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SatCon Technology 10-K 2009

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TABLE OF CONTENTS
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2008

Commission file number 1-11512



SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization)
  04-2857552
(I.R.S. Employer Identification Number)

27 Drydock Avenue, Boston, Massachusetts
(Address of principal executive offices)

 

02210
(Zip Code)

(617) 897-2400
(Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act:

Title of Class   Name of Exchange on Which Registered
Common Stock, $.01 Par Value   The NASDAQ Stock Market, LLC

Securities registered pursuant to section 12(g) of the Act: None

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

        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 ý    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. ý

        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):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

        The aggregate market value of the registrant's Common Stock, $.01 par value per share, held by non-affiliates of the registrant was $144,377,441 based on the last reported sale price of the registrant's Common Stock on the Nasdaq Capital Market as of the close of business on the last business day of the registrant's most recently completed second quarter ($3.01). There were 51,549,472 shares of Common Stock outstanding as of March 2, 2009.

        DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Proxy Statement for its 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.


Table of Contents

        Explanatory Note:    While Satcon Technology Corporation (the "Company") is no longer a "smaller reporting company" as of the last business day of its most recently completed second fiscal quarter, under the rules and regulations of the Securities and Exchange Commission, the Company may finish reporting using the scaled disclosure afforded to a smaller reporting company for the rest of the fiscal year, including in its annual report on Form 10-K. Accordingly, the Company is providing such scaled disclosure in this Annual Report on Form 10-K. As allowed by such rules and regulations, the Company will begin providing the standard non-scaled disclosure in its Quarterly Report on Form 10-Q for the quarter ended April 4, 2009.


Table of Contents


SatCon Technology Corporation

TABLE OF CONTENTS

 
   
   
  PAGE  

Part I

               

  Item 1.  

Business

    3  

  Item 1A.  

Risk Factors

    12  

  Item 1B.  

Unresolved Staff Comments

    23  

  Item 2.  

Properties

    23  

  Item 3.  

Legal Proceedings

    23  

  Item 4.  

Submission of Matters to a Vote of Security Holders

    23  

Part II

               

  Item 5.  

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    24  

  Item 6.  

Selected Consolidated Financial Data

    25  

  Item 7.  

Management's Discussion and Analysis of Financial Condition and Results of Operation

    27  

  Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

    37  

  Item 8.  

Consolidated Financial Statements and Supplementary Data

    38  

  Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    108  

  Item 9A.  

Controls and Procedures

    108  

  Item 9B.  

Other Information

    109  

Part III

               

  Item 10.  

Directors, Executive Officers and Corporate Governance

    109  

  Item 11.  

Executive Compensation

    109  

  Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    109  

  Item 13.  

Certain Relationships and Related Transactions, and Director Independence

    109  

  Item 14.  

Principal Accounting Fees and Services

    109  

Part IV

               

  Item 15.  

Exhibits, Financial Statement Schedules

    110  

  Signatures     111  

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PART I

        This Annual Report on Form 10-K contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. You can identify these forward-looking statements by our use of the words "believes," "anticipates," "plans," "expects," "may," "will," "intends," "estimates," and similar expressions, whether in the negative or in the affirmative. The forward-looking statements contained in this Annual Report are generally located in the material set forth under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," but may be found in other locations as well. Although we believe that these forward-looking statements reasonably reflect our plans, intentions and expectations disclosed in the forward-looking statements, our actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements under the heading "Risk Factors" under Item 1A that we believe could cause our actual results to differ materially from the forward-looking statements that we make. Forward-looking statements contained in this Annual Report speak only as of the date of this report. Subsequent events or circumstances occurring after such date may render these statements incomplete or out of date. We undertake no obligation and expressly disclaim any duty to update such statements.

Item 1.    BUSINESS

Overview

        Satcon Technology Corporation ("Satcon" or "Company") is a leading clean energy technology provider of utility grade power solutions for the renewable and distributed energy markets. We deliver power conversion solutions and system design services for large-scale renewable energy plants. Our products are utilized by businesses and utility companies to efficiently convert renewable energy sources into stable and reliable electrical power.

        Our PowerGate® Plus suite of photovoltaic and fuel cell power inverters, which are sold through our Renewable Energy Solutions division, offer rugged and reliable solutions that enhance the total output and power production of the solar installation. We also offer system design services and solutions for management, monitoring, and performance measurement to maximize capital investment and improve overall quality and performance over the entire lifespan of the installation.

        In addition to our core power conditioning solutions, we also develop, design and build power conversion electronics, power management and distribution systems for a variety of defense and commercial applications through our Applied Technology division.

