principal challenge to
widespread adoption of solar power for on-grid applications is
reducing manufacturing costs so that the cost of installed solar
panels is equal to or less than the cost of grid-generated
electricity without impairing product reliability. This concept
is known as reaching grid parity. We believe the following
challenges of solar power technology must be overcome in order
to reach grid parity:
We further believe the two principal solar power technologies,
conventional crystalline silicon and thin films, are not
adequately addressing these challenges:
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OUR
BUSINESS
We believe we are well-positioned to be a leader in the solar
power industry based on the following competitive strengths:
Proven Manufacturing Technology. Our
proprietary String Ribbon technology, combined with our
integrated manufacturing process know-how enables us to produce
wafers, cells and panels at competitive costs. We have been
developing and enhancing our patented String Ribbon technology
since 1994 and have achieved what we believe to be the lowest
silicon consumption rates in the industry with our dual ribbon
wafer furnace, which consumes less than five grams of silicon
per watt or approximately 50% of the silicon used by
conventional sawing wafer production processes. String Ribbon
technology has been successfully demonstrated at EverQ, where
there is approximately 100 MW of annual production capacity
in place as of December 31, 2007. Our new quad ribbon
furnace technology is expected to improve performance over our
dual ribbon furnace with significantly increased automation. We
believe that our facility in Marlboro, Massachusetts and EverQ,
which has been shipping product since June 2006, clearly
demonstrate that we can use our String Ribbon technology to
reduce the cost of manufacturing solar panels through
substantially reduced materials cost, simplified processing and
increased scalability.
Established Relationships with Key
Suppliers. Polysilicon is currently in short
supply and represents the most costly component in the
production of solar cells. We currently have agreements in place
for 100% of our anticipated silicon supply needs through 2012.
In July 2007, we entered into an eight-year polysilicon supply
agreement with Wacker with shipments beginning in 2010. In
October 2007, we entered into a supply agreement with Nitol for
specified annual quantities of polysilicon at fixed prices
beginning in 2009 and continuing through 2014. In December 2007,
we entered into a
10-year
polysilicon supply agreement with Silpro with shipments
beginning in 2010. In April 2007 and January 2008 we signed
polysilicon supply agreements with DC Chemical for multi-year
contracts through 2015. We may enter into additional long-term
silicon supply contracts with leading international and domestic
suppliers.
Attractive Take-or-Pay Sales Contracts. Over
the past 24 months, we have established long-term business
relationships with leading distributors, installers, project
developers and other resellers and have signed take-or-pay sales
contracts for the sale of solar panels with six distribution
partners, PowerLight Corporation (or PowerLight, recently
acquired by SunPower Corporation), S.A.G. Solarstrom (or
S.A.G.), Donauer Solartechnik (or Donauer), Mainstream Energy
(or Mainstream), Sun Edison and Global Resource Options (or
groSolar), with a total value of almost $1 billion for
deliveries through 2011. Through December 31, 2007,
approximately $170 million of sales under these contracts
have been fulfilled. These contracts include fixed quantity and
timing provisions. Our attractive take-or-pay sales contracts
confirm the viability of our products and provide a predictable
revenue stream. We will continue to pursue additional favorable
contracts with other distributors, installers, project
developers and other resellers.
Integrated Manufacturing Capacities. Our
operations currently include the production of wafers, cells and
panels, which comprise a significant portion of the solar power
value chain. Our String Ribbon technology
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enables continuous growth of crystalline silicon ribbons that
are cut into solar wafers eliminating the need for ingot
formation, sectioning and wire sawing necessary in the
conventional wafer manufacturing process. The elimination of the
need for ingot formation, sectioning and wafer sawing provides
us with significant advantages including increasing the speed
of, and reducing costs related to, building new production
facilities. We aim to leverage the advantages of our unique
integrated business model to rapidly expand our manufacturing
capacity at reduced costs.
Strong, Experienced Management Team. Richard
Feldt, our President and Chief Executive Officer, and our other
executive team members, have guided us from an innovative
research and development-focused company to an emerging
manufacturing leader in the solar energy industry.
Mr. Feldt previously served as Senior Vice President and
General Manager of Worldwide Operations at Symbol Technologies
where he streamlined the complex supply chain and significantly
reduced cycle times and material costs. His
30-year
track record in successfully growing global technology and
manufacturing businesses is instrumental to our long-term
development plan to expand manufacturing capacity. Our executive
officers are dedicated to the continuous development of our
technologies, including our proprietary quad ribbon wafer
furnace design, to enhance our competitive advantage in the
cost-efficient production of solar cells. With this talented
group of experienced executives from various technology
manufacturing and other relevant backgrounds, we expect to
execute on our current business plan and drive continued and
rapid growth.
Our fundamental business objective is to use our technologies to
become a leader in developing, manufacturing and marketing solar
panels throughout the world. We are implementing the following
strategies to meet this objective:
Innovate to Lower Cost of Solar to Achieve Grid Parity Cost
Structure. The long-term challenge of solar
energy is its higher cost compared to conventional sources of
electricity such as fossil fuels. Solar-power product
manufacturers who have the ability to manufacture products that
can generate electricity at or close to grid parity will
consequently have a distinct advantage, including the ability to
sell into markets where government subsidies are minimal or
non-existent. We expect our String Ribbon technology and other
advancements in wafer, cell and panel technology will allow us
to lower our manufacturing costs to approximately $1.50 per watt
in factories opening in 2011, upon reaching full capacity. We
also expect to continue to work with partners further down the
value chain to reduce the installed cost of solar. For example,
through our alliances with NSTAR, a Boston-based utility, and
other utilities, combined with our relationships with PowerLight
and Sun Edison, we expect to help reduce the marketing,
distribution and installation costs so that electricity
generated by our solar panels, as installed, costs the same as
or less than electricity generated by conventional sources.
Maintain Our Technology Leadership in Wafer, Cell and Panel
Manufacturing through Continuous Innovation. We
employ 77 research and development employees at an approximately
40,000 square foot facility in Marlboro, Massachusetts
primarily dedicated to research and development initiatives. Our
dual ribbon wafer technology affords us with a significant
technology advantage over many of our competitors as it results
in silicon consumption rates of less than five grams per watt,
which is about 50% of the silicon used by conventional sawing
wafer production processes. We are currently focused on further
enhancing our String Ribbon technology through the
implementation of our proprietary quad ribbon furnace design,
which we believe will help us achieve increased manufacturing
efficiencies and enable us to reduce our silicon consumption to
approximately
two-and-a-half
grams per watt by 2012. We also have plans to improve cell
conversion efficiencies and we are developing processes that
will improve factory yields. Through various initiatives, we
expect to achieve cell conversion efficiencies of approximately
18% and factory yields approaching 90% by 2012 while continuing
to reduce our total manufacturing costs per watt.
Significantly Increase Our Wholly Owned Manufacturing
Capacity. Building upon some of our experience in
scaling production using our String Ribbon technology at EverQ,
we are currently implementing a plan to expand our own
manufacturing capacity starting with the Devens facility, which
is expected to increase our production capacity by approximately
160 MW. We expect to have annual production of
approximately
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125 MW in 2009, 300 MW in 2010, 600 MW in 2011
and 850 MW in 2012. We have agreements in place for 100% of
our anticipated silicon supply needs through 2012.
Solar panels are generally composed of the following:
One or more solar panels can be assembled in a solar system (or
solar array) by physically mounting and electrically
interconnecting the panels, often with batteries or power
electronics, including inverters, to produce electricity.
Typical residential on-grid systems produce 2,000 to 6,000 watts
of power. Solar panels are our primary product, although we may
in the future also sell wafers, cells or systems. We believe our
panels are very competitive with other products in the
marketplace. They are certified to international standards of
safety, reliability and quality. If our development programs are
successful, we expect to see continued increases in conversion
efficiency and power output from our solar panels as we rapidly
expand our manufacturing capacity.
We sell our solar panels using domestic and international
distributors, system integrators, project developers and other
resellers, who often add value through system design by
incorporating our solar panels with inverters and other
electronics, mounting structures and wiring systems. Most of our
distribution partners have a geographic or applications focus.
Our distribution partners include companies that are exclusively
solar power system resellers as well as others for whom solar
power is an extension of their core business, such as
engineering design firms or other energy product marketers.
Going forward we expect to collaborate closely with a relatively
small number of resellers throughout the world. As of
December 31, 2007, we had approximately 10 main resellers
worldwide and are actively working to refine our distribution
partners by very careful addition of a select few new accounts
and channel partners. We intend to selectively pursue additional
strategic relationships with other companies worldwide for the
joint marketing, distribution and manufacturing of our products.
These resellers are expected to range from large, multinational
corporations to small, development-stage companies, each chosen
for their particular expertise. We believe that these
relationships will enable us to leverage the marketing,
manufacturing and distribution capabilities of other companies,
explore opportunities for additional product development and
more easily enter new geographic markets in a cost effective
manner, attract new distribution partners and develop advanced
solar power applications.
For the year ended December 31, 2007, sales to our five
largest distribution partners accounted for approximately 74% of
our total product revenues. In that period our largest
distribution partner, PowerLight accounted for approximately 31%
of our total product revenues. As we continue to expand
manufacturing capacity and sales volumes, we anticipate
developing relationships with additional distribution partners
and decreasing our dependence on any single distribution
partner. Additional information regarding the geographic
distribution of our sources of revenue may be found in the notes
to the financial statements.
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In addition, we market our products through trade shows,
on-going distribution partner communications, promotional
material, our website, direct mail and advertising. Our staff
provides customer service and applications engineering support
to our distribution partners while also gathering information on
current product performance and future product requirements.
Our principal manufacturing objective is to provide for
large-scale manufacturing of our solar power products at low
cost, thereby enabling us to penetrate price-sensitive solar
power markets. We are significantly increasing our manufacturing
capacity with the development of a state-of-the-art facility in
Devens, Massachusetts. We will manufacture and assemble solar
panels in the Devens facility using our quad ribbon furnaces.
The construction of Devens I began in September 2007 and has
progressed as scheduled. Foundations have been poured,
structural steel members have been erected and the Devens
facility was substantially enclosed before the full onset of the
New England winter allowing us to continue construction through
the winter. If we are able to continue construction at the
current pace and our equipment suppliers meet their forecasted
delivery deadlines, we believe we will begin manufacturing solar
panels at Devens I in mid-2008.
By the second quarter of 2008 we expect to complete the planning
and permitting and begin ordering equipment for Devens II.
Certain shared elements of Devens I and Devens II have
already been designed into and permitted for construction in
Devens I. Production in Devens II is expected to commence
in early 2009 and reach full capacity by late 2009.
Our current 96,000 square foot facility, at two adjacent
sites in Marlboro, Massachusetts, includes approximately
56,000 square feet of manufacturing space, and an
additional 40,000 square feet of space for research and
development and engineering development. The Marlboro facility
includes a complete line of equipment to manufacture String
Ribbon wafers, fabricate and test solar cells, and laminate and
test panels, with a total capacity of up to approximately
18 MW per year if operated at full capacity. Going forward,
however, we expect the Marlboro facility to continue to both
manufacture and to test, pilot, validate and benchmark new
manufacturing equipment and processes and product designs, and,
therefore, we expect actual production from our Marlboro
facility to be approximately 15 MW or lower.
We expect that our Devens facility will also include equipment
to manufacture string. We use a special form of string in our
wafer manufacturing process that is not used by any other wafer
manufacturer. We currently meet our string requirements using a
single supplier, and as part of our strategy of securing
adequate raw material supplies and reducing cost, we are
developing our own ability to produce string. We are in the
process of permitting this facility and expect to begin
production later this year. Together with our current supplier,
we will gradually grow our supply of string to meet the
expansion plans for both us and EverQ.
In recent years, our EverQ partnership has substantially
increased the volume of solar power products being manufactured
using our String Ribbon technology. EverQ has increased
productive capacity from about 30 MW in 2006 to
approximately 100 MW as of December 31, 2007 and we
expect its capacity to reach 180 MW by the second half of
2009 as a result of the addition of a third integrated wafer,
cell and panel factory. We and our EverQ partners also recently
announced plans to expand EverQ’s capacity to 600 MW
by 2012.
Because the market opportunity for solar power encompasses
numerous applications in both developed and developing nations
worldwide, we expect a significant portion of our future sales
will be made outside the United States. Over time, we also
expect that our manufacturing will become increasingly global.
We believe there are several advantages to manufacturing close
to local markets, including reduced shipping costs, reduced
currency exposure, enhanced brand recognition, avoidance of
import tariffs and access to local private or public sector
financing. See “Risk Factors — Risks Relating to
Our Industry, Products, Financial Results and
Operations — We face risks associated with the
marketing, distribution and sale of our solar power products
internationally, and if we are unable to effectively manage
these risks, it could impair our ability to expand our business
abroad.”
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Continuously improving our technology is an important part of
our overall strategy. Therefore, we have maintained and intend
to maintain a strong research and development effort.
Approximately 40,000 square feet of space is dedicated to
research and development and advanced engineering and contains
equipment to support the development, fabrication and evaluation
of new solar power products and technologies.
We believe that our commercial success will significantly depend
on our ability to protect our intellectual property rights
underlying our proprietary technologies. We seek U.S. and
international patent protection for major elements of our
technology platform, including our manufacturing process and
methods and apparatuses for producing crystalline silicon
wafers, solar cells and solar panels. We currently have 22
U.S. patents, seven Indian patents, and six European
patents that have been validated with enforceable rights in 10
foreign jurisdictions. These patents begin to expire in 2016 and
will all expire by 2023. In addition, we have 20
U.S. patent applications pending and 26 foreign patent
applications pending (including PCT applications) related to our
business. We devote substantial resources to building a strong
patent position and we intend to continue to file additional
U.S. and foreign patent applications to seek protection for
technology we deem important to our commercial success. Our
patents cover the following areas:
We have one U.S. registered trademark we are currently
using and three pending U.S. trademarks we presently intend
to continue to pursue and several foreign trademark
registrations associated with and used in our business,
including registrations and applications for the trademarks
Evergreen Solar, the Evergreen Solar logo and Think Beyond.
Furthermore, we use a number of common law trademarks and
service marks, including the trademark String Ribbon. We are
working to increase, maintain and enforce our rights in our
trademark portfolio, the protection of which is important to our
reputation and branding. We also own copyrights relating to our
products, services and business, including copyrights in the
software we have developed, in our marketing materials and in
our product manuals.
With respect to, among other things, proprietary know-how that
is not patentable and processes for which patents are difficult
to enforce, we rely on trade secret protection and
confidentiality agreements to protect our interests. We believe
that several elements of our solar panels and manufacturing
processes involve proprietary know-how, technology or data,
which are not covered by patents or patent applications,
including selected
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materials, technical processes, equipment designs, algorithms
and procedures. We have taken security measures to protect our
proprietary know-how, technologies and confidential data, and we
continue to explore additional methods of protection. While we
require all employees, key consultants and other third parties
to enter into confidentiality agreements with us, we cannot be
assured that proprietary information will not be disclosed
inappropriately, that others will not independently develop
substantially equivalent proprietary information and techniques
or otherwise gain access to our trade secrets, or that we can
meaningfully protect our trade secrets. Any material leak of
confidential or proprietary information into the public domain
or to third parties could result in the loss of a competitive
advantage in the solar power market.
The solar power market is intensely competitive and rapidly
evolving. According to Solarbuzz, there are over
100 companies which engaged in PV products manufacturing or
have announced to do so. Our main competitors are, among others,
BP Solar International Inc., First Solar, Inc., Kyocera
Corporation, Mitsubishi, RWE Schott Solar, Inc., Sanyo
Corporation, Sharp Corporation, Solar World AG, SunPower
Corporation and SunTech Power Holdings Co., Ltd. We also expect
that future competition will include new entrants to the solar
power market offering new technological solutions. We may also
face competition from semiconductor manufacturers, several of
which have already announced their intention to start production
of solar cells.
Many of our existing and potential competitors have
substantially greater financial, manufacturing and other
resources than we currently do. Our competitors’ greater
size and, in some cases, longer operating histories provide them
with a competitive advantage with respect to manufacturing costs
because of their economies of scale and their ability to
purchase raw materials at lower prices. For example, those of
our competitors that also manufacture semiconductors may source
both semiconductor grade silicon wafers and solar grade silicon
wafers from the same supplier. As a result, such competitors may
have stronger bargaining power with the supplier and have an
advantage over us in pricing as well as securing silicon wafer
supplies at times of shortages.
We believe that the cost and performance of our technology will
continue to have advantages compared to competitive
technologies. Our products offer the reliability, efficiency and
market acceptance of other crystalline silicon products. We
believe our technology provides lower manufacturing costs
resulting from significantly better silicon consumption and
fewer processing steps, particularly in wafer fabrication.
Compared to thin film products, our products offer generally
higher performance. Some thin film technologies, such as cadmium
telluride, use toxic materials that inhibit their market
acceptance, where others, such as copper indium diselenide, rely
on raw materials in short supply, such as indium. Other
technologies, including all of the polymer and nanomaterial
technologies, are still being developed and have not yet reached
the commercialization stage.
The entire solar industry also faces significant competition
from other power generation sources, both conventional sources
as well as other emerging technologies. Solar power has certain
advantages and disadvantages when compared to other power
generating technologies. The advantages include the ability to
deploy products in many sizes and configurations, to install
products almost anywhere in the world, to provide reliable power
for many applications, to serve as both a power generator and
the skin of a building and to eliminate air, water and noise
emissions. Whereas solar generally is cost effective for
off-grid applications, the high up-front cost of solar relative
to most other solutions is the primary market barrier for
on-grid applications. Furthermore, unlike most conventional
power generators, which can produce power on demand, solar power
cannot generate power where sunlight is not available, although
it is often matched with battery storage to provide highly
reliable on demand power solutions.
We use toxic, volatile or otherwise hazardous chemicals in our
research and development and manufacturing activities and
generate and discharge hazardous emissions, effluents and wastes
from these operations. We are subject to a variety of foreign,
federal, state and local governmental regulations related to the
storage, use, discharge, emission and disposal of hazardous
materials. We are also subject to occupational health and
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safety regulations designed to protect worker health and safety
from injuries and adverse health effects from exposure to
hazardous chemicals and working conditions.
We believe that we have all environmental permits necessary to
conduct our business. We believe that we have properly handled
our hazardous materials and wastes and have not materially
contributed to any contamination at any of our past or current
premises, although historical contamination may be present at
these locations from prior uses. We are not aware of any
environmental, health or safety investigation, proceeding or
action by foreign, federal or state agencies involving our past
or current facilities. If we fail to comply with present or
future environmental, health or safety regulations, we could be
subject to fines, suspension of production or a cessation of
operations. Any failure by us to control the use of, prevent
public or employee exposure to, or to restrict adequately the
emission and discharge of hazardous substances in accordance
with applicable environmental laws and regulations could subject
us to substantial financial liabilities, operational
interruptions and adverse publicity, any of which could
materially and adversely affect our business, results of
operations and financial condition. In addition, under some
foreign, federal and state statutes and regulations, a
governmental agency or private party may seek recovery of
response costs or damages from operators of property where
releases of hazardous substances have occurred or are ongoing,
even if the operator was not responsible for the release or
otherwise was not at fault.
As of December 31, 2007, we had approximately
400 full-time employees, including approximately 77 engaged
in research and development and approximately 276 engaged in
manufacturing. Approximately 47 of our employees have advanced
degrees, including 19 with Ph.D.s. None of our employees are
represented by any labor union nor are they organized under a
collective bargaining agreement. We have never experienced a
work stoppage and believe that our relations with our employees
are good. Devens I and Devens II are expected to increase
our number of full-time employees by approximately 410 and 350
respectively.
Our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports are made available free of
charge though our internet website
(http://www.evergreensolar.com)
as soon as practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission. Except as otherwise stated in these documents, the
information contained on our website or available by hyperlink
from our website is not incorporated by reference into this
report or any other documents we file with or furnish to the SEC.
The factors discussed below are cautionary statements that
identify important factors that could cause actual results to
differ materially from those anticipated by the forward-looking
statements contained in this report. For more information
regarding the forward-looking statements contained in this
report, see “Concerns Regarding Forward-Looking
Statements” at the beginning of this report. You should
carefully consider the risks and uncertainties described below,
together with all of the other information included in this
report, in considering our business and prospects. The risks and
uncertainties described below are not the only ones that we
face. Additional risks and uncertainties not presently known to
us or that we currently deem to be immaterial also may
materially impair our business operations. The occurrence of any
of the following risks could adversely affect our business,
financial condition or results of operations.
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Risks
Relating to Our Industry, Products, Financial Results and
Operations
There is limited historical information available about our
company upon which you can base your evaluation of our business
and prospects. Although we were formed in 1994 to research and
develop crystalline silicon technology for use in manufacturing
solar power products and began shipping product in 1997, we
first shipped commercial products from our Marlboro
manufacturing facility in September 2001. Relative to the entire
solar industry, we have shipped only a limited number of solar
power panels manufactured in our Marlboro facility and have
recognized limited revenues generated by products produced at
this facility.
The solar power market is rapidly evolving and is experiencing
technological advances and new market entrants. Our future
success will require us to scale our manufacturing capacity
significantly beyond the capacity of our existing Marlboro
facility and the planned Devens expansions, and our business
model, technologies and processes are unproven at significant
scale. Moreover, EverQ is only in the early stages of expansion,
and we have limited experience upon which to predict whether it
will continue to be successful. As a result, you should consider
our business and prospects in light of the risks, expenses and
challenges that we will face as an early-stage company seeking
to develop and manufacture new products in a growing and rapidly
evolving market.
Since our inception, we have incurred significant net losses,
including a net loss of $16.6 million for the year ended
December 31, 2007. Principally as a result of ongoing
operating losses, we had an accumulated deficit of
$136.3 million as of December 31, 2007. We expect to
incur substantial losses until Devens I approaches full
capacity, and if we do not achieve our expected production
targets we may never become profitable. Even if we do achieve
profitability, we may be unable to sustain or increase our
profitability in the future, which in turn could materially
decrease the market value of our common stock. We expect to
continue to make significant capital expenditures and anticipate
that our expenses will increase as we seek to:
We do not know whether our revenues will grow at all or grow
rapidly enough to absorb these costs, and our limited operating
history makes it difficult to assess the extent of these
expenses or their impact on our operating results.
We will need to generate cash internally or raise significant
additional capital to fund our planned expansion of
manufacturing facilities beyond the Devens facility, to acquire
complementary businesses, to secure silicon beyond our existing
contracts and obtain other raw materials
and/or
necessary technologies. In addition, the net proceeds from our
February 2008 public offering of common stock and cash on hand
will not be sufficient to fully construct and equip
Devens II and, therefore, we will need to secure additional
financing to do so. Furthermore, we, along with REC and Q-Cells,
have guaranteed a long-term loan entered into by EverQ. A
default by EverQ on this loan could materially impact the
availability of our existing funds, and
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require us to secure additional capital. If adequate capital is
not available or is not available on acceptable terms, our
ability to fund our operations, further develop and expand our
manufacturing operations and distribution network, or otherwise
respond to competitive pressures would be significantly limited.
In such a case, the stock price of our common stock would likely
be materially and adversely impacted.
If we raise a significant amount of capital through the debt
markets, we may become subject to the additional risks and
uncertainties that are faced by highly leveraged companies. For
example, substantial indebtedness could have significant effects
on our business, such as, among other things, requiring us to
use a substantial portion of our cash flow from operations to
service our indebtedness (thereby reducing available cash flow
to fund working capital, capital expenditures, development
projects and other general corporate purpose) and placing us at
a competitive disadvantage compared to our competitors that have
less debt.
Our
future success depends on our ability to increase our
manufacturing capacity through the development of additional
manufacturing facilities, including the Devens facility. If we
are unable to achieve our capacity expansion goals, which would
limit our growth potential and impair our operating results and
financial condition.
Our future success depends on our ability to increase our
manufacturing capacity mainly with additional manufacturing
facilities, including the Devens facility. Our ability to
complete the construction and
ramp-up of
Devens I and Devens II is contingent on our ability to
obtain and satisfy all the requirements imposed by certain
permits needed to begin operations. Our failure to obtain or
satisfy the requirements of these permits could delay
construction of Devens I or Devens II. The net proceeds from our
February 2008 public offering of common stock will not be
sufficient to fully construct and equip Devens II and,
therefore, we will need to secure additional financing to do so.
There can be no assurance that we will be successful in
establishing additional facilities or, once established, that we
will attain the expected manufacturing capacity or financial
results.
Our ability to complete the planning, construction and equipping
of Devens I and Devens II and additional manufacturing
facilities is subject to significant risk and uncertainty,
including:
If we are unable to develop and successfully operate additional
manufacturing facilities, or if we encounter any of the risks
described above, we may be unable to scale our business to the
extent necessary to improve results of operations and achieve
profitability. Moreover, there can be no assurance that if we do
expand our manufacturing capacity that we will be able to
generate customer demand for our solar power products at these
production levels or that we will increase our revenues or
achieve profitability.
We expect to expand our business significantly in order to
satisfy demand for our solar power products and increase our
market share. To manage the expansion of our operations, we will
be required to improve our operational and financial systems,
procedures and controls and expand, train and manage our growing
employee base. Our management will also be required to maintain
and expand our relationships with
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distribution partners, suppliers and other third parties and
attract new distribution partners and suppliers. In addition,
our current and planned operations, personnel, systems and
internal procedures and controls might be inadequate to support
our future growth. If we cannot manage our growth effectively,
we may be unable to take advantage of market opportunities,
execute our business strategies or respond to competitive
pressures, and our business and results of operations could be
harmed.
Furthermore, under the master joint venture agreement that
governs the joint venture parties’ relationship with
respect to EverQ, we have agreed to give to each of Q-Cells and
REC, respectively, a right of first refusal to participate in
specified future joint ventures that we may decide to undertake
for development of manufacturing facilities outside the United
States. This limitation could have the effect of frustrating
attempts we may make to expand our manufacturing outside of the
United States.
We intend to use at least half of the net proceeds received from
our public offering which closed on February 15, 2008, for
the completion of Devens I and the planning, construction and
equipping of Devens II. The scheduled completion dates for
Devens I and Devens II and the budgeted costs necessary to
complete construction assume that there are no material
unforeseen or unexpected difficulties or delays. Among other
things, a delay in the completion of the plans and
specifications for Devens II and a delay in the
commencement of construction on Devens II beyond the
scheduled commencement date may increase our overall cost for
the construction.
The net proceeds from the public offering which closed on
February 15, 2008, and cash on hand will not be sufficient
to fully construct and equip Devens II and, therefore, we
will need to secure additional financing in the future to do so.
We may be unable to secure additional financing on reasonable
terms or at all, which may force us to modify the scope and
schedule of construction. Our inability to pay development costs
as they are incurred would negatively affect our ability to
complete Devens II on time or within budget and thus could
have a material adverse effect on our financial condition and
results of operations.
Construction, equipment or staffing problems or difficulties in
obtaining all of the requisite licenses, permits or
authorizations from regulatory authorities could delay or
prevent the construction or opening or otherwise affect the
design and features of Devens. Certain permits, licenses and
other approvals necessary for the development, construction and
operation of Devens have not yet been obtained. Delays in
obtaining these approvals or other unexpected changes or
concessions required by local, state or federal regulatory
authorities could involve additional costs and result in a delay
in the scheduled opening of Devens. Failure to complete Devens
within budget or on schedule may have a significant negative
effect on our financial condition and results of operations.
Polysilicon is an essential raw material in our production of PV
cells. There is currently an industry-wide shortage of
polysilicon and a limited number of polysilicon suppliers, which
has resulted in significant price increases and pre-payment
requirements under polysilicon agreements. Although we have
contracted with vendors for polysilicon supply sufficient for
our stated expansion plans, our estimates regarding our supply
needs may not be correct and our suppliers may not satisfy their
obligations under these contracts. In addition, with respect to
our recently announced supply agreements with DC Chemical, Nitol
and Silpro, such suppliers must construct new facilities that
will be used to manufacture the polysilicon to be delivered to
us. The construction of these facilities is a substantial
undertaking, requiring several years to complete and subject to
numerous risks and uncertainties relating to new construction.
Each of DC Chemical, Silpro and Nitol have
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limited experience in developing polysilicon manufacturing
facilities. We have also made significant prepayments with our
polysilicon suppliers. In many instances these payments are not
refundable or will be difficult to recover if a supplier
defaults on its obligations. If DC Chemical, Wacker, Nitol,
Silpro or any of our other polysilicon suppliers are unable or
unwilling to supply us with polysilicon in accordance with the
applicable supply agreements, our ability to meet existing and
future customer demand for our products would be impaired. In
turn, this could cause us to make fewer shipments, lose
distribution partners and market share and generate lower than
anticipated revenue, thereby seriously harming our financial
condition and results of operations.
During 2007, we entered into two multi-year polysilicon supply
agreements that were denominated in Euros. While we endeavor to
denominate the purchase price of our materials in United State
dollars, we are not always successful in doing so. To the extent
that such purchases are made in foreign currency, we will be
exposed to currency gains or losses. Unfavorable changes in
these foreign currency exchange rates could significantly
increase the cost of our products, adversely impacting our
future financial condition and results of operations.
We manufacture all of our solar power products using materials
and components procured from a limited number of suppliers,
which makes us susceptible to quality issues, shortages and
price changes. If we fail to develop, maintain, and in many
cases, expand our relationships with these or our other
suppliers, we may be unable to manufacture our products or our
products may be available only at a higher cost or after a long
delay, which could prevent us from delivering our products to
our distribution partners within required time frames, which in
turn could lead to order cancellations and loss of market share.
To the extent the processes that our suppliers use to
manufacture materials and components are proprietary, we may be
unable to obtain comparable materials and components from
alternative suppliers. The failure of a supplier to supply
materials and components in a timely manner, or to supply
materials and components that meet our quality, quantity and
cost requirements could impair our ability to manufacture our
products or increase the costs of our products, particularly if
we are unable to obtain substitute sources of these materials
and components on a timely basis or on terms acceptable to us.
Certain of the capital equipment used in the manufacture of our
solar power products has been developed and made specifically
for us, is not readily available from multiple vendors and would
be difficult to repair or replace if it were to become damaged
or stop working. Consequently, any damage to or breakdown of our
manufacturing equipment at a time when we are manufacturing
commercial quantities of our products may have a material
adverse impact on our business. For example, a supplier’s
failure to supply this equipment in a timely manner, with
adequate quality and on terms acceptable to us, could delay our
manufacturing capacity expansion and otherwise disrupt our
production schedule or increase our costs of production.
Our interest in EverQ will be diluted if the EverQ IPO occurs,
which may adversely affect our corporate governance influence
over EverQ’s business and decision making. In addition, in
preparation for and in connection with the IPO, we have entered
into a binding memorandum of understanding with EverQ regarding
their rights to our intellectual property and may need to modify
our other material agreements with EverQ, or enter into
additional agreements, such as additional license and technology
transfer agreements and transition agreements, with EverQ. Such
modifications, adjustments or renegotiations of the terms and
conditions of
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these agreements may adversely affect future revenues we receive
from EverQ, including, without limitation, royalties and fees
under the license and technology transfer agreement and the
sales representative agreement.
We also can give no assurance regarding whether the IPO can be
successfully completed and, if completed, we can give no
assurance regarding the level of the initial offering price or
the market performance of EverQ shares after the IPO. Our shares
may experience additional volatility following an EverQ IPO as a
result of changes in the price of EverQ shares.
We have historically invested heavily in research and
development related to new product development and improving our
manufacturing processes, and expect to continue to invest
heavily in research and development in the future. If we fail to
develop successfully our new solar power products or
technologies, we will likely be unable to recover the costs we
have incurred to develop these products and technologies and may
be unable to increase our revenues and to become profitable.
Some of our new product and manufacturing technologies are
unproven at commercial scale and represent a departure from
conventional solar power technologies, and it is difficult to
predict whether we will be successful in completing their
development. In addition, we invest significantly in developing
new manufacturing processes designed to reduce our total costs
of production. Our new manufacturing technologies, including our
quad ribbon wafer furnace design, have been tested only in our
Marlboro facility and, in most cases, only limited
pre-production prototypes of our new products have been
field-tested
and/or sold
in limited quantities. If our development efforts regarding new
manufacturing technologies are not successful, and we are unable
to increase the efficiency and decrease the costs of our
manufacturing process, we may not be able to reduce the price of
our products, which might prevent our products from gaining wide
acceptance, and our gross margins may be negatively impacted.
The development of a successful market for our solar power
products may be adversely affected by a number of factors, many
of which are beyond our control, including:
If our solar power products fail to gain market acceptance, we
would be unable to increase our revenues and market share and to
achieve and sustain profitability.
The solar power market is characterized by continually changing
technology requiring improved features, such as increased
efficiency, higher power output and lower price. Our failure to
further refine our technology and develop and introduce new
solar power products could cause our products to become
uncompetitive or obsolete, which could reduce our market share
and cause our revenues to decline. The solar power industry is
rapidly evolving and competitive. We will need to invest
significant financial resources in research and development to
keep pace with technological advances in the solar power
industry and to effectively compete in the future. A variety of
competing solar power technologies are under development by
other companies that could result in lower manufacturing costs
or higher product performance than those expected for our solar
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power products. Our development efforts may be rendered obsolete
by the technological advances of others, and other technologies
may prove more advantageous for the commercialization of solar
power products.
We currently sell our solar power products primarily to domestic
and international distributors, system integrators, project
developers and other resellers, which typically resell our
products to end users on a global basis. During our year ended
December 31, 2007, we sold our solar power products to
approximately 38 distributors, system integrators, project
developers and other resellers. Substantially all of our
products were sold to just 10 of these distribution partners. If
we are unable to refine successfully our existing distribution
relationships and expand our distribution channels, our revenues
and future prospects will be materially harmed. As we seek to
grow our revenues by entering new markets in which we have
little experience selling our products, our ability to increase
market share and revenues will depend substantially on our
ability to expand our distribution channels by identifying,
developing and maintaining relationships with resellers. We may
be unable to enter into relationships with resellers in the
markets we target or on terms and conditions favorable to us,
which could prevent us from entering these markets or entering
these markets in accordance with our plans. Our ability to enter
into and maintain relationships with resellers will be
influenced by the relationships between these resellers and our
competitors, market acceptance of our products and our low brand
recognition as a new entrant.
Our product revenues outside of the United States, which
excludes sales by EverQ for the year ended December 31,
2007, constituted approximately 18% and 63% of our total product
revenues for the year ended December 31, 2007 and 2006,
respectively. We expect that in the near future our revenues
both from resellers and distributors outside of the United
States and through our resellers and distributors to end users
outside of the United States, will represent a majority of our
total product revenues, particularly as we increase our
production capacity. Significant management attention and
financial resources will be required to develop successfully our
international sales channels. In addition, the marketing,
distribution and sale of our solar power products outside the
United States expose us to a number of markets in which we have
limited experience. If we are unable to manage effectively these
risks, it could impair our ability to grow our business abroad.
These risks include:
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Our strategy may include establishing local manufacturing
facilities in international markets. As we implement our
strategy, we may encounter legal restrictions and liability,
encounter commercial restrictions and incur taxes and other
expenses to establish our manufacturing facilities in certain
countries. In addition, we may potentially forfeit, voluntarily
or involuntarily, foreign assets due to economic or political
instability in the countries in which we choose to locate our
manufacturing facilities. Furthermore, under the master joint
venture agreement that governs the joint venture parties’
relationship with respect to EverQ, we have agreed to give to
each of Q-Cells and REC, respectively, a right of first refusal
to participate in specified future joint ventures that we may
decide to undertake for development of manufacturing facilities
outside the United States. This limitation could have the effect
of frustrating attempts we may make to expand our manufacturing
outside of the United States.