Revenue Comparison with Prior Years

        Consolidated revenues for the years ended December 31, 2008 and 2007 were as follows:

 
  Year Ended
December 31,
 
 
  2008   2007  

United States

  $ 54,600,486   $ 35,418,686  

International

    7,921,617     6,608,537  
           
 

Total

  $ 62,522,103   $ 42,027,223  
           

        These numbers have been adjusted to reflect the sale of our Electronics and Power Systems US business units, which was finalized in the third quarter of 2008. See Note D (Discontinued Operations) to the Consolidated Financial Statements.

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Industry Background & Market Opportunity

        The worldwide demand for clean and renewable sources of energy, such as solar, is being driven globally by a variety of factors. These factors include increasing electricity usage, power grid capacity constraints, fossil fuel price volatility, and harmful levels of pollution and greenhouse gases. As a result of these and other challenges facing traditional energy sources, individuals, businesses and governments are seeking more reliable, efficient and cleaner solutions for their power needs through renewable portfolio standards (RPS), tax incentives, and international treaties.

        Within this renewable energy market we believe that the fastest growth area for Satcon involves large-scale, utility grade renewable energy and distributed power generation. These solutions require power quality control products to manage the performance of individual solar installations and monitor how it will interconnect with larger energy infrastructure (grid). In order to be commercially viable and operate effectively, these solutions must be highly reliable, efficient, and deliver the command and control performance required to profitably manage multi-megawatt solar power plants. Our intellectual property, in the form of technical expertise and innovative product offerings, uniquely positions the company to provide the next generation of large-scale, utility grade renewable energy projects with the energy storage, power quality, and distributed power systems they will require.

Products

        We deliver a full suite of power conditioning solutions and services for large commercial and utility scale renewable energy installations through our two business segments: Renewable Energy Solutions and Satcon Applied Technology.

Renewable Energy Solutions (formerly Satcon Power Systems, Canada)

        We produce a broad range of products to provide the critical bridge between clean energy sources and large-scale power grids, helping companies meet the rising demand for clean energy.

        Our solutions for renewable energy consist of two core product offerings:

    Utility Grade Inverters for Solar Photovoltaic and Fuel Cell.  We develop modular inverters for use in connection with large, utility-scale, renewable energy power systems such as stationary fuel cell power plants, photovoltaic power plants, and distributed power generation systems. Our PowerGate® Plus inverters are designed to convert the DC power generated by a renewable energy source into useable AC power. They also provide the interface with the electric utility grid, an energy storage device, and end user applications. Our inverters are built on a proprietary technology framework that allows them to effectively manage high-power requirements. We introduced our first inverter product in fiscal year 2002.

    Micro Grid and Smart Grid Solutions.  Satcon's Micro Grid solutions supply stable, high quality renewable power locally, at the point of demand. Our utility grade Micro Grid solutions are developed to solve the renewable energy challenges of intermittancy and power storage and ensure the grid load is always powered. Built on an architecture of PowerGate Plus photolvoltaic, fuel cell and hybrid inverter systems, they provide uninterrupted utility grade renewable energy to deliver the energy security, reliability, safety, sustainability and cost effectiveness required for large scale utility adoption.

      Satcon's Micro Grid solutions are the distributed renewable building blocks for the future Smart Grid, a large scale system of distributed command and control centers composed of a dense network of interconnected micro grids. In this design, Satcon Micro Grids become the Smart Grid framework , enhancing network wide quality and performance by localizing speed, control and intelligence through renewable power conditioning.

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    Other Legacy Power Products.  We also provide static transfer switches, static voltage regulators, frequency converters and AC arc furnace line controllers from 5 kilowatts to 100 megawatts.

        Revenues for the years ended December 31, 2008 and 2007 from our Renewable Energy Solutions business unit were as follows:

 
  Year Ended
December 31,
 
(Amounts in Millions)
  2008   2007  

Product Revenue

             

Alternative Energy Products

  $ 52.2   $ 25.4  

Other Legacy

    2.1     7.6  
           

Total Product Revenue

  $ 54.3   $ 33.0  
           

        These numbers have been adjusted to reflect the sale of our Electronics and Power Systems US business units, which was finalized in the third quarter of 2008. See Note D (Discontinued Operations) to the Consolidated Financial Statements.

Applied Technology

        Applied Technology develops, designs and builds power conversion electronics, power management and distribution systems, for a variety of defense and commercial applications. We pursue development programs in areas where we have technical expertise and where we believe there is significant long-term production potential for the developed technology. Technical disciplines represented at our Applied Technology business unit include electromechanics, digital and analog electronics, power electronics and electronic packaging, thermal management, motor dynamics, materials, software development, control technology and system integration. To date, Applied Technology has built products for use in distributed power generation, energy storage and power quality, high performance electric machinery, transportation and defense systems, including components for military hybrid-electric vehicles, "all-electric" ships and aircraft subsystems.

        Revenue for the years ended December 31, 2008 and 2007 from our Applied Technology division was as follows:

 
  Year Ended
December 31,
 
(Amounts in Millions)
  2008   2007  

Funded Research and Development and other revenue

  $ 8.2   $ 9.0  

Financial Results by Business Segment

        Our financial results by business segments for the fiscal years ended December 31, 2008 and 2007 are presented in Note S to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Satcon Product Attributes

        We strive to meet our customers' needs by providing power conditioning solutions and systems that encompass the following key attributes:

    Performance.  Our products use proprietary designs and technology to ensure that high-quality power is efficiently produced in all operating conditions.

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    Reliability.  We design and manufacture high-reliability, long-life power electronics for solar photovoltaic applications. We design, manufacture and test our systems for optimal performance over the entire lifespan of the photovoltaic system. We design our products to support the long-life, always-on requirements of the power quality markets through a comprehensive suite of programs including: support services, system design services, and warranty and preventative maintenance programs.

    Efficiency.  We design and manufacture our products to meet the efficiency needs of our customers as defined by their specifications and the end use of the product. The overall efficiency of a renewable power system, or its ability to deliver power with minimum energy loss, is vital to its effective commercialization and overall profitability dynamic, and depends on the efficiency of all of its component parts. Our proprietary maximum power production tracking (Edge™ MPPT) technology ensures that the entire photovoltaic system delivers maximum throughput in the harshest environments. Our products also are compatible across all photovoltaic cell technologies, including thin film, monocrystalline, and polycrystalline photovoltaic panels.

    Quality.  Our Renewable Energy Solutions division operates with Quality Management Systems. Our Applied Technology division is ISO 9001:2000 certified. All of the high power level inverters manufactured in our Renewable Energy Solutions division are Underwriter Laboratory listed as meeting their requirements for safety.

    High Power Density.  We design our products to meet the market demand for high power density. High power density, or the ability to convert, condition and manage large amounts of energy within a compact design, is required for cost reduction and is critical in applications such as large commercial and utility-scale solar photovoltaic power systems where environmental conditions are stringent.

    Flexibility.  We develop and manufacture our products for use in various renewable energy and power quality systems such as fuel cells, photovoltaics, wind turbines, micro-turbines and UPS systems. Our products are modular and scalable to meet a wide range of power requirements. Our engineers work closely with our customers to address overall systems design issues and to ensure that our products meet their system specifications. A close working relationship between the customers' engineers and our engineers is particularly important in the rapidly evolving renewable energy industry.

Sales, Marketing and Service

        We sell our products and services through direct sales personnel, distributor arrangements and sales agent arrangements which comprise a global market presence for Satcon. Our direct sales staff manages our key customer accounts, regional distributors and agents, as well as, provides customer support and identifies significant market opportunities in their respective markets.

        In order to maximize our customer's return on assets and investment profitability, we offer a suite of services focused on delivering optimized design and installation support. We also maintain localized customer service capabilities at sites throughout North America, Europe and Asia. Our services provide technical support throughout the entire lifespan of a product. We believe these factors are essential to building close, long-term value for our customers, and maintaining our competitive edge.

        Within our Applied Technology division, we compete for and market our research and development contracts through several methods, including pursuing new and existing customer relationships in the commercial and government sectors and responding to unsolicited requests for proposals and through our Internet site.

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Strategy

        Our strategy is to drive revenue growth, expand our leadership position in key markets, and enhance operating results by increasing the adoption of our products in the large commercial and utility scale renewable energy market. Our focus continues to be:

    Leverage our diverse expertise and proprietary technology.  We apply our diverse expertise and proprietary technology in the fields of power electronics and power conversion design to offer the industry's largest selection of commercial and utility grade inverters. Our products' advanced capabilities are highly differentiated in the rapidly developing renewable energy market where we currently offer the broadest range of utility grade power ratings ranging from 30kW to 1 MW. Our success should be sustainable in the longer term because it depends on fundamental knowledge of key power technology. We are not critically dependent on the technology of a specific application, the business of a single customer or the success of a single product. We strive to create balance between breadth and focus.

    Establish our products as industry standards.  We are a major developer and manufacturer of power electronics, power conversion and power conditioning solutions in renewable energy applications worldwide. We currently provide our solutions and services for the largest and most demanding solar installations in the world. We come from a history of innovation in large-scale, advanced solutions including introducing the world's first one box 100 kW photovoltaic inverter, the first 500 kW photovoltaic inverter, as well as the first 2.4 megawatt fuel cell inverter. In 2008, we introduced the first 1 MW photovoltaic inverter. Our innovation and history of firsts position our products as industry standards in the large commercial and utility scale renewable energy market.

    Leverage our intellectual property.  Satcon is composed of industry leading experts in large-scale photovoltaic and fuel cell design, manufacturing and solution delivery.