As of December 31, 2007, approximately 31%, 14% and 12% of
our product revenues were generated from sales to PowerLight,
Sun Edison and groSolar. These companies are in various stages
of development and the loss of sales to any of them or the
decline of any of their businesses could materially adversely
affect our business, financial condition and results of
operation. We anticipate that sales of our solar power products
to a limited number of distribution partners will continue to
account for a significant portion of our total product revenues
for the foreseeable future. Consequently, any one of the
following events may cause material fluctuations or declines in
our product revenues and negatively impact our operating results:
Consistent with standard practice in the solar industry, the
duration of our product warranties is lengthy. Our current
standard product warranty includes a five-year warranty period
for defects in material and workmanship and a
25-year
warranty period for declines in power performance beyond
specified levels. We believe our warranty periods are consistent
with industry practice. Due to the long warranty period, we bear
the risk of extensive warranty claims long after we have shipped
product and recognized revenues. Although we have sold solar
panels since 1997, the substantial majority of them have been
operating for less than two years. The possibility of future
product failures could cause us to incur substantial expenses to
repair or replace defective products. Furthermore, widespread
product failures may damage our market reputation and reduce our
market share and cause sales to decline.
Our ability to establish strategic relationships will depend on
a number of factors, many of which are outside our control, such
as the competitive position of our technology and our products
relative to our competitors. Furthermore, under the master joint
venture agreement that governs the joint venture parties’
relationship with respect to EverQ, we have agreed to give to
each of Q-Cells and REC, respectively, a right of first refusal
to participate in specified future joint ventures that we may
decide to undertake for development of manufacturing facilities
outside the United States. This limitation could have the effect
of frustrating
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attempts we make to establish strategic relationships with third
parties. We can provide no assurance that we will be able to
establish new strategic relationships in the future.
In addition, strategic alliances that we may establish, will
subject us to a number of risks, including risks associated with
sharing proprietary information, loss of control of operations
that are material to our business and profit-sharing
arrangements. Moreover, strategic alliances may be expensive to
implement, require us to issue additional shares of our common
stock and subject us to the risk that the third party will not
perform its obligations under the relationship, which may
subject us to losses over which we have no control or expensive
termination arrangements. As a result, even if our strategic
alliances with third parties are successful, our business may be
adversely affected by a number of factors that are outside of
our control.
We have attracted a highly skilled management team and
specialized workforce, including scientists, engineers,
researchers and manufacturing and marketing professionals. If we
were to lose the services of any of our executive officers and
key employees, our business could be materially and adversely
impacted. We do not carry key person life insurance on any of
our senior management or other key personnel.
We had approximately 400 employees as of December 31,
2007, and we anticipate that we will need to hire approximately
410 employees and 350 employees, respectively, in
connection with Devens I and Devens II. Competition for
personnel is intense, and qualified technical personnel are
likely to remain a limited resource for the foreseeable future.
Locating candidates with the appropriate qualifications,
particularly in the desired geographic location, can be costly
and difficult. We may not be able to hire the necessary
personnel to implement our business strategy given our
anticipated hiring needs, or we may need to provide higher
compensation or more training to our personnel than we currently
anticipate. Moreover, any officer or employee can terminate his
or her relationship with us at any time.
We utilize highly flammable materials such as silane and methane
in our manufacturing processes. By utilizing these materials, we
are subject to the risk of losses arising from explosions and
fires. Our inability to fill customer orders during an extended
business interruption could materially adversely impact existing
distribution partner relationships resulting in market share
decreases and reduced revenues.
We believe that the growth of the majority of our target
markets, depends on the availability and size of government
subsidies and economic incentives for solar technology. Today,
the cost of solar power substantially exceeds the cost of power
furnished by the electric utility grid. As a result, federal,
state and local governmental bodies in many countries, most
notably the United States, Japan and Germany, have provided
subsidies in the form of cost reductions, tax incentives and
other incentives to end users, distributors, systems
integrators, other resellers and manufacturers of solar power
products to promote the use of solar energy and to reduce
dependency on other forms of energy. In the future, these
government subsidies and economic incentives could be reduced or
eliminated altogether. For example, German subsidies decline at
a rate of 5.0% to 6.5% per year (based on the type and size of
the PV system) and the German Federal Ministry for the
Environment recently announced a gradual increase of two
percentage points from 2010 through 2011 and three percentage
points in 2012 in the rate at which German subsidies decline. In
addition, the Emerging Renewables Program in California has
finite funds that may not last through the current program
period. California subsidies have declined in the past and will
continue to decline as cumulative installations exceed stated
thresholds. Net metering policies in California, which currently
only require each investor owned utility to provide net metering
up to 2.5% of its aggregate customer peak demand, could also
limit the amount of
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solar power installed within California. Further, the 30%
investment tax credit for solar energy manufacturers provided in
the Energy Policy Act of 2005 is set to expire after 2008 if not
extended by the United States federal government. The reduction
or elimination of government subsidies and economic incentives
would likely reduce the size of these markets
and/or
result in increased price competition, which could cause our
revenues to decline.
The market for solar power products is emerging and rapidly
evolving, and its future success is uncertain. If solar power
technology proves unsuitable for widespread commercial
deployment or if demand for solar power products fails to
develop sufficiently, we would be unable to generate enough
revenues to achieve and sustain profitability. In addition,
demand for solar power products in the markets and geographic
regions we target may not develop or may develop more slowly
than we anticipate. Many factors will influence the widespread
adoption of solar power technology and demand for solar power
products, including:
The solar power market is intensely competitive and rapidly
evolving. According to Solarbuzz, there are over
100 companies that are engaged in manufacturing PV products
or have announced an intention to do so. Many of our competitors
have established a market position more prominent than ours, and
if we fail to attract and retain distribution partners and
establish a successful distribution network for our solar power
products, we may be unable to increase our sales and market
share. There are a large number of companies in the world that
produce solar power products, including BP Solar International
Inc., First Solar, Inc., Kyocera Corporation, Mitsubishi, RWE
Schott Solar, Inc., Sanyo Corporation, Sharp Corporation, Solar
World AG, SunPower Corporation and SunTech Power Holdings Co.,
Ltd. We also expect that future competition will include new
entrants to the solar power market offering new technological
solutions. In the future, as EverQ becomes an independent
company, it may also compete directly with us. In addition, we
may face competition from semiconductor manufacturers, several
of which have already announced their intention to start
production of solar cells. Further, many of our competitors are
developing and are currently producing products based on new
solar power technologies, including other crystalline silicon
ribbon and sheet technologies, that they believe will ultimately
have costs similar to, or lower than, our projected costs. Many
of our existing and potential competitors have substantially
greater financial, technical, manufacturing and other resources
than we currently do. Our competitors’ greater size and, in
some cases, longer operating histories provide them with a
competitive advantage with respect to manufacturing costs
because of their economies of scale and their ability to
purchase raw materials at lower prices. For example, those of
our competitors that also manufacture
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semiconductors may source both semiconductor grade polysilicon
and solar grade polysilicon from the same supplier. As a result,
such competitors may have stronger bargaining power with such
supplier and have an advantage over us in pricing as well as
securing polysilicon at times of shortages. Many also have
greater name recognition, more established distribution networks
and larger installed bases of customers. In addition, many of
our competitors have well-established relationships with our
current and potential resellers and their customers and have
extensive knowledge of our target markets. As a result, our
competitors may be able to devote greater resources to the
research, development, promotion and sale of their products and
respond more quickly to evolving industry standards and changing
customer requirements than we can.
Our ability to compete effectively against competing solar power
technologies will depend, in part, on our ability to protect our
current and future proprietary technology, product designs and
manufacturing processes by obtaining, maintaining, and enforcing
our intellectual property rights through a combination of
patents, copyrights, trademarks, and trade secrets and also
through unfair competition laws. We may not be able to obtain,
maintain or enforce adequately our intellectual property and may
need to defend our products against infringement or
misappropriation claims, either of which could result in the
loss of our competitive advantage in the solar power market and
materially harm our business and profitability. We face the
following risks in protecting our intellectual property and in
developing, manufacturing, marketing and selling our products:
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In recent years, there has been significant litigation involving
patents and other intellectual property rights in many
technology-related industries. There may be patents or patent
applications in the United States or other countries that are
pertinent to our products or business of which we are not aware.
The technology that we incorporate into and use to develop and
manufacture our current and future solar power products may be
subject to claims that they infringe the patents or proprietary
rights of others. The success of our business will also depend
on our ability to develop new technologies without infringing or
misappropriating the proprietary rights of others. Third parties
may allege that we infringe patents, trademarks or copyrights,
or that we misappropriated trade secrets. These allegations
could result in significant costs and diversion of the attention
of management.
If a successful claim were brought against us and we are found
to infringe a third party’s intellectual property right, we
could be required to pay substantial damages, including treble
damages if it is determined that we have willfully infringed
such rights, or be enjoined from using the technology deemed to
be infringing or using, making or selling products deemed to be
infringing. If we have supplied infringing products or
technology to third parties, we may be obligated to indemnify
these third parties for damages they may be required to pay to
the patent holder and for any losses they may sustain as a
result of the infringement. In addition, we may need to attempt
to license the intellectual property right from such third party
or spend time and money to design around or avoid the
intellectual property. Any such license may not be available on
reasonable terms, or at all. Regardless of the outcome,
litigation can be very costly and can divert management’s
efforts. An adverse determination may subject us to significant
liabilities
and/or
disrupt our business.
Our business and competitive position depend upon our ability to
protect our proprietary technology, including any manufacturing
processes and solar power products that we develop. Despite our
efforts to protect this information, unauthorized parties may
attempt to obtain and use information that we regard as
proprietary. Any patents issued in connection with our efforts
to develop new technology for solar power products may not be
broad enough to protect all of the potential uses of the
technology.
In addition, when we do not control the prosecution, maintenance
and enforcement of certain important intellectual property, such
as a technology in-licensed to us, the protection of the
intellectual property rights may not be in our hands. If the
entity that controls the intellectual property rights does not
adequately protect those rights, our rights may be impaired,
which may impact our ability to develop, market and
commercialize the related solar power products.
Our means of protecting our proprietary rights may not be
adequate, and our competitors may:
We pursue a policy of having our employees, consultants and
advisors execute proprietary information and invention
agreements when they begin working for us. However, these
agreements may not provide meaningful protection for our trade
secrets or other proprietary information in the event of
unauthorized use or
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disclosure. If we fail to maintain trade secret and patent
protection, our potential, future revenues may be decreased.
We have entered into license agreements for technologies and
intellectual property rights, including an agreement relating to
the manufacture of string we intend to use to produce String
Ribbon wafers. Any of our license agreements may be subject to
terms and conditions which may limit our ability to use the
licensed intellectual property under certain circumstances. For
example, our string-related license may terminate if we
materially breach the license agreement or if we abandon the
construction of a manufacturing facility to exploit the licensed
technology. We may need to enter into additional license
agreements in the future for other technologies or intellectual
property rights of third parties. Such licenses, however, may
not be available to us on commercially reasonable terms or at
all.
The market for electricity generation products is heavily
influenced by foreign, federal, state and local government
regulations and policies concerning the electric utility
industry, as well as internal policies and regulations
promulgated by electric utilities. These regulations and
policies often relate to electricity pricing and technical
interconnection of customer-owned electricity generation. In the
United States and in a number of other countries, these
regulations and policies are being modified and may continue to
be modified. Customer purchases of, or further investment in the
research and development of, alternative energy sources,
including solar power technology, could be deterred by these
regulations and policies, which could result in a significant
reduction in the potential demand for our solar power products.
For example, utility companies commonly charge fees to larger,
industrial customers for disconnecting from the electric grid or
for having the capacity to use power from the electric grid for
back-up
purposes. These fees could increase the cost to our customers of
using our solar power products and make them less desirable,
thereby harming our business, prospects, results of operations
and financial condition.
We anticipate that our solar power products and their
installation will be subject to oversight and regulation in
accordance with national, state and local laws and ordinances
relating to building codes, safety, environmental protection,
utility interconnection and metering and related matters. There
is also a burden in having to track the requirements of
individual states and design equipment to comply with the
varying standards. Any new government regulations or utility
policies pertaining to our solar power products may result in
significant additional expenses to us and our resellers and
their customers and, as a result, could cause a significant
reduction in demand for our solar power products.
If we fail to comply with present or future environmental laws
or regulations we may be required to pay substantial civil or
criminal penalties, incur significant capital expenditures,
suspend or limit production or cease operations. We use toxic,
volatile and otherwise hazardous chemicals in our research and
development and manufacturing activities, and generate and
discharge hazardous emissions, effluents and wastes from these
operations. Any failure by us to control the use of or
generation of, or to restrict adequately the discharge or
disposal of, hazardous substances or wastes or to otherwise
comply with the complex, technical environmental regulations
governing our activities could subject us to potentially
significant monetary damages and penalties, criminal
proceedings, third party property damage or personal injury
claims, natural resource damage claims, cleanup costs or other
costs, or restrictions or suspensions of our business
operations. In addition, under some foreign, federal and state
statutes and regulations governing liability for releases of
hazardous substances or wastes to the environment, a
governmental agency or private party may seek recovery of
response costs or damages from generators of the hazardous
substances or operators of property where releases of hazardous
substances have occurred or are ongoing, even if such party was
not responsible for the release or otherwise at
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fault. Also, federal, state or international environmental laws
and regulations may ban or restrict the availability and use of
certain hazardous or toxic raw materials that are or may be used
in producing our products, and substitute materials may be more
costly or unsatisfactory in performance. We believe that we
either have all environmental permits necessary to conduct our
business or have initiated the process to obtain additional or
modified environmental permits needed to conduct our business.
While we are not aware of any outstanding, material
environmental claims, liabilities or obligations, future
developments such as the implementation of new, more stringent
laws and regulations, more aggressive enforcement policies, or
the discovery of unknown environmental conditions associated
with our current or past operations or properties may require
expenditures that could have a material adverse effect on our
business, results of operations or financial condition. Any
noncompliance with or incurrence of liability under
environmental laws may subject us to adverse publicity, damage
our reputation and competitive position and adversely affect
sales of our products.
Our manufacturing operations and research and development
activities involve the use of mechanical equipment and hazardous
chemicals, which involve a risk of potential injury to our
employees. These operations are subject to regulation under the
Occupational Safety and Health Act, or OSHA. If we fail to
comply with OSHA requirements, or if an employee injury occurs,
we may be required to pay substantial penalties, incur
significant capital expenditures, suspend or limit production or
cease operations. Also, any such violations, employee injuries
or failure to comply with industry best practices may subject us
to adverse publicity, damage our reputation and competitive
position and adversely affect sales of our products.
Like other retailers, distributors and manufacturers of products
that are used by consumers, we face an inherent risk of exposure
to product liability claims in the event that the use of the
solar power products we sell results in injury. Since our
products are electricity producing devices, it is possible that
consumers could be injured or killed by our products, whether by
product malfunctions, defects, improper installation or other
causes. In addition, since revenues generated from our existing
products have been modest and the products we are developing
incorporate new technologies and use new installation methods,
we cannot predict whether or not product liability claims will
be brought against us in the future or the effect of any
resulting adverse publicity on our business. We rely on our
general liability insurance to cover product liability claims
and have not obtained separate product liability insurance. The
successful assertion of product liability claims against us
could result in potentially significant monetary damages and if
our insurance protection is inadequate to cover these claims,
they could require us to make significant payments. Also, any
product liability claims and any adverse outcomes with respect
thereto may subject us to adverse publicity, damage our
reputation and competitive position and adversely affect sales
of our products.
Recently, due to the expansion of EverQ’s production, we
have realized substantial revenue and income associated with
royalties, selling fees and our share of EverQ’s net
income. Since EverQ is engaged in the same business and utilizes
our String Ribbon technology, EverQ is subject, in many ways, to
the same risks and uncertainties we face. As such, if any of
these risks and uncertainties substantially and adversely
impacts EverQ, our future revenue and share of EverQ’s
profits could be adversely affected.
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Any issuance of equity, convertible or exchangeable securities,
including for the purposes of financing acquisitions and the
expansion of our business, may have a dilutive effect on our
existing stockholders. In addition, the perceived risk
associated with the possible issuance of a large number of
shares or securities convertible or exchangeable into a large
number of shares could cause some of our stockholders to sell
their stock, thus causing the price of our stock to decline.
Subsequent sales of our common stock in the open market or the
private placement of our common stock or securities convertible
or exchangeable into our common stock could also have an adverse
effect on the market price of the shares. If our stock price
declines, it may be more difficult for us to or we may be unable
to raise additional capital.
In addition, future sales of substantial amounts of our
currently outstanding common stock in the public market, or the
perception that such sales could occur, could adversely affect
prevailing trading prices of our common stock and could impair
our ability to raise capital through future offerings of equity
or equity-related securities. We cannot predict what effect, if
any, future sales of our common stock, or the availability of
shares for future sales, will have on the market price of our
stock. As of December 31, 2007, we had:
In connection with a multi-year polysilicon supply agreement and
pursuant to a stockholders agreement, each of which we entered
into with DC Chemical in April 2007, DC Chemical owns
10,750,000 shares of our restricted common stock. The
restrictions on the stock will lapse upon the satisfaction of
certain conditions related to DC Chemical’s delivery of
polysilicon under the supply agreement, at which time we will be
obligated to file a registration statement pursuant to which
such shares will become freely tradable. We currently expect DC
Chemical to satisfy this delivery obligation in early 2010.
In connection with our recent public offering, we, our executive
officers and directors, and DC Chemical entered into
lock-up
agreements which restrict the sale of shares of common stock
until about May 15, 2008. The shares held by our executive
officers and directors, and DC Chemical represent approximately
18,186,145 shares, or 15%, of our outstanding common stock
as of February 15, 2008. Following the termination of these
lock-up
periods, these stockholders will have the ability to sell a
substantial number of shares of common stock in the public
market in a short period of time. In addition, following the
expiration of the
lock-up
period, we will not be contractually prohibited from issuing and
selling shares of our common stock. Sales of a substantial
number of shares of common stock in the public trading markets,
whether in a single transaction or a series of transactions, or
the perception that these sales may occur, could also have a
significant effect on volatility and market price of our common
stock.