    Develop new technology.  We believe that new products, manufacturing capabilities and technologies will enhance our competitive position and growth opportunities. In 2008, we were recognized by Sandia Laboratories to develop the next generation of distributed renewable energy solutions through the Solar Energy Grid Integration Systems (SEGIS) project. The SEGIS project is focused on developing advanced clean energy technologies required to increase the usage of photovoltaic systems in the energy network, and improving the power quality and reliability of the overall utility grid. The combination of our advanced technology, intellectual property and industry expertise provide us the opportunity to develop the industry's next generation of power conversion solutions.

    Develop strategic alliances and relationships.  These alliances may take the form of marketing, sales, distribution or manufacturing agreements. We continue to expand and deepen our operations globally and we are committed to establishing a large, direct local presence in the European and Asian countries where we plan to compete, as well as maintain and build upon the strong relationships we have in North America.

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Competition

        We believe that competitive performance in the marketplace for power conditioning and control products depends upon several factors, including product price, technical innovation, product quality and reliability, range of products, customer service and technical support. Satcon remains focused on solving large-scale power production challenges and we have aligned all resources within our organization behind this focus. Our technical innovation emphasizing product performance and reliability, supported by our commitment to strong customer service and technical support, enables us to continue to compete successfully against our competitors.

    Siemens

    Markets:  Industrial Plant Automation, Energy, Healthcare

    Products:  Solar Inverters, Communication Software, Wind Turbines, Gas Turbines, Steam Turbines, Generators, Compressors & Trains, Fans, Fuel Gasifier, Fuel Cells, Environmental Systems

    SMA Solar Technology

    Markets:  Renewable Energy, Solar Inverters, Energy Systems

    Products:  Residential Inverters, Commercial Inverters, Solar Plants

    Schneider Electric

    Markets:  Renewable Energy, Energy Management

    Products:  Solar Inverters, Automation and Control, Electrical Distribution, Energy Efficiency

    Advanced Energy Industries

    Market:  Renewable Energy, Solar Equipment

    Products:  Solar Inverters, Power Systems

    Fronius

    Markets:  Renewable Energy, Solar Power, Welding Technology, Battery Chargers

    Products:  Solar Inverters, Energy Cell, Battery Chargers, Welding Equipment

    Ingeteam

    Markets:  Electrical & Control Systems for Renewable Energy; Electrical Marine Motors; Mechanical Engineering & Supply for Turnkey Iron/Steel Plants; Railway Traction

    Products:  Wind Converters, Generators, Solar Inverters, Hydroelectric Equipment/Generators, Solar Thermal/Bio-Fuel Equipment, Automation & Protection, PV Solar Hybrid Equipment

    Magnetek

    Markets:  Renewable Energy, Material Handling, Elevators, Mining

    Products:  Solar Inverters, Wind Converters, Wind Inverters, Multimode Wind Inverters

    PV Powered

    Markets:  Renewable Energy, Grid-Tied PV Inverters

    Products:  Residential Solar Inverters, Commercial Solar Inverters

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    Santerno

    Markets:  Renewable Energy; Industrial Automation

    Products:  Vector Inverters, Soft Starters, AC/DC Converters, Remote Drives, Asynchronous Motors, Asynchronous Vector Motors, Accessories, Solar Battery Chargers, Solar Inverters, Remote Sunway, String Boxes

        Our ability to continue to compete successfully with these companies depends on our ability to continue to innovate through our products and services.

Significant Customers

        There were two customers that were classified as significant customers in 2008 (i.e., sales to any one customer exceeding 10% of our revenue or gross accounts receivable exceeding 10% of our gross accounts receivable). Our largest customer accounted for approximately 14% of our 2008 revenue. Our second largest customer accounted for approximately 10% of our 2008 revenue. At December 31, 2008, both customers had a balance greater than 10%, or approximately $3.3 million, of our outstanding gross accounts receivable. For the year ended December 31, 2007, two customers accounted for approximately 26%, or approximately $11.1 million, of revenue. At December 31, 2007, three customers had a balance greater than 10%, or approximately $4.4 million, of our outstanding gross accounts receivable.

Backlog

        Our backlog consists primarily of orders for power control systems and product development contracts. At December 31, 2008, our backlog was approximately $25 million. Of this amount, approximately $20 million is scheduled to be shipped during 2009. Many of our contracts and sales orders may be canceled at any time with limited or no penalty. In addition, contract awards may be subject to funding approval from the U.S. government and commercial entities, which involves political, budgetary and other considerations over which we have no control.

Research and Development

        We believe that the continued and timely development of new products and enhancements to our existing products is necessary to maintain our competitive position. We use technologies developed by our business units, together with information supplied by our distributors and customers, to design and develop new products and product enhancements and to reduce the time-to-market for our products.