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DC Chemical owns 15,699,441 shares of our common stock
(which number includes 10,750,000 shares of restricted
common stock, which have full voting rights), representing
approximately 13% of our voting power outstanding as of
February 15, 2008. In addition, pursuant to the
stockholders agreement we entered into with DC Chemical, DC
Chemical has the right to purchase securities in future
offerings. Accordingly, DC Chemical can significantly influence
matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other
extraordinary transactions. The interests of DC Chemical may
differ from yours and DC Chemical may vote in a way with which
you disagree and which may be adverse to your interests. This
concentration of ownership may have the effect of delaying,
preventing or deterring a change of control of our company, and
might ultimately affect the market price of our common stock.
Our common stock is quoted on The Nasdaq Global Market. The
trading price of our common stock has been and may continue to
be volatile. The closing sale prices of our common stock, as
reported by The Nasdaq Global Market, have ranged from $8.17 to
$18.84 for the 52-week period from February 17, 2007 to
February 15, 2008. Our operating performance will
significantly affect the market price of our common stock. To
the extent we are unable to compete effectively and gain market
share or the other factors described in this risk factors
section affect us, our stock price will likely decline. The
market price of our common stock also may be adversely impacted
by broad market and industry fluctuations regardless of our
operating performance, including general economic and technology
trends. The Nasdaq Global Market has, from time to time,
experienced extreme price and trading volume fluctuations, and
the market prices of technology companies such as ours have been
extremely volatile. In addition, some companies that have
experienced volatility in the market price of their stock have
been the subject of securities class action litigation. We may
be involved in securities class action litigation in the future.
This litigation often results in substantial costs and a
diversion of management’s attention and resources.
Our quarterly revenue, operating results and market price of our
common stock have fluctuated significantly in the past and may
fluctuate significantly from quarter to quarter in the future
due to a variety of factors, including:
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We anticipate that our operating expenses will continue to
increase significantly, particularly as we develop our internal
infrastructure to support our anticipated growth. If our product
revenues in any quarter do not increase correspondingly, our net
losses for that period will increase. Moreover, given that a
significant portion of our operating expenses is largely fixed
in nature and cannot be quickly reduced, if our product revenues
are delayed or below expectations, our operating results are
likely to be adversely and disproportionately affected. For
these reasons, quarter-to-quarter comparisons of our results of
operations are not necessarily meaningful and you should not
rely on results of operations in any particular quarter as an
indication of future performance. If our quarterly revenue or
results of operations fall below the expectations of investors
or public market analysts in any quarter, the market value of
our common stock would likely decrease, and it could decrease
rapidly and substantially.
We have never declared or paid any cash dividends on our common
stock. We anticipate that we will retain our future earnings, if
any, to support our operations and to finance the growth and
development of our business and do not expect to pay cash
dividends in the foreseeable future. As a result, the success of
an investment in our common stock will depend upon any future
appreciation in the value of our common stock. There is no
guarantee that our common stock will appreciate in value or even
maintain its current price.
Provisions of our certificate of incorporation and by-laws, each
as amended, as well as Delaware law, could make it more
difficult and expensive for a third party to pursue a tender
offer, change in control transaction or takeover attempt that is
opposed by our board of directors. Stockholders who wish to
participate in these transactions may not have the opportunity
to do so. We also have a staggered board of directors, which
makes it difficult for stockholders to change the composition of
our board of directors in any one year. If a tender offer,
change in control transaction, takeover attempt or change in our
board of directors is prevented or delayed, the market price of
our common stock could decline. Even in the absence of a
takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of our common stock
if they are viewed as discouraging takeover attempts in the
future.
Our certificate of incorporation authorizes us to issue up to
27,227,668 shares of preferred stock with designations,
rights and preferences determined from time-to-time by our board
of directors. Accordingly, our board of directors is empowered,
without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights
superior to those of stockholders of our common stock. For
example, an issuance of shares of preferred stock could:
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We have in the past and we may in the future issue additional
shares of authorized preferred stock at any time.
None.
As of December 31, 2007, we lease the following locations
pursuant to long-term leases:
Our leases expire on various dates between June 2009 and January
2013 other than our Devens lease which continues until 2037 and
can be extended to 2057. As of December 31, 2007, we were
productively utilizing substantially all of the space in our
facilities other than the Devens facility which is now under
construction.
Our Devens facility is being constructed on property in Devens,
Massachusetts we are leasing from a Massachusetts state agency
for an annual rent of $1. Combined, our Devens I, Devens II, and
string factory will occupy approximately 476,000 square feet. We
have an option to purchase this property on or before
November 20, 2012 for a purchase price of $2.7 million
or thereafter for the remainder of the initial
30-year term
of the lease for the greater of $2.7 million and the fair
market value of the property.
We believe that our facilities are suitable and adequate for our
present needs and we periodically evaluate whether additional
facilities are necessary. We will need to lease or acquire
additional properties in the future and develop those properties
to accommodate our long-term capacity expansion plans.
We are not a party to any material legal proceedings.
No matters were submitted to a vote of security holders during
the quarter ended December 31, 2007.
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Our common stock is traded on the Nasdaq Global Market under the
symbol “ESLR”. The following table sets forth for the
calendar periods indicated, the high and low sales price of our
common stock on the Nasdaq Global Market.
On February 15, 2008, the last reported sale price for our
common stock on the Nasdaq Global Market was $10.47 per share.
As of February 15, 2008, there were 120,987,715 shares
of our common stock outstanding held by approximately 326
holders of record.
We have never declared or paid any cash dividends on our common
stock. We anticipate that we will retain our earnings to support
operations and to finance the growth and development of our
business and do not expect to pay cash dividends on our common
stock in the foreseeable future.
Information about our equity incentive plans can be found in
note 7 and note 8 to our consolidated financial
statements contained within this Annual Report on
Form 10-K.
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The following graph compares the cumulative total stockholder
return on our common stock against the cumulative total return
of (i) the Hemscott Weighted Nasdaq Index (the “NASDAQ
Market Index”) and (ii) an SIC Index that includes all
organizations in the Hemscott Group 836 Code Index —
Diversified Electronics (the “SIC Code Index”) for the
five fiscal years beginning January 1, 2003 and ending
December 31, 2007. The comparison assumes $100 was invested
at the close of business on December 29, 2002, the last
trading day before the beginning of the Company’s fifth
preceding fiscal year, in our common stock and in each of the
foregoing indices and assumes dividends, if any, were
reinvested. The comparisons are provided in response to SEC
disclosure requirements and are not intended to forecast or be
indicative of future performance.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG EVERGREEN SOLAR, INC.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
ASSUMES
$100 INVESTED ON DEC. 31, 2002
ASSUMES DIVIDEND REINVESTED FISCAL YEAR ENDED DEC. 31, 2007
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You should read the data set forth below in conjunction with our
financial statements and related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing elsewhere in
this filing. The statement of operations data presented below
for the fiscal years ended December 31, 2005, 2006, and
2007 and the balance sheet data at December 31, 2006 and
2007 have been derived from our audited financial statements
which appear elsewhere in this filing. The statement of
operations data presented below for the years ended
December 31, 2003 and 2004, and the balance sheet data at
December 31, 2003, 2004 and 2005 have been derived from our
audited financial statements, which are not included in this
filing. As of December 31, 2005 we owned 64% of EverQ. On
December 19, 2006 we reduced our interest to one-third. As
a result of our reduction in ownership to one-third, effective
December 20, 2006, we account for our ownership interest in
EverQ using the equity method of accounting. Under the equity
method of accounting, we report our one-third share of
EverQ’s net income or loss as a single line item in our
income statement and our investment in EverQ as a single line
item on our balance sheet. Prior to December 20, 2006, we
consolidated EverQ’s results of operations into our results
of operations. Therefore, our results of operations from prior
periods are not comparable with our results of operations since
December 20, 2006. Under our sales agreement with EverQ, we
continue to market and sell all solar panels manufactured by
EverQ under the Evergreen Solar brand, as well as manage
customer relationships and contracts, for which we receive fees.
We do not report product revenue or cost of revenue for the sale
of EverQ panels. We also receive royalty payments pursuant to
our technology license agreement with EverQ.
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We develop, manufacture and market solar panels utilizing our
proprietary String
Ribbontm
technology. String Ribbon technology is a cost effective process
for manufacturing ribbons of crystalline silicon that are then
cut into wafers. These wafers are the primary components of
photovoltaic, or PV, cells which, in turn, are used to produce
solar panels. We believe that our proprietary and patented
technologies, combined with our integrated manufacturing process
know-how, offer significant cost and manufacturing advantages
over competing polysilicon-based PV technologies. With silicon
consumption of less than five grams per watt, we believe we are
the industry leader in efficient polysilicon consumption and use
approximately 50% of the silicon used by conventional sawing
wafer production processes.
Through intensive research and design efforts we have
significantly enhanced our String Ribbon technology and our
ability to manufacture crystalline silicon wafers by developing
a quad ribbon wafer furnace, which enables us to grow four
silicon ribbons from one furnace compared to two silicon ribbons
grown with our dual ribbon furnace presently in use in our
prototype facility in Marlboro, Massachusetts. Our quad ribbon
furnace incorporates a state of the art automated ribbon cutting
technology that we expect will improve our manufacturing process
when it is used in our future factories. We have used quad
ribbon furnaces to produce a limited quantity of solar panels in
our Marlboro facility which have been sold to our distribution
partners and will use quad furnaces in our new manufacturing
facility in Devens, Massachusetts.
Our revenues today are primarily derived from the sale of solar
panels, which are assemblies of PV cells that have been
electrically interconnected and laminated in a physically
durable and weather-tight package. We sell our products using
distributors, systems integrators and other value-added
resellers, who often add value through system design by
incorporating our panels with electronics, structures and wiring
systems. The primary applications for our current products is
on-grid generation, in which supplemental electricity is
provided to an electric utility grid, but has in the past and is
expected in the future to include off-grid generation for
markets where access to conventional electric power is not
economical or physically feasible. Our products are currently
sold primarily in the United States, Germany and Korea.
We began construction in Devens, Massachusetts in September 2007
and expect to begin production of solar panels there in
mid-2008. Upon reaching full production capacity in
Devens I, which we expect to take place in early 2009,
Devens I is expected to increase our current manufacturing
capacity of 15 MW by approximately 80 MW. In addition,
Devens II, which is expected to add a second production line in
early 2009, should increase our production capacity at the
Devens facility to approximately 160 MW by late 2009. Our
String Ribbon technology is also used by EverQ, which has grown
its annual production capacity to approximately 100 MW as
of December 31, 2007. EverQ is currently planning to expand
its annual manufacturing capacity to 600 MW by 2012 using
our quad ribbon wafer furnaces.
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In connection with our manufacturing expansion plans, we have
entered into multi-year polysilicon supply agreements and
multi-year panel sales agreements. Under our silicon supply
agreements with DC Chemical, Wacker, Nitol and Silpro, including
an agreement entered into with DC Chemical in January 2008, we
have silicon under contract to reach annual production levels of
approximately 125 MW in 2009, 300 MW in 2010,
600 MW in 2011 and 850 MW in 2012. We plan to expand
our manufacturing operations accordingly. The combined
production of our Marlboro facility, Devens I and Devens II
and EverQ will be used to satisfy the requirements of the sales
agreements that we have entered with six customers, including
for the sale of approximately $900 million in solar panels
over the next four years.
On February 15, 2008, we completed an underwritten public
offering of 18.4 million shares of our common stock, which
included the exercise of an underwriters’ option to
purchase 2.4 million additional shares. We received net
proceeds of approximately $166.9 million (net of
underwriting discounts). The shares of common stock were sold at
a per share price to the public of $9.50.
We believe that our current cash, cash equivalents, marketable
securities and access to the capital markets will be sufficient
to fund our planned capital programs and to fund our operating
expenditures over the next twelve months, including the
completion of construction of Devens I in mid-2008 and the
development of Devens II beginning in March of 2008. We
will be required to raise additional capital to provide further
funding to complete Devens II, secure raw materials or necessary
technologies. We do not know whether we will be able to raise
additional financing or whether we will be able to do so on
terms favorable to us. If adequate funds are not available or
are not available on acceptable terms, our ability to fund our
operations, further develop and expand our manufacturing
operations and distribution network, or otherwise respond to
competitive pressures would be significantly limited.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in
accordance with generally accepted accounting principals
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities, if
applicable. We base our estimates on historical experience and
on various other assumptions that are believed 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. We believe the following critical
accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial
statements:
On December 19, 2006, we became equal partners in EverQ
with Q-Cells and REC and now share equally in its prospective
net income or loss. As a result of our reduction in ownership to
one-third, we are required to account for our interest in EverQ
under the equity method of accounting, as opposed to
consolidating the operating results of EverQ as we had in the
past. Under the equity method of accounting, we report our
one-third share of EverQ’s net income or loss as a single
line item in our statement of operations and our investment in
EverQ as a single line item in our balance sheet. We began
applying the equity method with respect to EverQ on
December 20, 2006.
We market and sell all solar panels manufactured by EverQ under
the Evergreen Solar brand, as well as manage customer
relationships and contracts. We receive fees from EverQ and no
longer consolidate their gross revenue or cost of goods sold
resulting from the sale of EverQ’s solar panels. During
2007, we received a fee of 1.7% of gross EverQ revenue
relating to the sales and marketing of solar panels. In
addition, we received royalty payments for our ongoing
technology agreement with EverQ. Taken together, the sales and
marketing fee and royalty payments totaled approximately 6.0% of
gross EverQ revenue for fiscal 2007. We also received
payments from EverQ of approximately $1.9 million in fiscal
2007 to reimburse us for certain research and development and
other support costs we incurred that could benefit EverQ. Income
statement classification of these research and development
reimbursement payments depend on how we are reimbursed.
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A best efforts arrangement allows for the reimbursement to
offset expenses whereas a specific performance arrangement
requires us to record both revenue and an offsetting cost of
revenue. These reimbursements in fiscal 2007 were best efforts
in nature and therefore are shown as a reduction of our expenses.
We recognize product revenue if there is persuasive evidence of
an agreement with the customer, shipment has occurred, risk of
loss has transferred to the customer, the sales price is fixed
or determinable, and collectability is reasonably assured. The
market for solar power products is emerging and rapidly
evolving. We currently sell our solar power products primarily
to distributors, system integrators and other value-added
resellers within and outside of North America, who typically
resell our products to end users throughout the world. For new
customers requesting credit, we evaluate creditworthiness based
on credit applications, feedback from provided references, and
credit reports from independent agencies. For existing
customers, we evaluate creditworthiness based on payment history
and known changes in their financial condition. Royalty and fee
revenue are recognized at contractual rates upon shipment of
product by EverQ.
We also evaluate the facts and circumstances related to each
sales transaction and consider whether risk of loss has passed
to the customer upon shipment. We consider whether our customer
is purchasing our product for stock, and whether contractual or
implied rights to return the product exist or whether our
customer has an end user contractually committed. To date, we
have not offered rights to return our products other than for
normal warranty conditions.
We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers
were to deteriorate, such that their ability to make payments
was impaired, additional allowances could be required.
We have provided for estimated future warranty costs of
approximately $705,000 as of December 31, 2007,
representing our best estimate of the likely expense associated
with fulfilling our obligations under such warranties. We engage
in product quality programs and processes, including monitoring
and evaluating the quality of component suppliers, in an effort
to ensure the quality of our product and reduce our warranty
exposure. Our warranty obligation will be effected not only by
our product failure rates, but also the costs to repair or
replace failed products and potentially service and delivery
costs incurred in correcting a product failure. If our actual
product failure rates, repair or replacement costs, service or
delivery costs differ from these estimates, accrued warranty
costs would be adjusted in the period that such events or costs
become known.
On January 1, 2006, we adopted the provisions of Statement
of Financial Accounting Standards No. 123 —
(revised 2004), “Share-Based Payment”
(“SFAS 123R”). SFAS 123R requires entities
to measure compensation cost arising from the grant of
share-based payments to employees at fair value and to recognize
such cost in income over the period during which the employee is
required to provide service in exchange for the award, usually
the vesting period. We selected the modified prospective method
for implementing SFAS 123R and began applying the
provisions to stock-based awards granted on or after
January 1, 2006, plus any unvested awards granted prior to
January 1, 2006. Total equity compensation expense
recognized during the years ended December 31, 2006 and
2007, was approximately $5.1 million and $6.4 million,
respectively. Stock-based compensation cost is measured at the
grant date based on the fair value of the award and is
recognized as expense on a straight-line basis over the
awards’ service periods, which are the vesting periods,
less estimated forfeitures. Estimated compensation for grants
that were outstanding as of the effective date will be
recognized over the remaining service period using the
compensation cost estimated for the SFAS 123R pro forma
disclosures for prior periods.
During 2007 and 2006, we granted 900,000 shares and
800,000 shares, respectively, of performance-based
restricted stock, all of which immediately vest upon the
achievement of specific financial performance targets
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prior to 2012 and 2011, respectively. We have assumed that none
of these performance-based awards will vest and accordingly have
not provided for compensation expense associated with the
awards. We periodically evaluate the likelihood of reaching the
performance requirements and will be required to recognize
compensation expense of approximately $18.2 million
associated with these performance-based awards if such awards
should vest.
See Note 7 of our consolidated financial statements for
further information regarding our stock-based compensation
assumptions and expenses, including pro forma disclosures for
prior periods as if we had recorded stock-based compensation
expense in accordance with SFAS 123R.
Inventory is valued at the lower of cost or market determined on
a first-in,
first-out basis. Certain factors may impact the realizable value
of our inventory including, but not limited to, technological
changes, market demand, changes in product mix strategy, new
product introductions and significant changes to our cost
structure. Estimates of reserves are made for obsolescence based
on the current product mix on hand and its expected net
realizable value. If actual market conditions are less favorable
or other factors arise that are significantly different than
those anticipated by management, additional inventory
write-downs or increases in obsolescence reserves may be
required. We consider lower of cost or market adjustments and
inventory reserves as an adjustment to the cost basis of the
underlying inventory. Accordingly, favorable changes in market
conditions are not recorded to inventory in subsequent periods.
Our policy regarding long-lived assets is to evaluate the
recoverability or usefulness of these assets when the facts and
circumstances suggest that these assets may be impaired. This
analysis relies on a number of factors, including changes in
strategic direction, business plans, regulatory developments,
economic and budget projections, technological improvements, and
operating results. The test of recoverability or usefulness is a
comparison of the asset value to the undiscounted cash flow of
its expected cumulative net operating cash flow over the
asset’s remaining useful life. If such a test indicates
that an impairment exists, then the asset is written down to its
estimated fair value. Any write-downs would be treated as
permanent reductions in the carrying amounts of the assets and
an operating loss would be recognized. To date, we have had
recurring operating losses and the recoverability of our
long-lived assets is contingent upon executing our business plan
that includes further reducing our manufacturing costs and
significantly increasing sales. If we are unable to execute our
business plan, we may be required to write down the value of our
long-lived assets in future periods.
We are required to estimate our income taxes in each of the
jurisdictions in which we operate as part of our consolidated
financial statements. This involves estimating the actual
current tax in addition to assessing temporary differences
resulting from differing treatments for tax and financial
accounting purposes. These differences together with net
operating loss carryforwards and tax credits may be recorded as
deferred tax assets or liabilities on the balance sheet. A
judgment must then be made of the likelihood that any deferred
tax assets will be recovered from future taxable income. To the
extent that we determine that it is more likely than not that
deferred tax assets will not be utilized, a valuation allowance
is established. Taxable income in future periods significantly
different from that projected may cause adjustments to the
valuation allowance that could materially increase or decrease
future income tax expense.
Results
of Operations
Revenues. Our total revenues consist of
revenues from the sale of products, royalty revenue associated
with our ongoing technology agreement with EverQ, and fees from
EverQ for our marketing and selling activities associated with
sales of product manufactured by EverQ under the Evergreen Solar
brand. Product
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revenues consist of revenues primarily from the sale of solar
cells, panels and systems. Reported product revenues represented
83%, 100% and 100% of total revenues, in 2007, 2006 and 2005,
respectively.
As a result of our reduction in ownership in EverQ to one-third
on December 19, 2006, we have applied the equity method of
accounting for our share of EverQ results from December 20,
2006 forward. Due to this transition, a significant portion of
our product revenue is generated from United State customers.
International product sales accounted for approximately 18%, 63%
and 71% of total product revenues for the years ended
December 31, 2007, 2006 and 2005, respectively.
Cost of revenues. Cost of product revenues
consists primarily of material expenses, salaries and related
personnel costs, including stock based compensation,
depreciation expense, maintenance, rent and other support
expenses associated with the manufacture of our solar power
products.
Research and development expenses. Research
and development expenses consist primarily of salaries and
related personnel costs, including stock based compensation
costs, consulting expenses and prototype costs related to the
design, engineering, development, testing and enhancement of our
products, manufacturing equipment and manufacturing technology.
We expense our research and development costs as incurred. We
also may receive payments from EverQ and other third parties as
reimbursement of certain research and development costs we will
incur. We believe that research and development is critical to
our strategic objectives of enhancing our technology, reducing
manufacturing costs and meeting the changing requirements of our
customers.
Selling, general and administrative
expenses. Selling, general and administrative
expenses consist primarily of salaries and related personnel
costs, including stock based compensation costs, employee
recruiting costs, accounting and legal fees, rent, insurance and
other selling and administrative expenses. We expect that
selling expenses will continue to increase in absolute dollars
as we increase our sales efforts to support our anticipated
growth, hire additional sales personnel and initiate additional
marketing programs.
Facility
start-up. Facility
startup expenses consist primarily of salaries and
personnel-related costs and costs of operating a new facility
before it has been qualified for full production. It also
includes all expenses related to the selection of a new site and
the related legal and regulatory costs and the costs to maintain
our plant expansion program, to the extent we cannot capitalize
these expenditures. We expect to incur significant facility
start-up
expenses as we continue to plan, construct and qualify new
facilities, including costs associated with our new facility
currently under construction in Massachusetts.
Other income (expense). Other income (expense)
consists of interest income primarily from interest earned on
the holding of short-term marketable securities, bond premium
amortization (or discount accretion), interest expense on
outstanding debt and net foreign exchange gains and losses.
Equity income from interest in EverQ. As of
December 20, 2006, we began accounting for our share of
EverQ’s results under the equity method of accounting,
which requires us to record our one-third share of EverQ’s
net income or loss as one line item in our consolidated
statement of operations. During the period from
December 20, 2006 to December 31, 2006, EverQ recorded
approximately $1.5 million in net income, of which we
recorded approximately $495,000 in our consolidated statement of
operations. For the year ended December 31, 2007, EverQ
recorded approximately $6.5 million in net income, of which
we recorded approximately $2.2 million in our consolidated
statement of operations.
Minority interest. Through December 19,
2006, we consolidated the financial results of EverQ in our
financial statements. Through December 19, 2006, EverQ
incurred losses of $2.4 million, which are consolidated in
our financial statements. However, $849,000 of those losses
represents the portion of EverQ losses attributable to the
Q-Cells and REC minority interests for the period ended
December 19, 2006.
COMPARISON
OF YEARS ENDED DECEMBER 31, 2007 AND 2006
Through December 19, 2006, we owned 64% of EverQ and
consolidated the financial statements of EverQ. As a result of
our reduction in ownership in EverQ to one-third on
December 19, 2006, we have
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applied the equity method of accounting for our share of
EverQ’s operating results from December 20, 2006. This
change in accounting has significantly impacted year-over-year
comparability.
Revenues. Our product revenues for the year
ended December 31, 2007 were $58.3 million, a decrease
of $43.9 million, or 43%, from $102.3 million for the
year-ended December 31, 2006. This decrease in reported
revenues is attributable to EverQ product revenues, which we
consolidated with our product revenues through December 19,
2006 but are not consolidated with our product revenues in 2007.
EverQ, which began shipping product in 2006, accounted for
approximately $57.3 million of consolidated revenues for
the year ended December 31, 2006. The decline in product
revenues is partially offset by royalty revenue and marketing
and selling fees from EverQ in 2007 of approximately
$11.5 million.
In order to efficiently manage worldwide distribution of product
based on String Ribbon technology, we fulfill orders largely
based on geography. More than half of the product produced at
EverQ is distributed to customers in Europe and the majority of
the product produced at our Marlboro facility is distributed to
customers in the United States. International product revenues
accounted for approximately 18% and 63% of total revenues for
the years ended December 31, 2007 and 2006, respectively.
This decline in international revenues is attributable to EverQ
which began product shipments in the second quarter of 2006 and
now primarily fulfills European customer orders. As we increase
our own capacity, including our new facility in Devens, we
expect that our worldwide customer geographic mix will become
more balanced.
The following table summarizes the concentration of our product
revenues by geography and customer:
Cost of product revenues and gross margin. Our
cost of product revenues for the year ended December 31,
2007 was $52.8 million, a decrease of approximately
$37.5 million, or 41%, from $90.3 million for the same
period in 2006. Cost of product revenue for the year ended
December 31, 2006 included approximately $48.1 million
in costs associated with EverQ. None of EverQ’s cost of
product revenue is included in our financial statements for the
year ended December 31, 2007. Gross margin for the year
ended December 31, 2007 was 24.4% as compared to 11.7% for
the year ended December 31, 2006. The increase in gross
margin primarily resulted from the royalty and selling fees
earned from EverQ in the year ended December 31, 2007, in
addition to improved operating efficiencies and higher
production volumes at our Marlboro pilot manufacturing facility
and costs allocated to research and development supporting pilot
programs.
The main purpose of our Marlboro facility is to develop and
prototype new manufacturing process technologies which, when
developed, will be employed in new factories. As such, our
manufacturing costs
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incurred in Marlboro are substantially burdened by additional
engineering costs and also reflect inefficiencies typically
inherent in pilot and development operations.
As royalty and selling fees from EverQ increase in the future as
a result of sales volume increases associated with factory
expansion, we expect our gross margin to increase as well. There
are no significant incremental sales and marketing costs
incurred, or expected to be incurred, in future periods in
connection with the sales and marketing agreements with EverQ.
Due to the pilot manufacturing nature of our existing Marlboro
facility, we do not expect substantial improvement in gross
margins generated by product sold from this facility. We do
expect, however, that as we scale to capacity with our new
80 MW factory that product gross margins should improve
substantially.
Research and development expenses. Our
research and development expenses for the year ended
December 31, 2007 were $20.6 million (net of
$1.9 million of reimbursements from EverQ), an increase of
$2.2 million, or 12%, from $18.4 million for the same
period in 2006. The increase is primarily attributable to
increased compensation and related costs, including costs
supporting piloting programs, and higher depreciation and
operating costs associated with expanded R&D facilities.
Loss on disposal of fixed assets. During the
year ended December 31, 2006, as a result of the successful
introduction of new manufacturing technology, we disposed of
equipment with a total net book value of $1.5 million in
order to replace them with more technologically advanced
equipment expected to improve the operational performance of our
technology.
Selling, general and administrative
expenses. Our selling, general and administrative
expenses for the year ended December 31, 2007 were
approximately $20.6 million, a decrease of
$1.3 million, or 6%, from $21.9 million in 2006. EverQ
costs, which were approximately $4.9 million for the year
ended December 31, 2006, were included in our consolidated
selling, general and administrative expenses for the year ended
December 31, 2006, and are not included in the comparable
period for 2007. This decline was primarily offset by increases
in compensation and related costs associated with additional
personnel and higher management incentive compensation. In
addition, increased costs associated with marketing
communications, including our effort to re-brand Evergreen with
a new logo, and increased insurance and legal costs associated
with the growth of our operations and routine regulatory filings
were incurred. As we begin to hire employees and scale
operations for our planned expansion, we expect that selling,
general, and administrative expenses will increase in future
periods.
Facility
start-up. Facility
start-up
costs for the year ended December 31, 2007 of
$1.4 million were comprised primarily of salaries and
personnel related costs and legal costs associated with the
construction of our new facility in Massachusetts which began in
September 2007.
Other income (expense) net. Other income, net
of $6.8 million for the year ended December 31, 2007
was comprised of $444,000 in net foreign exchange gains,
$9.8 million in interest income, and $3.4 million in
interest expense. Other income for the period ended
December 31, 2006 consisted of $3.3 million in net
foreign exchange gains, $4.6 million in interest income and
$6.1 million in interest expense. The increase in interest
income is attributable to our higher cash balance that resulted
from additional capital raised during the year ended
December 31, 2007. The decline in interest expense was
primarily due to the interest cost associated with the EverQ
loan facility with Deutsche bank, which we consolidated with our
interest expense for the year ended December 31, 2006 but
is not consolidated with our interest expense in the comparable
period in 2007. In addition, we have higher capitalized interest
costs in 2007 associated with our on-going infrastructure
improvement initiatives.
Equity income from interest in EverQ. The
equity income from our interest in EverQ of $2.2 million
for the year ended December 31, 2007 represents our
one-third share of EverQ’s net income of $6.5 million.
EverQ’s increased net income resulted primarily from
incremental production volume.
Net loss. Net loss was $16.6 million and
$26.7 million for the years ended December 31, 2007
and December 31, 2006, respectively. The decrease in our
net loss was due primarily to the royalty revenue and marketing
and selling fees earned from EverQ in 2007 of approximately
$11.5 million offset by an overall
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increase in our Marlboro net operating loss as we continue to
scale-up our
operations. The increase in our other income, net, of
approximately $5.0 million, also contributed to the decline
in our net loss.
Revenues. Our product revenues for the year
ended December 31, 2006 were $102.3 million, an
increase of $58.6 million, or 134%, from $43.6 million
for the same period in 2005. The increase in product revenues
was due primarily to sales of product manufactured by EverQ,
which began shipping product in 2006 and accounted for
approximately $57.3 million of total revenue. The first
EverQ factory was completed in 2006 and reached its full
capacity run rate by the fourth quarter of 2006.
Cost of product revenues and gross margin. Our
cost of product revenues for the year ended December 31,
2006 was $90.3 million, an increase of $50.3 million,
or 126%, from $40.0 million for the same period in 2005.
The increase was due to the cost of product revenues associated
with production at EverQ, which accounted for approximately
$48.1 million of total cost of product revenue. Product
gross margin for the year ended December 31, 2006 was 11.7%
versus 8.4% for the year ended December 31, 2005. The
year-over-year improvement in product gross margin primarily
resulted from improving gross margins of EverQ as manufacturing
reached full capacity at its first manufacturing facility.
Further improvements in gross margin may result from increases
in manufacturing scale and technology improvements.
Research and development expenses. Our
research and development expenses for the year ended
December 31, 2006 were $18.4 million, an increase of
$7.8 million, or 73%, from $10.6 million for the same
period in 2005. Approximately 54% of the increase was due to
increased labor costs (including $1.6 million of expense
related to the adoption of SFAS 123R) and approximately 23%
of the increase was due to increases in material costs
associated with internal initiatives aimed at improving our
manufacturing technology.
Loss on disposal of fixed assets. During the
year, as a result of the successful introduction of new
manufacturing technology, we disposed of existing equipment in
order to replace them with more technologically advanced
equipment expected to improve operational performance of our
technology. Equipment with a total net book value of
$1.5 million was disposed of.
Selling, general and administrative
expenses. Our selling, general and administrative
expenses for the year ended December 31, 2006 were
$21.9 million, an increase of $9.2 million, or 72%,
from $12.7 million in 2005. Approximately 51% of the
increase was due to increased compensation costs associated with
additional personnel (including $3.0 million of expense
related to the adoption of SFAS 123R, net of terminations),
approximately 25% of the increase was due to general and
administrative costs incurred by EverQ which are included in our
consolidated statement of operations through December 19,
2006, approximately 9% related to increased legal and accounting
expenses and most of the remainder was due to an increase in
sales and marketing expenses incurred to support the increase in
worldwide sales.
Other income. Other income for the period
ended December 31, 2006 was comprised of $3.3 million
in net foreign exchange gains, $4.6 million in interest
income and $6.1 million in interest expense. Other income
for the period ended December 31, 2005 consisted of $5,000
in foreign exchange gains, $527,000 of gain on the sale of a
portion of our EverQ interest to REC, $3.1 million in
interest income and $2.5 million in interest expense. The
increase in interest income was due to the larger average cash,
cash equivalents and marketable securities balances during 2006
due to the 2005 common stock and subordinated convertible debt
financings. Interest expense increased due to interest charges
associated with increased debt incurred by EverQ as well as the
impact of a full year’s worth of interest expense related
to the convertible notes.
Net loss. Net loss was $26.7 million and
$17.3 million for the years ended December 31, 2006
and December 31, 2005, respectively. The increase in net
loss was due primarily to the overall increase in net operating
losses associated with the
scale-up of
EverQ operations as well as the impact of recognizing
$5.1 million in expense related to the adoption of
SFAS 123R.
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LIQUIDITY
AND CAPITAL RESOURCES
We have historically financed our operations and met our capital
expenditure requirements primarily through sales of capital
stock, issuance of debt and, to a lesser extent, product
revenues; and beginning in 2007, fees from EverQ for our
marketing and sale of EverQ panels and royalty payments for our
technology contribution to EverQ. Research and development
expenditures have historically been partially funded by
government research contracts. At December 31, 2007, we had
working capital of $112.2 million, including cash, cash
equivalents and marketable securities of $140.7 million
which includes our restricted cash on deposit with Deutsche Bank
AG of $41.0 million.
Net cash used in operating activities was $7.3 million,
$10.3 million and $12.0 million for the years ended
December 31, 2005, 2006 and 2007, respectively. The use of
cash for operating activities in the year ended
December 31, 2007 was due primarily to losses from our
operations of $5.7 million, net of non-cash charges,
increases in inventory levels of $3.3 million, primarily
silicon, in addition to prepaid cost of inventory of
$23.1 million associated with new silicon supply
agreements, and increases in other current assets, primarily VAT
receivables. These uses were offset by reductions in accounts
receivable of approximately $11.0 million associated with
customer payments, and increases in accounts payable of
$16.6 million. The use of cash for operating activities in
the year ended December 31, 2006 was due primarily to our
loss of $26.7 million, increases in accounts receivable of
$12.4 million, increases in inventory of
$11.0 million, and increases in other current assets of
$6.7 million offset by a net increase in deferred grants
funding of $19.0 million, increases in accrued expenses of
$15.3 million and depreciation expense and losses on fixed
assets disposals of $11.7 million. In general, net cash
used in operating activities for the year ended
December 31, 2006 was primarily due to supporting the
increase in working capital requirements of EverQ as the first
manufacturing facility ramped to full production by the end of
the third quarter of 2006. The use of cash for operating
activities in the year ended December 31, 2005 was due
primarily to the net loss of $17.3 million and an increase
in other current assets of $2.7 million, offset by
increases in accounts payable of $9.3 million, a decrease
in accounts receivable of $2.1 million and depreciation
expense and losses on fixed asset disposals of $4.2 million.
Net cash used in investing activities was $137.3 million,
$85.5 million and $140.5 million for the years ended
December 31, 2005, 2006 and 2007, respectively. Net cash
used in investing activities for the years ended
December 31, 2005, 2006 and 2007 was primarily due to
purchases of equipment and marketable securities, partially
offset by proceeds from the sale and maturity of marketable
securities. For the year ended December 31, 2007, we
deposited approximately $41.0 million with Deutsche Bank
associated with the guarantee of the EverQ loan. In addition, a
loan of approximately $21.9 million was provided to
Silicium De Provence (Silpro) as part of our silicon supply
agreement with them. As of December 31, 2006, we no longer
consolidate the balance sheet of EverQ and therefore, our cash
balance at December 31, 2006 excludes EverQ’s cash
balances, and the decrease in EverQ’s cash balance is
reflected as a use of cash in investing activities.