        During the years ended December 31, 2008 and 2007, we expended approximately $6.5 million and $6.7 million, respectively, on funded research and development and other revenue activities funded by commercial customers and U.S. government agency sponsors. Under the agreements funded by the U.S. government, the government retains a royalty-free license to use the technology developed for government purposes and we retain exclusive rights to the technology for commercial and industrial applications. The rights to technology developed under contracts funded by commercial customers are negotiated on a case-by-case basis. We expended approximately $5.1 million and $2.3 million on internally-funded research and development during the years ended December 31, 2008 and 2007, respectively.

Manufacturing Facilities

        We manufacture our products at our facilities located in Burlington, Ontario, Canada. Our overall manufacturing process has a current production capacity of approximately 400MW per year. As our business continues to grow both domestically and overseas we are looking to expand our manufacturing capabilities to establish a direct local presence in all of the regions where we plan to compete. This

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strategy will enable us to better support the increased worldwide demand for our photovoltaic power conditioning solutions.

        Reducing product cost is essential to our ability to further penetrate the market with our power conditioning solutions and service offerings. We believe that most of the raw materials used in our products are readily available from a variety of vendors. Additionally, we design and develop our products to use commodity parts in order to simplify the manufacturing process. We have made and expect to continue to make technological improvements that reduce the costs to manufacture our products.

        Our manufacturing facilities are subject to numerous environmental laws and regulations, particularly with respect to industrial waste and emissions. Compliance with these laws and regulations has not had a material impact on our capital expenditures or competitive position.

Intellectual Property

        Our success and competitiveness depend on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright law and contract restrictions to protect the proprietary aspects of our technologies. We seek to limit disclosure of our intellectual property by requiring employees, consultants and any third parties with access to our proprietary information to execute confidentiality agreements and by restricting access to that information.

        Innovation is at the core of our business. Satcon's success in transitioning its technology development programs to commercially successful solutions has been consistently recognized by governments and industry. A select list of awards and recognitions is included below:

SEGIS Project   2008
 
Focused on developing the next generation of clean energy technologies required to increase the usage of photovoltaic (PV) systems into the energy network. The goal of the project is to create efficient and sustainable growth through advances in technology and expanding the usage of solar generated energy, while at the same time improving the power quality and reliability of the overall utility grid.

Tibbetts Award

 

1997
 
Awarded for developing the 20C1000 Series Cable/Telecom, 2.0 kWh flywheel energy systems, which is specifically designed as a "plug-for-plug" replacement for lead-acid batteries in standby power supply applications

National Committee for the Partnership for Next Generation Vehicles

 

1996
 
A cooperative research and development program between the federal government and the United States Council for Automotive Research (USCAR) focused on development of a vehicle to achieve up to three times the fuel efficiency of contemporary vehicles, while maintaining or improving current levels of performance, size, utility, and total cost of ownership and while meeting or exceeding federal safety and emissions requirements.    

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Co-chaired the Power Electronics Subcommittee

 

1996
 

Discover Magazine Award for Technological Innovation

 

1995
 
For work on the Advanced Hybrid Electric Patriot Race Car Drivetrain.    

        As of December 31, 2008, we held approximately 61 U.S. patents and had 9 patent applications pending with the U.S. Patent and Trademark Office. We have also obtained corresponding patents in the rest of North America, Europe and Asia. In addition, we have a non-exclusive, royalty-free license for non-automotive applications for 38 other patents that were issued to our employees and subsequently assigned to DaimlerChrysler. The expiration dates of our patents range from 2009 to 2021, with the majority expiring after 2015.

        Many of the U.S. patents described above are the result of retaining ownership of inventions made under U.S. government-funded research and development programs. As a qualifying small business, we have retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants, including small business innovation research contracts. With respect to any invention made with government assistance, the government has a nonexclusive, nontransferable, irrevocable, paid-up license to use the technology or have the technology employed for or on behalf of the U.S. government throughout the world. Under certain conditions, the U.S. government also has "march-in rights." These rights enable the U.S. government to require us to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to responsible applicants, upon terms that are reasonable under the circumstances.

Foreign Operations

        We have foreign operations through our Renewable Energy Solutions facility in Burlington, Ontario, Canada.

Government Regulation

        We presently are subject to various federal, state and local laws and regulations relating to, among other things, export control energy generation, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of pollutants into the atmosphere. To date, we believe that we have obtained all the necessary government permits and have been in substantial compliance with all of these applicable laws and regulations.

Government Contracts

        Through our Applied Technology division we act as a prime contractor or major subcontractor for many different U.S. government programs, including those that involve the development of electro-mechanical transportation, navigation and energy-related products. Over its lifetime, a program may be implemented by the award of many individual contracts and subcontracts, or contracts with option years, or partially funded contracts.

        U.S. government contracts include provisions permitting termination, in whole or in part, without prior notice, at the U.S. government's discretion. The U.S. government generally pays compensation for work actually done and commitments made at the time of termination, and some allowance for profit on the work performed. The U.S. government may also terminate for default in performance and pay only the value delivered to the U.S. government. It can also hold the contractor responsible for re-procurement costs.

        Our government contract business is also subject to specific procurement statutes and regulations and a variety of socio-economic and other factors. Failure to comply with these regulations and requirements could lead to loss of contract or suspension or debarment from U.S. government

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contracting or subcontracting for a period of time. Examples of these statutes and regulations are those related to procurement integrity, export control, employment practices, the accuracy of records and the recording of costs.

        Sales to the U.S. government may be affected by changes in research interests in the areas in which we engage, changing government department budgets, and changing procurement policies.

Employees

        At December 31, 2008, we had a total of 213 full-time employees, 10 part-time employees and 55 contract employees. Of the total, 66 persons were employed in engineering, 153 in manufacturing, 36 in administration and 23 in sales and marketing. Our future success depends in large part on the continued service of our key technical and senior management personnel, and on our ability to attract, retain and motivate qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on us. None of our employees are represented by a union. We believe that our relations with our employees are good.

Reports

        Our web site is www.Satcon.com. We make available on this site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with the SEC. These reports may be accessed through our website: http://investor.Satcon.com/index.cfm

Item 1A.    RISK FACTORS

        The risks described below may materially impact your investment in our company or may in the future, and, in some cases already do, materially affect us and our business, financial condition and results of operations. You should carefully consider these factors with respect to your investment in our securities. This section includes or refers to certain forward-looking statements; you should read the explanation of the qualifications and limitations on such forward-looking statements beginning on pages 4 of this report.

Risks Related to Our Company

         We have a history of operating losses, may not be able to achieve profitability and may require additional capital in order to sustain our businesses.

        For each of the past ten fiscal years, we have experienced losses from operating our businesses. As of December 31, 2008, we had an accumulated deficit of approximately $190.0 million. During the year ended December 31, 2008 we had a loss from continuing operations of approximately $13.2 million. If, however, we are unable to operate on a cash flow breakeven basis in the future, we may need to raise additional capital in order to sustain our operations. There can be no assurance that we will be able to achieve such results or to raise such funds if they are required.

         We could issue additional common stock, which might dilute the book value of our common stock.

        We have authorized 200,000,000 shares of our common stock, of which 51,479,822 shares were issued and outstanding as of December 31, 2008. Our board of directors has the authority, without action or vote of our stockholders in most cases, to issue all or a part of any authorized but unissued shares. Such stock issuances may be made at a price that reflects a discount from the then-current trading price of our common stock. In addition, in order to raise the capital that we may need at today's stock prices, we will need to issue securities that are convertible into or exercisable for a

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significant amount of our common stock. These issuances would dilute your percentage ownership interest, which will have the effect of reducing your influence on matters on which our stockholders vote, and might dilute the book value of our common stock. You may incur additional dilution of net tangible book value if holders of stock options, whether currently outstanding or subsequently granted, exercise their options or if warrant holders exercise their warrants to purchase shares of our common stock.

         The sale or issuance of a large number of shares of our common stock could depress our stock price.

        As of March 1, 2009, we have reserved 35,498,928 shares of common stock for issuance upon exercise of stock options and warrants and 662,618 shares for future issuances under our stock plans. We have also reserved 935,484 shares of common stock for issuance upon conversion of the outstanding Series B Preferred Stock, which can be converted at any time. In addition, we have reserved 24,038,461 shares of common stock for issuance upon conversion of the outstanding Series C Preferred Stock, which can be converted at any time. As of March 1, 2009, holders of warrants and options to purchase an aggregate of 28,355,157 shares of our common stock may exercise those securities and transfer the underlying common stock at any time subject, in some cases, to Rule 144.

        We have not consistently complied with Nasdaq's Marketplace Rules for continued listing, which exposes us to the risk of delisting from the Nasdaq Stock Market.

        As a result of our failure to comply with the continued listing requirements of The Nasdaq Global Market, on October 25, 2006 we transferred our securities to The Nasdaq Capital Market. However, if we fail to maintain compliance with the rules for continued listing on The Nasdaq Capital Market, including, without limitation, the minimum $1.00 bid price requirement, and our common stock is delisted from The Nasdaq Capital Market, there could be a number of negative implications, including reduced liquidity in our common stock as a result of the loss of market efficiencies associated with The Nasdaq Capital Market, the loss of federal preemption of state securities law, the potential loss of confidence by suppliers, customers and employees, as well as the loss of analyst coverage and institutional investor interest, fewer business development opportunities and greater difficulty in obtaining financing.

         We expect to generate a significant portion of our future revenues from sales of our power control products and cannot assure market acceptance or commercial viability of our power control products.