Capital expenditures were $57.7 million (which includes
$8.2 million of deposits for the manufacture of fixed
assets), $107.7 million (which includes $7.0 million
of deposits for the manufacture of fixed assets) and
$50.7 million for the years ended December 31, 2005,
2006 and 2007, respectively. Capital expenditures for the years
ended December 31, 2005 and 2006 were primarily for
equipment needed for our Marlboro manufacturing facility and
equipment for EverQ. The 2007 expenditures were primarily for
facility improvements and equipment for our Marlboro
manufacturing facility in addition to expenditures for
construction of our new Devens, Massachusetts manufacturing
facility, which will increase our production capacity in
Massachusetts by approximately 160 MW in two 80 MW phases
and increase our employee base to approximately 1,000 by mid
2009. The Commonwealth of Massachusetts support program is
expected to include up to $23.5 million in grants, up to
$17.5 million in low interest loans and a low-cost,
30-year land
lease. As of December 31, 2007, we had outstanding
commitments for capital expenditures of approximately
$111.2 million. Most of our commitments for capital
expenditures are associated with our new Devens facility
and infrastructure improvements and equipment purchases for our
Marlboro facility.
Net cash provided by financing activities was
$171.2 million, $75.0 million and $175.1 million
for the years ended December 31, 2005, 2006 and 2007,
respectively. The cash provided by financing activities for the
year ended December 31, 2007 resulted primarily from the
net proceeds of 17,250,000 shares of our common stock sold
in a public offering at $8.25 per share and which closed on
May 30, 2007. An additional 3.0 million shares
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of our common stock were sold to DC Chemical for $12.07 per
share in conjunction with a stock purchase agreement. On
April 6, 2007, we entered into a Loan and Security
Agreement with a bank for a credit facility that provides for a
$25.0 million secured revolving line of credit, which may
be used to borrow revolving loans or to issue letters of credit
on our behalf, and includes a foreign exchange sublimit and cash
management services sublimit. The cash provided by financing
activities for the year ended December 31, 2006 primarily
represents an increase in EverQ debt through December 19,
2006 and cash received upon the exercise of stock options and
warrants. The cash provided by financing activities for the year
ended December 31, 2005 primarily represents net proceeds
from common stock issued in conjunction with the common stock
public offering completed in February 2005 as well as the
convertible subordinated debt issuance in June 2005.
In February 2005, we completed a $62.3 million common stock
offering, net of offering costs of approximately
$4.4 million, to satisfy existing capital requirements and
to fund the continuing capacity expansion of our Marlboro,
Massachusetts manufacturing and development facilities and the
expenditures necessary for the initial build-out and initial
operation of EverQ. For this common stock offering, we issued
13,346,000 shares of our common stock. The shares of common
stock were sold at a per share price of $5.00 (before deducting
underwriting discounts).
In June 2005, we issued convertible subordinated notes
(“Notes”) in the aggregate principal amount of
$90.0 million, and we received proceeds of
$86.9 million, net of offering costs. A portion of the
proceeds from the financing was used to increase research and
development spending on promising next generation technologies,
to explore further expansion opportunities and to fulfill our
commitments with EverQ. Interest on the Notes is payable
semiannually at the annual rate of 4.375%. The Notes do not have
required principal payments prior to maturity on July 1,
2012. However, the Notes are convertible at any time prior to
maturity, redemption or repurchase, into shares of our common
stock at an initial conversion rate of 135.3180 shares of
common stock per $1,000 principal amount of Notes (equivalent to
a conversion price of approximately $7.39 per share), subject to
adjustment. On or after July 1, 2010, we may redeem the
Notes for cash at the following prices expressed as a percentage
of the principal amount:
We may redeem the Notes on or after July 6, 2008 and prior
to July 1, 2010 only if the closing price of our common
stock exceeds 130% of the then-current conversion price of the
Notes for at least 20 trading days in a period of 30 consecutive
trading days ending on the trading day prior to the date on
which we provide notice of redemption. We may be required to
repurchase the Notes upon a designated event (either a
termination of trading or a change in control) at a price (which
will be in cash or, in the case of a change in control, cash,
shares of our common stock or a combination of both) equal to
100% of the principal amount of the Notes to be repurchased plus
accrued interest. Upon a change in control, we may under certain
circumstances be required to pay a premium on redemption which
will be a number of additional shares of our common stock as
determined by our stock price and the effective date of the
change in control.
The Notes are subordinate in right of payment to all of our
existing and future senior debt.
We incurred financing costs of approximately $3.1 million
which are being amortized ratably over the seven year term of
the Notes. For the years ended December 31, 2006 and 2007,
we recorded approximately $3.6 million and
$3.0 million, respectively, in interest expense associated
with the Notes, net of capitalized interest of approximately
$350,000 and $983,000, respectively.
On April 30, 2007, we entered into a Guarantee and
Undertaking Agreement with Q-Cells AG and Renewable Energy
Corporation ASA in connection with EverQ entering into a loan
agreement with a syndicate of lenders led by Deutsche Bank AG
(the “Guarantee”). The loan agreement provides EverQ
with aggregate borrowing availability of up to
142.0 million Euros. Pursuant to the Guarantee, we along
with Q-Cells AG and Renewable Energy Corporation ASA, each
agreed to guarantee a one-third portion of the loan outstanding,
up to
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30.0 million Euros of EverQ’s repayment obligations
under the loan agreement. As of December 31, 2007, we have
$41.0 million deposited with Deutsche Bank AG fulfilling
our obligation under the Guarantee, which is classified as
restricted cash in our balance sheet. Upon EverQ reaching
certain milestones, expected to be achieved in the next 12
months, the guarantee will be cancelled. As of December 31,
2007, the total amount of debt outstanding under the loan
agreement was 110.0 million Euros (approximately
$160.6 million at December 31, 2007 exchange rates) of
which 57.5 million Euros was current (approximately
$84.0 million at December 31, 2007 exchange rates).
Repayment of the loan is due in quarterly installments through
September 30, 2010.
In November 2005, we entered into a Shareholder Loan Agreement
to provide EverQ with a loan totaling 8.0 million Euros.
Under the terms of the Shareholder Loan Agreement, the loan
carried a fixed interest rate of 5.4%, had a term of four years
and was subordinated to all other outstanding debt of EverQ. In
addition, during 2006 we provided EverQ with additional loans to
help fund the initial financing requirement of the first two
factories. In January 2007, we, REC and Q-Cells entered into a
new shareholder loan agreement with EverQ. Under the terms of
the shareholder loan agreement, EverQ repaid all outstanding
shareholder loans, plus accrued interest, in exchange for a new
shareholder loan of 30 million Euros from each shareholder.
The table below summarizes the principal and terms of our share
of this outstanding loan as of December 31, 2007:
We believe that our current cash, cash equivalents, marketable
securities and access to the capital markets will be sufficient
to fund our planned capital programs and to fund our operating
expenditures over the next twelve months, including the
completion of construction of Devens I in 2008 and the
development of Devens II beginning in March of 2008.
However, the net proceeds from our February 2008 public offering
of common stock and cash on hand will not be sufficient to fully
construct and equip Devens II and; therefore, we will need
to secure additional financing to do so, and to secure raw
materials or necessary technologies. We do not know whether we
will be able to raise additional financing or whether we will be
able to do so on terms favorable to us. If adequate funds are
not available or are not available on acceptable terms, our
ability to fund our operations, further develop and expand our
manufacturing operations and distribution network, or otherwise
respond to competitive pressures would be significantly limited.
We have routine operating leases associated with our Marlboro
facilities. In addition, we have subordinated convertible notes
which holders may convert into shares of our common stock at any
time.
The following table summarizes our contractual obligations as of
December 31, 2007 and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods (in thousands):
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During 2007, we entered into four multi-year polysilicon supply
agreements with various terms and conditions. Following is a
brief summary of each of these agreements.
On April 17, 2007, we entered into a multi-year polysilicon
supply agreement with DC Chemical Co., Ltd. (“DC
Chemical”) under which DC Chemical will supply us with
polysilicon at fixed prices beginning in late 2008 and
continuing through 2014. Concurrent with the execution of the
supply agreement, we entered into a stock purchase agreement
(the “Purchase Agreement”) with DC Chemical pursuant
to which DC Chemical purchased 3.0 million shares of our
common stock for $12.07 per share, representing the closing
price of our common stock on the Nasdaq Global Market on
April 16, 2007. Pursuant to the Purchase Agreement, we
issued an additional 4.5 million shares of transfer
restricted common stock and 625 shares of transfer
restricted preferred stock to DC Chemical. The preferred stock
automatically converted into 6.25 million shares of
transfer restricted common stock in May 2007 upon the
termination of the applicable waiting period under the Hart
Scott Rodino Antitrust Improvements Act of 1976, as amended. The
restrictions on the common stock will lapse upon the delivery of
specified quantities of polysilicon to us by DC Chemical.
Issuance of the restricted shares represented a prepayment of
inventory cost valued at approximately $119.9 million,
based on the issuance date market price of our common stock
adjusted for a discount to reflect the transfer restriction, and
will be amortized as an additional cost of inventory as silicon
is delivered by DC Chemical and utilized by us. When the
transfer restriction on these shares lapse, we will record an
additional cost of inventory equal to the value of the discount
associated with the restriction at that time if the stock price
on that date is higher than $12.07 which will be amortized as an
incremental cost of inventory as silicon is delivered by DC
Chemical and utilized by us. In January 2008 we entered into a
second multi-year polysilicon supply agreement with DC Chemical
which is further described in Recent Developments.
On July 24, 2007, we entered into a multi-year polysilicon
supply agreement with Wacker Chemie AG (“Wacker”).
This supply agreement provides the general terms and conditions
pursuant to which Wacker will supply us with specified annual
quantities of polysilicon at fixed prices beginning in 2010 and
continuing through 2018. In connection with the agreement we
made a payment of approximately 9.0 million Euros to Wacker.
On October 24, 2007, we entered into a multi-year
polysilicon supply agreement with Nitol. This supply agreement
provides the general terms and conditions pursuant to which
Nitol will supply us with specified annual quantities of
polysilicon at fixed prices beginning in 2009 and continuing
through 2014. In connection with the agreement we made a
$10.0 million prepayment to Nitol. An additional prepayment
of $5.0 million will be required within 15 days of the
completion of certain milestones which is expected to occur in
the first half of 2008.
On December 7, 2007, we entered into a multi-year
polysilicon supply agreement with Silpro. This supply agreement
provides the general terms and conditions pursuant to which
Silpro will supply us with specified annual quantities of
polysilicon at fixed prices beginning in 2010 and continuing
through 2019. In connection with the supply agreement, we agreed
to loan Silpro 30 million Euros at an interest rate of 3.0%
compounded annually. The initial 15.0 million euro
installment of the loan was disbursed to Silpro in December
2007. The second 15.0 million euro installment of the loan
will be disbursed to Silpro during the first quarter of 2008.
As of December 31, 2007, we had federal and state net
operating loss carryforwards of approximately $94.0 million
and $60.8 million, respectively, available to reduce future
taxable income which begin to expire in 2009 and 2008,
respectively. In addition, we have excess tax deductions of
approximately $18.7 million related to equity compensation
for which the benefit, when realized, will be recognized in our
financial statements when it results in a reduction of taxes
payable with a corresponding credit to additional paid in
capital income in accordance with SFAS 123R. We also has
federal and state research and development tax credit
carryforwards of approximately $2.0 million and
$1.2 million, respectively, which begin to expire in 2010
and state Investment Tax Credit carryforwards of approximately
$1.6 million which began to expire in 2008, available to
reduce future tax liabilities.
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We adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”) an interpretation of FASB
Statement No. 109 (“SFAS 109”) on
January 1, 2007. As a result of the implementation of
FIN 48, there was no adjustment to accumulated deficit or
the liability for uncertain tax positions. As of the adoption
date of January 1, 2007 and at December 31, 2007, we
had no accrued interest related to uncertain tax positions.
We have evaluated the positive and negative evidence bearing
upon the realization of our deferred tax assets. We have
considered our history of losses and, in accordance with the
applicable accounting standards, have fully reserved the
deferred tax asset.
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value
Measurements”. This statement establishes a framework for
measuring fair value in accordance with GAAP, clarifies the
definition of fair value within that framework, and expands
disclosures about the use of fair value measurements. It also
responds to investors’ requests for expanded information
about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair
value and the effect of fair value measurements on earnings.
SFAS No. 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value,
and does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued a FASB
Statement of Position that amends SFAS No. 157 to
delay its effective date for all non-financial assets and
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis, to
fiscal years beginning after November 15, 2008. We do not
expect that the adoption of SFAS No. 157 will have a
material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of
SFAS No. 115”. This statement permits entities to
choose to measure certain financial instruments and other items
at fair value. This statement is expected to expand the use of
fair value measurement, which is consistent with the FASB’s
long-term measurement objectives for accounting for financial
instruments. SFAS No. 159 is effective for the fiscal
year beginning January 1, 2008. We do not expect that the
adoption of SFAS No. 159 will have a material impact
on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51”.
This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008, which for us is the year ending
December 31, 2009, and the interim periods within that
fiscal year. The objective of this Statement is to improve the
relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated
financial statements. We are currently evaluating the potential
impact, if any, of the adoption of SFAS No. 160 on our
consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R)
“Business Combinations”. This statement is effective
for fiscal years, beginning on or after December 15, 2008,
which for us is the year ending December 31, 2009. The
objective of the statement is to establish principles and
requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling
interest in the acquire. The statement also provides guidance
for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. We are
currently evaluating the potential impact, if any, of the
adoption of SFAS No. 141R on our consolidated
financial statements.
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We do not use derivative financial instruments to manage
interest rate risk. Interest income earned on our cash, cash
equivalents and marketable securities is subject to interest
rate fluctuations, but we believe that the impact of these
fluctuations will not have a material effect on our financial
position due to the liquidity and short-term nature of these
financial instruments. For these reasons, a hypothetical
100-basis point adverse change in interest rates would not have
a material effect on our consolidated financial position,
results of operations or cash flows.
For the year ended December 31, 2007, approximately 7% of
our product revenues were denominated in Euros. As we expand our
manufacturing operations and distribution network
internationally, our exposure to fluctuations in currency
exchange rates may increase. During 2007, we entered into
multi-year polysilicon supply agreements with four suppliers.
The agreements have varied start and end dates and two of these
agreements are denominated in Euros. Additionally, from time to
time we may agree to purchase equipment and other materials
internationally with delivery dates as much as six to twelve
months in the future. We endeavor to denominate the purchase
price of this equipment and materials in United State dollars,
but are not always successful in doing so. To the extent that
such purchases are made in foreign currency, we will be exposed
to currency gains or losses.
Our Financial Statements and related Notes and the Report of the
Independent Registered Public Accounting Firm are included
beginning on
page F-1
of this Annual Report on
Form 10-K.
None.
ITEM 9A. CONTROLS
AND PROCEDURES.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as of
December 31, 2007. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as
of such date our disclosure controls and procedures were
effective at the reasonable assurance level. In designing and
evaluating our disclosure controls and procedures, we and our
management recognize that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgement in
evaluating and implementing possible controls and procedures.
The term “disclosure controls and procedures,” as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act, means controls and other procedures of a
company that are 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 recorded, processed,
summarized and reported, within the time periods specified in
the SEC’s rules and forms. 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.
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During the fiscal quarter ended December 31, 2007, there
has been no change in our internal control over financial
reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Our internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation and fair presentation of published financial
statements.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal
Control — Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2007.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions and that the degree
of compliance with the policies or procedures may deteriorate.
Our internal control over financial reporting as of
December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
We expect to hold our 2008 Annual Meeting of Stockholders on or
about June 4, 2008.
Certain information required by this Item 10 relating to
our directors, executive officers and corporate governance is
incorporated by reference herein from our proxy statement in
connection with our 2008 annual meeting of stockholders, which
proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended
December 31, 2007.
Our Board of Directors has adopted a Code of Business Conduct
and Ethics (the “Code of Ethics”) for our Chief
Executive Officer, Chief Financial Officer and all other members
of management, all directors and all employees and agents of the
Company. The Code of Ethics is intended to promote the highest
standards of honest and ethical conduct throughout the Company,
full, accurate and timely reporting, and compliance with law,
among other things. A copy of the Code of Ethics is posted on
our website at www.evergreensolar.com.
The Code of Ethics prohibits any waiver from the principles of
the Code of Ethics without the prior written consent of our
Board of Directors. To date, there have been no waivers under
our Code of Ethics. We will post any waivers, if and when
granted, of our Code of Ethics on our website at
www.evergreensolar.com, in accordance with the rules of the
Securities and Exchange Commission.
Certain information required by this Item 11 relating to
remuneration of directors and executive officers and other
transactions involving management is incorporated by reference
herein from our proxy statement in
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connection with 2008 annual meeting of stockholders, which proxy
statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended
December 31, 2007.
Certain information required by this Item 12 relating to
security ownership of certain beneficial owners and management
is incorporated by reference herein from our proxy statement in
connection with our 2008 annual meeting of stockholders, which
proxy statement will be filed with the SEC not later than
120 days after the close of our fiscal year ended
December 31, 2007. For information on securities authorized
for issuance under equity compensation plans, see the section
entitled “Market for Registrant’s Common Equity and
Related Stockholders Matters” in Part II, Item 5.
in this Annual Report on
Form 10-K.
Certain information required by this Item 13 relating to
certain relationships and related transactions, and director
independence is incorporated by reference herein from our proxy
statement in connection with our 2008 annual meeting of
stockholders, which proxy statement will be filed with the SEC
not later than 120 days after the close of our fiscal year
ended December 31, 2007.
Certain information required by this Item 14 regarding
principal accounting fees and services is incorporated by
reference herein from our proxy statement in connection with our
2008 annual meeting of stockholders, which proxy statement will
be filed with the SEC not later than 120 days after the
close of our fiscal year ended December 31, 2007.
Schedules not listed above are omitted because they are not
required or because the required information is given in the
consolidated financial statements or notes thereto.
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
1. Financial Statements. The financial statements included
in Item 8 of Part II which appear beginning on
page F-1
of this Annual Report on
Form 10-K.
2. Index to Financial Statements and Schedule. Certain
financial statement schedules are omitted as the information is
included in the Consolidated Financial Statements and notes
thereto in Item 8 of Part II which appear beginning on
page F-1
of this Annual Report on
Form 10-K.