        We intend to continue to expand development of our power control products. We cannot assure you that potential customers will select Satcon's products to incorporate into their systems or that our customers' products will realize market acceptance, that they will meet the technical demands of their end users or that they will offer cost-effective advantages over existing products. Our marketing efforts have included development contracts with several customers and the targeting of specific market segments for power and energy management systems. We cannot know if our commercial marketing efforts will be successful in the future. Additionally, we may not be able to develop competitive products, our products may not receive market acceptance, and we may not be able to compete profitably in this market, even if market acceptance is achieved. If our products do not gain market acceptance or achieve commercial viability, we will not attain our anticipated levels of profitability and growth.

        If we are unable to maintain our technological expertise in design and manufacturing processes, we will not be able to successfully compete.

        We believe that our future success will depend upon our ability to develop and provide products that meet the changing needs of our customers. This requires that we successfully anticipate and

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respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. As a result, we continually evaluate the advantages and feasibility of new product design and manufacturing processes. We cannot, however, assure you that our process improvement efforts will be successful. The introduction of new products embodying new technologies and the emergence of shifting customer demands or changing industry standards could render our existing products obsolete and unmarketable, which would have a significant impact on our ability to generate revenue. Our future success will depend upon our ability to continue to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers. We may experience delays in releasing new products and product enhancements in the future. Material delays in introducing new products or product enhancements may cause customers to forego purchases of our products and purchase those of our competitors.

         Our contracts with the U.S. government are subject to audit by the Defense Contract Audit Agency and other agencies of the government, which may challenge our treatment of direct and indirect costs and reimbursements, resulting in a material adjustment and adverse impact on our financial condition.

        The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any such contract. Additionally, substantial portions of the payments to us under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies. Adjustments that result from inquiries or audits of our contracts could have a material adverse impact on our financial condition or results of operations. Currently 2006, 2007 and 2008 remain open for review with the Defense Contract Audit Agency.

        Since our inception, we have not experienced any material adjustments as a result of any inquiries or audits, but there can be no assurance that our contracts will not be subject to material adjustments in the future.

         The U.S. government has certain rights relating to our intellectual property.

        Many of our patents are the result of inventions made under U.S. government-funded research and development programs. With respect to any invention made with government assistance, the government has a nonexclusive, nontransferable, irrevocable, paid-up license to use the technology or have the technology employed for or on behalf of the U.S. government throughout the world. Under certain conditions, the U.S. government also has "march-in rights," which enable the U.S. government to require us to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to responsible applicants, upon terms that are reasonable under the circumstances.

         Our business could be adversely affected if we are unable to protect our patents and proprietary technology.

        As of March 1, 2009, we held approximately 61 U.S. patents and had 9 patent applications pending with the U.S. Patent and Trademark Office. We have also obtained corresponding patents in the rest of North America, Europe and Asia for many of these patents. The expiration dates of our patents range from 2009 to 2021, with the majority expiring after 2015. As a qualifying small business from our inception to date, we have retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants.

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        Our patent and trade secret rights are of significant importance to us and to our future prospects. Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary technology and systems designs relating to our products. Although we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be successful in doing so. Further, our competitors may independently develop or patent technologies that are substantially equivalent or superior to ours. No assurance can be given as to the issuance of additional patents or, if so issued, as to their scope. Patents granted may not provide meaningful protection from competitors. Even if a competitor's products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action and there can be no assurance that we would be successful in enforcing our intellectual property rights. Because we intend to enforce our patents, trademarks and copyrights and protect our trade secrets, we may be involved from time to time in litigation to determine the enforceability, scope and validity of these rights. This litigation could result in substantial costs to us and divert resources from operational goals. In addition, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country where we operate or sell our products.

         We may not be able to maintain confidentiality of our proprietary knowledge.

        In addition to our patent rights, we also rely on treatment of our technology as trade secrets through confidentiality agreements, which all of our employees are required to sign, assigning to us all patent rights and other intellectual property developed by our employees during their employment with us. Our employees have also agreed not to disclose any trade secrets or confidential information without our prior written consent. We also rely on non-disclosure agreement to protect our trade secrets and proprietary knowledge. These agreements may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of these agreements or may be independently developed by competitors. Failure to maintain the proprietary nature of our technology and information could harm our results of operations and financial condition by reducing or eliminating our technological advantages in the marketplace.

         Others may assert that our technology infringes their intellectual property rights.

        We believe that we do not infringe the proprietary rights of others and, to date, no third parties have asserted an infringement claim against us, but we may be subject to infringement claims in the future. The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our operating results may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.

         Our success is dependent upon attracting and retaining highly qualified personnel and the loss of key personnel could significantly hurt our business.

        To achieve success, we must attract and retain highly qualified technical, operational and executive employees. The loss of the services of key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering, operations and business development personnel, could result in the loss of business or could otherwise negatively impact our ability to operate and grow our business successfully.

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         We expect significant competition for our products and services.