Schedules not listed in the index are omitted because they are
not required.
3. Exhibits. Exhibits are as set forth in the section
entitled “Exhibit Index” which follows the
section entitled “Signatures” in this Annual Report on
Form 10-K.
Exhibits which are incorporated herein by reference can be
inspected and copied at the public reference rooms maintained by
the SEC in Washington, D.C., New York, New York, and
Chicago, Illinois. Please call the SEC at
1-800-SEC-0330
for further information on the public reference rooms. SEC
filings are also available to the public from commercial
document retrieval services and at the Web site maintained by
the SEC at
http://www.sec.gov.
(c) See Item 15(a)(2).
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To the Board of Directors and Shareholders of
Evergreen Solar, Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Evergreen Solar, Inc. and its
subsidiaries at December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Management’s Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Company’s internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 7 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 2008
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EVERGREEN
SOLAR, INC.
The accompanying notes are an integral part of these
consolidated financial statements.
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EVERGREEN
SOLAR, INC.
The accompanying notes are an integral part of these
consolidated financial statements.
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EVERGREEN
SOLAR, INC.
The accompanying notes are an integral part of these
consolidated financial statements.
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EVERGREEN
SOLAR, INC.
The accompanying notes are an integral part of these
consolidated financial statements.
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EVERGREEN
SOLAR, INC.
Evergreen Solar, Inc. (the “Company”), incorporated in
August 1994, develops, manufactures and markets solar power
products, including solar cells, panels and systems. In April
1997, the Company commenced product sales. The Company has
incurred losses since inception and has an accumulated deficit.
The Company has historically financed its operations and met its
capital expenditure requirements primarily through sales of its
capital stock, issuance of debt and, to a lesser extent, product
revenues
In January 2005, the Company entered into a strategic
partnership agreement with Q-Cells AG (“Q-Cells”). The
agreement provided for the organization and capitalization of
EverQ GmbH (“EverQ”), which is a limited liability
company incorporated under the laws of Germany. In November
2005, Q-Cells and the Company entered into an agreement with
Renewable Energy Corporation ASA (“REC”), whereby REC
acquired from the Company and Q-Cells for 4.7 million
Euros, a 15% ownership position in EverQ. REC obtained 11.1% of
the outstanding equity of EverQ directly from the Company and
3.9% of the outstanding equity of EverQ directly from Q-Cells.
The Company received $4.1 million from REC which resulted
in a gain on the sale of EverQ interest of $527,000. In December
2006, REC and Q-Cells purchased additional shares of EverQ,
which resulted in a reduction in the Company’s ownership
interest in EverQ to one-third and an associated gain on an
increase of the Company’s carrying value of its interest in
EverQ’s net assets of approximately $8.5 million. In
connection with the December 2006 transaction, REC and Q-Cells
made an additional capital contribution of approximately
19.6 million Euros in December 2007 resulting in a gain of
approximately $9.5 million to the Company. Both the
$8.5 million gain and the $9.5 million gain are
recorded as adjustments to additional paid-in capital. As a
result of the December 2006 purchase, the Company, REC and
Q-Cells each have equal ownership in EverQ. The purpose of EverQ
is to operate facilities to manufacture, market and sell solar
products based on the Company’s proprietary String Ribbon
technology. EverQ has accelerated the availability of wafer,
cell and panel manufacturing capacity based on String Ribbon
technology and provided the Company with greater access to the
European Union solar market.
The Company markets and sells all solar panels manufactured by
EverQ under the Evergreen Solar brand, as well as manages
customer relationships and contracts. The Company receives fees
from EverQ and does not report gross revenue or cost of goods
sold resulting from the sale of EverQ’s solar panels. The
Company currently receives a fee of 1.7% of gross EverQ
revenue. In addition, the Company receives royalty payments for
its ongoing technology contributions to EverQ.
In September 2007, the Company began constructing its own
manufacturing facility in Devens, Massachusetts. The Company
expects to begin production of solar panels at the Devens
facility upon completion of phase I of its development
(“Devens I”), which is scheduled to occur in mid-2008.
Upon reaching full production capacity, which the Company
expects to take place in early 2009, Devens I is expected to
increase the Company’s current manufacturing capacity of
15 MW by approximately 80 MW. In addition, by March of
2008 the Company expects to substantially complete the planning
and permitting and begin construction of phase II of the
Devens facility (“Devens II”), which will add a second
production line to the facility. Upon reaching full production
capacity, which the Company expects to occur in late 2009,
Devens II should increase our production capacity at the
Devens facility to approximately 160 MW.
In connection with the Company’s manufacturing expansion
plans, it has entered into multi-year polysilicon supply
agreements with DC Chemical Co., Ltd. (“DC Chemical”),
Wacker Chemie AG (“Wacker”), Solaricos Trading, LTD
(“Nitol”) and Silicium de Provence S.A.S.
(“Silpro”). The Company has silicon under contract to
have annual production of approximately 125 MW in 2009,
300 MW in 2010, 600 MW in 2011 and 850 MW in
2012, and plans to expand its manufacturing operations
accordingly.
In October 2007, EverQ agreed to license our new wafer furnace
technology, the quad ribbon wafer furnace, and the Company and
its two EverQ partners approved the construction of EverQ’s
third manufacturing facility, EverQ 3, in Thalheim, Germany,
which is expected to increase EverQ’s annual production
capacity
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
from approximately 100 MW to approximately 180 MW by
the second half of 2009. EverQ agreed to pay the Company a
market-based royalty based on actual cost savings realized using
the quad ribbon furnaces in EverQ 3 as compared to the
Company’s current dual ribbon furnaces, which are in use at
EverQ’s two current facilities. The Company and its
partners have also agreed to pursue an initial public offering,
of EverQ’s stock and expand EverQ’s annual production
capacity to approximately 600 MW by 2012. Provided that
EverQ becomes publicly traded prior to December 31, 2009,
REC has offered EverQ an additional supply agreement for
polysilicon to support this planned capacity expansion.
The Company believes that its current cash, cash equivalents,
marketable securities, coupled with its ability to access the
equity and debt capital markets and borrowings available under
its line of credit facility, will be sufficient to fund the
Company’s planned capital expenditure programs, including
the planned Massachusetts expansion, current commitments with
EverQ and operating expenditures over the next twelve months.
The Company will be required to raise additional capital to fund
the completion of the second phase of the development of its
manufacturing facility in Devens, Massachusetts, to provide
further funding for EverQ, if any is needed, to secure silicon
beyond current contracts and other raw materials
and/or
necessary technologies. The Company does not know whether it
will be able to raise additional capital on favorable terms or
at all. If adequate capital is not available or are not
available on acceptable terms, the Company’s ability to
fund its operations, further develop and expand its
manufacturing operations and distribution network, or otherwise
respond to competitive pressures would be significantly limited.
The Company is subject to risks common to companies in the high
technology and energy industries including, but not limited to,
development by the Company or its competitors of new
technological innovations, dependence on key personnel,
dependence on key or sole source suppliers for materials,
protection of proprietary technology and compliance with
government regulations. Any delay in the Company’s plan to
scale its capacity may result in increased costs and could
impair business operations.
A summary of the major accounting policies followed by the
Company in the preparation of the accompanying financial
statements is set forth below.
The consolidated financial statements include the accounts of
the Company’s wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated. Through
December 19, 2006, the Company owned 64% of EverQ GmbH
(“EverQ”), a joint venture created to develop and
operate facilities in Germany, and consolidated the financial
statements of EverQ in accordance with the provisions of
Financial Accounting Standards Board (FASB) FIN 46(R),
“Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51.” As a result of the
Company’s reduction in ownership in EverQ to one-third on
December 19, 2006, the Company has applied the equity
method of accounting for its share of EverQ’s operating
results from December 20, 2006 forward in accordance with
APB 18 “Equity Method of Accounting for Investments in
Common Stock.” Therefore, the Company’s Consolidated
Statements of Operations and of Cash Flows include the
consolidated results of operations of EverQ through
December 19, 2006 and the Company’s one-third share of
EverQ net income for the period December 20, 2006 through
December 31, 2006 and the year ended December 31,
2007. The Company’s Consolidated Balance Sheets at
December 31, 2006 and December 31, 2007 include the
Company’s investment in EverQ as a single line item. The
functional currency for Evergreen Solar GmbH, a wholly owned
subsidiary of Evergreen Solar, and EverQ is the Euro. Revenues
and expenses of Evergreen Solar GmbH and EverQ are translated
into U.S. dollars at the average rates of exchange during
the period, and assets and liabilities are translated into
U.S. dollars at the period-end rate of exchange.
Certain prior year balances have been reclassified to conform to
the current year presentation.
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash and cash equivalents consist of cash and highly liquid
investments with maturities of three months or less from the
date of purchase and whose carrying amount approximates fair
value.
The Company’s marketable securities are classified as
available-for-sale. At December 31, 2006 and 2007, the
Company primarily held commercial paper and corporate bonds. All
commercial paper is rated
A-1/P-1 or
higher, corporate bonds A/A2 or higher, and asset backed
securities AAA/Aaa. The investments are carried at market value.
At December 31, 2006 and 2007, there were unrealized gains
of $0 and $59,000, respectively, which are reported as part of
stockholders’ equity.
The following table summarizes the Company’s cash, cash
equivalents and marketable securities by type as of
December 31, (in thousands):
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and cash equivalents, investments and accounts receivable.
The Company places its cash and cash equivalents and foreign
exchange contracts, when applicable, with high quality financial
institutions. With respect to accounts receivable, such
receivables are primarily from distributors and integrators in
the solar power industry located throughout the world. The
Company performs ongoing credit evaluations of its
customers’ financial conditions. The Company generally does
not require collateral or other security against accounts
receivable; however, it maintains reserves for potential credit
losses and such losses have historically been within
management’s expectations.
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The table below summarizes the Company’s concentration of
accounts receivable for the years ended December 31, 2005,
2006 and 2007:
Inventory is valued at standard cost which approximates the
lower of cost or market determined on a
first-in,
first-out basis. Certain factors may impact the realizable value
of the Company’s inventory including, but not limited to,
technological changes, market demand, changes in product mix
strategy, new product introductions and significant changes to
its cost structure. Estimates of reserves are made for
obsolescence based on the current product mix on hand and its
expected net realizable value. If actual market conditions are
less favorable or other factors arise that are significantly
different than those anticipated by management, additional
inventory write-downs or increases in obsolescence reserves may
be required. The Company treats lower of cost or market
adjustments and inventory reserves as an adjustment to the cost
basis of the underlying inventory. Accordingly, favorable
changes in market conditions are not recorded to inventory in
subsequent periods.
During 2007, the Company entered into multi-year polysilicon
supply agreements with several suppliers, most of which required
a prepayment under the contract. These prepayments are not
refundable and would be difficult to recover if a supplier
defaults on its obligations. These prepayments are included in
the balance sheet in Prepaid Cost of Inventory.
The following is a summary of the Company’s agreements that
are within the scope of FASB Interpretation No. 45
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.”
The Company’s current standard product warranty includes a
two-year warranty period for defects in material and workmanship
and a
25-year
warranty period for declines in power performance. The Company
has provided for estimated future warranty costs of $705,000,
representing its best estimate of the likely expense associated
with fulfilling its obligations under such warranties. The
Company engages in product quality programs and processes,
including monitoring and evaluating the quality of component
suppliers, in an effort to ensure the quality of its product and
reduce its warranty exposure. The Company’s warranty
obligation will be affected not only by its product failure
rates, but also the costs to repair or replace failed products
and potential service and delivery costs incurred in correcting
a product failure. If the Company’s
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
actual product failure rates, repair or replacement costs, or
service or delivery costs differ from these estimates, accrued
warranty costs would be adjusted in the period that such events
or costs become known.
The Company enters into standard indemnification agreements in
its ordinary course of business. Pursuant to these agreements,
the Company indemnifies, holds harmless, and agrees to reimburse
the indemnified party for losses suffered or incurred by the
indemnified party, generally the Company’s business
partners, customers, directors and officers. The term of these
indemnification agreements is generally perpetual. The maximum
potential amount of future payments the Company could be
required to make under these indemnification agreements is
unlimited. However, the Company has never incurred costs to
defend lawsuits or settle claims related to these
indemnification agreements. The Company believes the estimated
fair value of such agreements is minimal.
On April 30, 2007, the Company, Q-Cells AG and Renewable
Energy Corporation ASA entered into a Guarantee and Undertaking
Agreement in connection with EverQ entering into a loan
agreement with a syndicate of lenders led by Deutsche Bank AG
(the “Guarantee”). The loan agreement provides EverQ
with aggregate borrowing availability of up to
142.0 million Euros. Pursuant to the Guarantee, the
Company, Q-Cells AG and Renewable Energy Corporation ASA each
agreed to guarantee a one-third portion of the loan outstanding,
up to 30.0 million Euros of EverQ’s repayment
obligations under the loan agreement. As of December 31,
2007, the Company has $41.0 million deposited with Deutsche
Bank AG fulfilling its obligation under the Guarantee, which is
classified as restricted cash in the Company’s balance
sheet. Upon EverQ reaching certain milestones, expected to be
achieved during 2008, the guarantee will be cancelled. As of
December 31, 2007, the total amount of debt outstanding
under the loan agreement was 110.0 million Euros
(approximately $160.6 million at December 31, 2007
exchange rates) of which 57.5 million Euros was current
(approximately $84.0 million at December 31, 2007
exchange rates). Repayment of the loan is due in quarterly
installments through September 30, 2010.
The Company maintains a letter of credit for the benefit of a
landlord of its manufacturing facility in Marlboro,
Massachusetts for $414,000, which is required under the terms of
the lease and will expire upon termination of the lease in 2010.
The amount of cash guaranteeing the letter of credit is
classified as restricted cash in the Company’s balance
sheet. The company has an additional letter of credit for
$300,000 as guarantee of payment for certain equipment.
Fixed assets are recorded at cost. As part of the cost of
acquiring certain assets and getting them ready for use, the
Company capitalizes a portion of its interest costs. Provisions
for depreciation are based on their estimated useful lives using
the straight-line method over three to seven years for all
laboratory and manufacturing equipment, computers, and office
equipment. Leasehold improvements are depreciated over the
shorter of the remainder of the lease’s term or the
estimated life of the improvements. The costs for constructing
assets are recorded in assets under construction and are
depreciated from the date these assets are put to use. Upon
retirement or disposal, the cost of the asset disposed of and
the related accumulated depreciation are removed from the
accounts and any gain or loss is reflected in net income or loss.
Expenditures for repairs and maintenance are expensed as
incurred.
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s policy regarding long-lived assets is to
evaluate the recoverability or usefulness of these assets when
the facts and circumstances suggest that these assets may be
impaired. This analysis relies on a number of factors, including
changes in strategic direction, business plans, regulatory
developments, economic and budget projections, technological
improvements, and operating results. The test of recoverability
or usefulness is a comparison of the asset value to the
undiscounted cash flow of its expected cumulative net operating
cash flow over the asset’s remaining useful life. If such a
test indicates that impairment is required, then the asset is
written down to its estimated fair value. Any write-downs would
be treated as permanent reductions in the carrying amounts of
the assets and an operating loss would be recognized. To date,
the Company has had recurring operating losses and the
recoverability of its long-lived assets is contingent upon
executing its business plan that includes further reducing its
manufacturing costs and significantly increasing sales. If the
Company is unable to execute its business plan, the Company may
be required to write down the value of its long-lived assets in
future periods. No impairments were required to be recognized
during the years ended December 31, 2005, 2006 and 2007 for
long-lived assets.
The Company recognizes product revenue if there is persuasive
evidence of an agreement with the customer, shipment has
occurred, risk of loss has transferred to the customer, the
sales price is fixed or determinable, and collectability is
reasonably assured. The market for solar power products is
emerging and rapidly evolving. The Company currently sells its
solar power products primarily to distributors, system
integrators and other value-added resellers within and outside
of North America, who typically resell these products to end
users throughout the world. For new customers requesting credit,
the Company evaluates creditworthiness based on credit
applications, feedback from provided references, and credit
reports from independent agencies. For existing customers, the
Company evaluates creditworthiness based on payment history and
known changes in their financial condition. Royalty and fee
revenue are recognized at contractual rates upon shipment of
product by EverQ.
The Company also evaluates the facts and circumstances related
to each sales transaction and considers whether risk of loss has
passed to the customer upon shipment. The Company considers
whether its customer is purchasing its product for stock, and
whether contractual or implied rights to return the product
exist or whether its customer has an end user contractually
committed. The Company has not offered rights to return its
products other than for normal warranty conditions and has had
no history of product returns.
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. If the financial condition of the
Company’s customers were to deteriorate, such that their
ability to make payments was impaired, additional allowances
could be required.
RESEARCH
AND DEVELOPMENT
Research and development costs are expensed as incurred.
The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets,
subject to valuation allowances, and liabilities for the
expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred
income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. A
valuation allowance is established if it is more likely than not
that all or a portion of the net deferred tax assets will not be
realized.
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company accounts for value-added taxes on a net basis which
excludes the amounts from revenues and costs. Value-added tax
receivables and payables are presented net on the balance sheet.
Comprehensive loss consists of unrealized gains and losses on
available-for-sale securities and cumulative foreign currency
translation adjustments. Other comprehensive income or loss is
reflected in the Consolidated Statement of Stockholder’s
Equity.
On January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards
No. 123 — revised 2004, “Share-Based
Payment” and related interpretations
(“SFAS 123R”). SFAS 123R requires entities
to measure compensation cost arising from the grant of
share-based payments to employees at fair value and to recognize
such cost in income over the period during which the employee is
required to provide service in exchange for the award, usually
the vesting period. The Company selected the modified
prospective method for implementing SFAS 123R and began
applying the provisions to stock-based awards granted on or
after January 1, 2006, plus any unvested awards granted
prior to January 1, 2006. Stock-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as expense on a straight-line basis over the
awards’ service periods, which are the vesting periods,
less estimated forfeitures. Estimated compensation for grants
that were outstanding as of the effective date is recognized
over the remaining service period using the compensation cost
estimated for the SFAS 123R pro forma disclosures for prior
periods. See Note 7 for further information regarding the
Company’s stock-based compensation assumptions and
expenses, including pro forma disclosures for prior periods as
if the Company had recorded stock-based compensation expense in
accordance with SFAS 123R. For the year ended
December 31, 2005, the Company had previously adopted the
provisions of Statement of Financial Accounting Standards
No. 123, “Accounting for Stock-Based
Compensation,” (“SFAS 123”), as amended by
SFAS No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure” through
disclosure only and accounted for its stock-based employee
compensation plans under APB Opinion No. 25. Accordingly,
no compensation cost was recorded as all options granted had an
exercise price at least equal to the fair market value of the
underlying common stock on the date of the grant.
The Company computes net loss per common share in accordance
with SFAS No. 128, “Earnings Per Share”
(“SFAS 128”), and SEC Staff Accounting
Bulletin No. 98 (“SAB 98”). Under the
provisions of SFAS 128 and SAB 98, basic net loss per
common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period.
The calculation of diluted net loss per common share for the
years ended December 31, 2005, 2006 and 2007 does not
include approximately 22.9 million, 19.4 million and
19.7 million potential shares of common stock equivalents
outstanding at December 31, 2005, 2006 and 2007,
respectively, as their inclusion would be antidilutive. Common
stock equivalents include outstanding common stock options,
unvested restricted stock awards, common stock warrants and
convertible debt.
Statement of Financial Accounting Standards No. 131,
“Disclosures about Segments of an Enterprise and Related
Information” (“SFAS No. 131”),
establishes standards for reporting information about operating
segments. The information in this report is provided in
accordance with the requirements of SFAS No. 131 and
is consistent with how business results are reported internally
to management.
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company currently operates as one segment. For the year
ended December 31, 2006, the Company had two reportable
operating segments: Evergreen Solar, Inc. and EverQ GmbH. The
chief operating decision maker evaluated performance based on a
number of factors, the primary measure being product revenue and
gross profit. Information on segment assets was not disclosed as
it was not reviewed by the chief operating decision maker.
The preparation of financial statements in conformity with
generally accepted accounting principals requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. The
Company bases its estimates on historical experience and various
other factors believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not
readily apparent from other sources. Estimates are used when
accounting for the collectability of receivables, realizability
of finished goods inventory, estimated warranty costs, and
deferred tax assets. Provisions for depreciation are based on
their estimated useful lives using the straight-line method over
three to seven years for all laboratory and manufacturing
equipment, computers, and office equipment. Leasehold
improvements are depreciated over the shorter of the remainder
of the lease’s term or the life of the improvements. Some
of these estimates can be subjective and complex and,
consequently, actual results may differ from these estimates
under different assumptions or conditions. While for any given
estimate or assumption made by the Company’s management
there may be other estimates or assumptions that are reasonable,
the Company believes that, given the current facts and
circumstances, it is unlikely that applying any such other
reasonable estimate or assumption would materially impact the
financial statements.
Financial instruments, including cash equivalents, marketable
securities, accounts receivable and accounts payable are carried
in the consolidated financial statements at amounts that
approximate fair value at December 31, 2006 and 2007. Fair
values are based on market prices and assumptions concerning the
amount and timing of estimated future cash flows and assumed
discount rates, reflecting varying degrees of perceived risk.
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value
Measurements”. This statement establishes a framework for
measuring fair value in accordance with GAAP, clarifies the
definition of fair value within that framework, and expands
disclosures about the use of fair value measurements. It also
responds to investors’ requests for expanded information
about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair
value and the effect of fair value measurements on earnings.
SFAS No. 157 applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value,
and does not expand the use of fair value in any new
circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued a FASB
Statement of Position that amends SFAS No. 157 to
delay its effective date for all non-financial assets and
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis, to
fiscal years beginning after November 15, 2008. We do not
expect that the adoption of SFAS No. 157 will have a
material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of
SFAS No. 115”. This statement permits entities to
choose to
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
measure certain financial instruments and other items at fair
value. This statement is expected to expand the use of fair
value measurement, which is consistent with the FASB’s
long-term measurement objectives for accounting for financial
instruments. SFAS No. 159 is effective for the fiscal
year beginning January 1, 2008. We do not expect that the
adoption of SFAS No. 159 will have a material impact
on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51”.
This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008, which for us is the year ending
December 31, 2009, and the interim periods within that
fiscal year. The objective of this Statement is to improve the
relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated
financial statements. We are currently evaluating the potential
impact, if any, of the adoption of SFAS No. 160 on our
consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R)
“Business Combinations”. This statement is effective
for fiscal years, beginning on or after December 15, 2008,
which for us is the year ending December 31, 2009. The
objective of the statement is to establish principles and
requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling
interest in the acquire. The statement also provides guidance
for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. We are
currently evaluating the potential impact, if any, of the
adoption of SFAS No. 141R on our consolidated
financial statements.
Inventory consisted of the following (in thousands):
During 2007, the Company entered into multiple multi-year
polysilicon supply agreements, several of which required
advanced funding under the contract:
On April 17, 2007, the Company entered into a multi-year
polysilicon supply agreement with DC Chemical Co., Ltd.
(“DC Chemical”) under which DC Chemical will supply
the Company with polysilicon at fixed prices beginning in late
2008 and continuing through 2014. In conjunction with this
agreement, the Company issued 10,750,000 shares of transfer
restricted common stock to DC Chemical. The restrictions on the
common stock will lapse upon the delivery of 500 metric tons of
polysilicon to the Company by DC Chemical. Issuance of the
restricted shares represented a prepayment of inventory cost
valued at approximately $119.9 million.
On July 24, 2007, the Company entered into a multi-year
polysilicon supply agreement with Wacker Chemie AG
(“Wacker”). This supply agreement provides the general
terms and conditions pursuant to which Wacker will supply the
Company with specified annual quantities of polysilicon at fixed
prices beginning in 2010 and continuing through 2018. In
connection with the agreement the Company made a payment of
approximately 9.0 million Euros to Wacker (approximately
$13.1 million at December 31, 2007 exchange rates).
Table of Contents
EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On October 24, 2007, the Company entered into a multi-year
polysilicon supply agreement with Solaricos Trading, LTD.
(“Nitol”). This supply agreement provides the general
terms and conditions pursuant to which Nitol will supply the
Company with specified annual quantities of polysilicon at fixed
prices beginning in 2009 and continuing through 2014. In
connection with the agreement the Company made a
$10.0 million prepayment to Nitol. An additional prepayment
of $5.0 million will be required within 15 days of the
completion of certain milestones which is expected to occur in
the first half of 2008.
The above prepayments, which are non-refundable, are presented
on the balance sheet in Prepaid Cost of Inventory and will be
amortized as an additional cost of inventory as silicon is
delivered and utilized by the Company.
On December 7, 2007, the Company entered into a multi-year
polysilicon supply agreement with Silicium de Provence S.A.S
(“Silpro”). This supply agreement provides the general
terms and conditions pursuant to which Silpro will supply the
Company with specified annual quantities of polysilicon at fixed
prices beginning in 2010 and continuing through 2019. In
connection with the supply agreement, the Company agreed to loan
Silpro 30 million Euros (approximately $43.8 million
at December 31, 2007 exchange rates) at an interest rate of
3.0% compounded annually. The difference between this rate and
prevailing market rates will be treated as an adjustment to the
cost of inventory. The initial 15.0 million Euro
installment of the loan was disbursed to Silpro in December 2007
(approximately $21.9 million at December 31, 2007 exchange
rates). The second 15.0 million Euro installment of the
loan will be disbursed to Silpro by January 31, 2008. This
loan is presented on the balance sheet as loan receivable from
silicon supplier.
Fixed assets consisted of the following at December 31,
2006 and 2007 (in thousands):
As of December 31, 2007, The Commonwealth of Massachusetts
support program had awarded the Company $20.0 million in
grants towards the construction of its Devens, Massachusetts
manufacturing facility, of which approximately $5.8 million
has been earned. This amount has been capitalized as a reduction
of the construction costs all of which are included in assets
under construction. The funds granted are subject to repayment
by the Company if, among other conditions, the Devens
manufacturing facility does not create and maintain 350 new jobs
in Massachusetts through November 20, 2014. The repayment
of the grants, if any, will be proportional to the targeted
number of jobs that are not created. As the Company has the
ability and intent to satisfy the obligations under the awards,
the grant monies received will be amortized over the same period
as the underlying assets to which they relate.
Depreciation expense for the years ended December 31, 2005,
2006 and 2007 was $4.1 million, $9.3 million and
$7.4 million, respectively. During 2006, as a result of the
Company’s successful introduction of new manufacturing
technology, the Company disposed of several pieces of existing
equipment in order to
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
replace them with more technologically advanced equipment
expected to improve operational performance at its Marlboro
facility. Equipment with a net book value of $2.4 million
was disposed.
As of December 31, 2007, the Company had outstanding
commitments for capital expenditures of approximately $111.2
million, primarily for the construction and equipment for its
new Devens facility and equipment for its Marlboro facility.
Income taxes computed using the federal statutory income tax
rate differ from the Company’s effective tax rate primarily
due to the following for the years ended December 31(in
thousands):
As of December 31, 2007, the Company had federal and state
net operating loss carryforwards of approximately
$94.0 million and $60.8 million, respectively,
available to reduce future taxable income which begin to expire
in 2009 and 2008, respectively. In addition, the Company has
excess tax deductions related to equity compensation of
$18.7 million of which the benefit will be realized when it
results in a reduction of taxable income in accordance with
SFAS 123R. The Company also had federal and state research
and development tax credit carryforwards of approximately
$2.0 million and $1.2 million, respectively, which
begin to expire in 2010 and state Investment Tax Credit
carryforwards of approximately $1.6 million which began to
expire in 2008, available to reduce future tax liabilities. Of
the Company’s valuation allowance, $6.4 million will
be credited to additional paid-in capital when and if reversed.
Since the Company’s formation, the Company has raised
capital through the issuance of capital stock on several
occasions, as well as transfers of common stock, which resulted
in changes of control, as defined by Section 382 of the
Internal Revenue Code. As a result of the ownership changes,
portions of the Company’s net operating loss carryforward
are subject to annual limitations under Section 382.
Subsequent ownership changes, as defined in Section 382,
could further limit the amount of net operating loss
carryforwards and research and development credits that can be
utilized annually to offset future taxable income.
Management of the Company has evaluated the positive and
negative evidence bearing upon the realization of its deferred
tax assets. Management has considered the Company’s history
of losses and, in accordance with the applicable accounting
standards, has fully reserved the deferred tax asset.
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred tax assets consist of the following at December 31
(in thousands):
The Company has not provided for U.S. income taxes on the
unremitted earnings of its foreign subsidiaries as these
earnings are considered to be indefinitely reinvested.
The Company has two classes of capital stock: common and
preferred. As of December 31, 2007, the Company had
150,000,000 shares of common stock authorized and
27,227,668 shares of preferred stock authorized, of which
26,227,668 shares were designated Series A convertible
preferred stock. In November 2006, the Company’s Board of
Directors approved a resolution increasing the number of
authorized shares of common stock from 100,000,000 to
150,000,000. The Company’s stockholder meeting was
subsequently held on January 5, 2007. At this meeting, the
stockholders approved a resolution increasing the number of
authorized shares of common stock from 100,000,000 to
150,000,000.
In February 2005, the Company completed a $62.3 million
common stock offering, net of offering costs of approximately
$4.4 million, to satisfy existing capital requirements and
to fund the continuing capacity expansion of its Marlboro,
Massachusetts manufacturing facility and the expenditures
necessary for the build-out and initial operation of EverQ. A
portion of the proceeds from the financing was also used to
increase research and development spending on promising next
generation technologies and to explore further expansion
opportunities. The Company issued 13,346,000 shares of its
common stock in the offering. The shares of common stock were
sold at a per share price of $5.00 (before underwriting
discounts), which represented a 6% discount to the $5.30 closing
price of shares of its common stock as reported on the Nasdaq
National Market as of the close of business on February 3,
2005.
On April 17, 2007, the Company entered into a multi-year
polysilicon supply agreement with DC Chemical Co., Ltd.
(“DC Chemical”) under which DC Chemical will supply
the Company with polysilicon at fixed prices beginning in late
2008 and continuing through 2014. Concurrent with the execution
of the supply agreement, the Company and DC Chemical entered
into a stock purchase agreement (the “Purchase
Agreement”) pursuant to which DC Chemical purchased
3.0 million shares of the Company’s common stock for
$12.07 per share, representing the closing price of the
Company’s common stock on the NASDAQ Global Market on
April 16, 2007. Pursuant to the Purchase Agreement, the
Company issued an additional 4.5 million shares of transfer
restricted common stock and 625 shares of transfer
restricted preferred stock to DC Chemical. The preferred stock
automatically converted into 6.25 million shares of
transfer restricted common
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
stock in May 2007 upon the termination of the applicable waiting
period under the Hart Scott Rodino Antitrust Improvements Act of
1976, as amended. The restrictions on the common stock will
lapse upon the delivery of 500 metric tons of polysilicon to the
Company by DC Chemical. Issuance of the restricted shares
represented a prepayment of inventory cost valued at
approximately $119.9 million, based on the issuance date
market price of the Company’s common shares adjusted for a
discount to reflect the transfer restriction, and will be
amortized as an additional cost of inventory as silicon is
delivered by DC Chemical and utilized by the Company. When the
transfer restriction on these shares lapse, the Company will
record an additional cost of inventory equal to the value of the
discount associated with the restriction at that time if the
stock price on that date is higher than $12.07 which will be
amortized as an incremental cost of inventory as silicon is
delivered by DC Chemical and utilized by the Company.
On May 30, 2007, the Company closed a public offering of
17,250,000 shares of its common stock, which included the
exercise of an underwriters’ option to purchase 2,250,000
additional shares. The shares of common stock were sold at a per
share price of $8.25 (before underwriting discounts).
Gross proceeds to the Company from the combined DC Chemical
stock purchase and public offering transactions were
approximately $178.6 million and net proceeds, after
underwriting commissions and other offering expenses, were
approximately $170.7 million.
At December 31, 2007, 10,650,000 shares of common
stock were authorized for issuance under the Company’s
Amended and Restated 2000 Stock Option and Incentive Plan and
approximately 467,000 shares were reserved for issuance
upon conversion of outstanding warrants from the June 2004
warrant agreement.
On January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standards
No. 123 — (revised 2004) “Share-Based
Payment” (“SFAS 123R”). The following table
presents stock-based compensation expense included in the
Company’s consolidated statements of operations under
SFAS 123R (in thousands):
Prior to the adoption of SFAS 123R on January 1, 2006,
the Company accounted for its stock-based employee compensation
plans under APB Opinion No. 25. Accordingly, no
compensation cost was recorded related to stock options as all
options granted had an exercise price at least equal to the fair
market value of the underlying common stock on the date of the
grant.
The Company had previously adopted the provisions of Statement
of Financial Accounting Standards No. 123, “Accounting
for Stock-Based Compensation,” (“SFAS 123”),
as amended by SFAS No. 148, “Accounting for
Stock-Based Compensation — Transition and
Disclosure” through disclosure only. The following table
illustrates the effects on net loss and net loss per share for
the year ended December 31, 2005
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
as if the Company had applied the fair value recognition
provisions of SFAS 123R to share-based employee awards:
Stock
Incentive Plans
The Company is authorized to issue up to 10,650,000 shares
of common stock pursuant to its Amended and Restated 2000 Stock
Option and Incentive Plan (the “2000 Plan”), of which
1,302,347 shares are available and reserved for future
issuance or future grant as of December 31, 2007. The
purpose is to incent employees and other individuals who render
services to the Company by providing opportunities to purchase
stock in the Company. The 2000 Plan authorizes the issuance of
incentive stock options, nonqualified stock options, restricted
stock awards, stock appreciation rights, performance units and
performance shares. All options granted will expire ten years
from their date of issuance. Incentive stock options and
restricted stock awards generally have a four-year vesting
period from their date of issuance and nonqualified options
generally vest immediately upon their issuance.
Stock option activity under the 2000 Plan is summarized as
follows:
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2007:
The weighted average grant-date fair value of stock options
granted during the year ended December 31, 2007 was $9.39.
The aggregate intrinsic value of outstanding options as of
December 31, 2007 was $53.8 million, of which
$47.3 million relates to options that were vested. The
aggregate intrinsic value of outstanding options as of
December 31, 2006 was $22.0 million, of which
$14.9 million relates to options that were vested. The
intrinsic value of options exercised during the years ended
December 31, 2007 and 2006 were approximately
$11.5 million and $10.2 million, respectively. As of
December 31, 2007, there was $4.0 million of total
unrecognized compensation cost related to unvested stock options
granted under the Company’s stock plans. That cost is
expected to be recognized over a weighted-average period of
1.6 years.
The Company estimates the fair value of stock options using the
Black-Scholes valuation model. Key input assumptions used to
estimate the fair value of stock options include the exercise
price of the award, the expected option term, the expected
volatility of the Company’s stock over the option’s
expected term, the risk-free interest rate over the stock
option’s expected term, and the Company’s expected
annual dividend yield. The Company believes that the valuation
technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of
the Company’s stock options granted for the fiscal years
ended December 31, 2005, 2006 and 2007. Estimates of fair
value are not intended to predict actual future events or the
value ultimately realized by persons who receive equity awards.
The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option valuation model
with the following weighted-average assumptions:
The Company’s expected option term assumption was
determined using the simplified method for estimating expected
option life, which qualify as “plain-vanilla” options.
The expected stock volatility factor was determined using
historical daily price changes of the Company’s common
stock. The Company bases the risk-free interest rate that is
used in the stock option valuation model on U.S. Treasury
securities issued with
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EVERGREEN
SOLAR, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
maturities similar to the expected term of the options. The
Company does not anticipate paying any cash dividends in the
foreseeable future and therefore uses an expected dividend yield
of zero in the option valuation model. The Company estimates
forfeitures at the time of grant and revises those estima | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||