        In the past, we have faced limited competition in providing research services, prototype development and custom and limited quantity manufacturing. We expect competition to intensify greatly as commercial applications increase for our products under development. Many of our competitors and potential competitors are well established and have substantially greater financial, research and development, technical, manufacturing and marketing resources than we do. Some of our competitors and potential competitors are much larger than we are. If these larger competitors decide to focus on the development of distributed power and power quality products, they have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of these products more quickly and effectively than we can. There can also be no assurance that current and future competitors will not develop new or enhanced technologies perceived to be superior to those sold or developed by us. There can be no assurance that we will be successful in this competitive environment.

         We are dependent on third-party suppliers for the supply of key components for our products.

        We use third-party suppliers for components in many of our systems. From time to time, shipments can be delayed because of industry-wide or other shortages of necessary materials and components from third-party suppliers. A supplier's failure to supply components in a timely manner, or to supply components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to deliver our products in accordance with contractual obligations.

         On occasion, we agree to fixed price engineering contracts, which exposes us to losses.

        Most of our engineering design contracts are structured on a cost-plus basis. However, on occasion we have entered into fixed price contracts, which may expose us to loss. In addition, in our manufacturing divisions we accept fixed price contracts via customer purchase orders. A fixed priced contract, by its very nature, requires cost estimates during the bidding process and throughout the contract, as the program proceeds to completion. Depending upon the complexity of the program, the estimated completion costs could change frequently and significantly during the course of the contract. We regularly involve the appropriate people on the program and finance staffs to arrive at a reasonable estimate of the cost to complete. However, due to unanticipated technical challenges and other factors, there is the potential for substantial cost overruns in order to complete a contract in accordance with the contract specifications. At December 31, 2008 and 2007, we have accrued approximately $1.3 million and $1.1 million, respectively, related to an anticipated loss on a fixed price contract.

        If we experience a period of significant growth or expansion, it could place a substantial strain on our resources.

        If our power control products are successful in achieving rapid market penetration, we may be required to deliver large volumes of technically complex products or components to our customers on a timely basis at reasonable costs to us. We have limited experience in ramping up our manufacturing capabilities to meet large-scale production requirements and delivering large volumes of our power control products. If we were to commit to deliver large volumes of our power control products, we cannot assure you that we will be able to satisfy large-scale commercial production on a timely and cost-effective basis or that such growth will not strain our operational, financial and technical resources.

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         Our business could be subject to product liability claims.

        Our business exposes us to potential product liability claims, which are inherent in the manufacturing, marketing and sale of our products, and we may face substantial liability for damages resulting from the faulty design or manufacture of products or improper use of products by end users. We currently maintain a moderate level of product liability insurance, and there can be no assurance that this insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain such coverage on acceptable terms, if at all, or that a product liability claim would not harm our business or financial condition. In addition, negative publicity in connection with the faulty design or manufacture of our products would adversely affect our ability to market and sell our products.

         We are subject to a variety of environmental laws that expose us to potential financial liability.

        Our operations are regulated under a number of federal, state and foreign environmental and safety laws and regulations that govern, among other things, the discharge or release of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Because we use hazardous materials in certain of our manufacturing processes, we are required to comply with these environmental laws. In addition, because we generate hazardous wastes, we, along with any other person who arranges for the disposal of our wastes, may be subject to potential financial exposure for costs associated with an investigation and remediation of sites at which we have arranged for the disposal of hazardous wastes if those sites become contaminated and even if we fully comply with applicable environmental laws. If we were found to be a responsible party, we could be held jointly and severably liable for the costs of remedial actions. To date, we have not been cited for any improper discharge or release of hazardous materials.

         Businesses and consumers might not adopt alternative energy solutions as a means for obtaining their electricity and power needs.

        On-site distributed power generation solutions, such as fuel cell, photovoltaic and wind turbine systems, which utilize our products, provide an alternative means for obtaining electricity and are relatively new methods of obtaining electrical power that businesses may not adopt at levels sufficient to grow this part of our business. Traditional electricity distribution is based on the regulated industry model whereby businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of distributed power to succeed, businesses and consumers must adopt new purchasing practices and must be willing to rely upon less traditional means of purchasing electricity. We cannot assure you that businesses and consumers will choose to utilize on-site distributed power at levels sufficient to sustain our business in this area. The development of a mass market for our products may be impacted by many factors which are out of our control, including:

    market acceptance of fuel cell, photovoltaic and wind turbine systems that incorporate our products;

    the cost competitiveness of these systems;

    regulatory requirements; and

    the emergence of newer, more competitive technologies and products.

        If a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop these products.

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         Our quarterly operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our share price may decrease significantly.

        Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our control. Because our operating expenses are based on anticipated revenue levels, our sales cycle for development work is relatively long and a high percentage of our expenses are fixed for the short term, a small variation in the timing of recognition of revenue can cause significant variations in operating results from quarter to quarter. If our earnings do not meet the expectations of securities analysts or investors, the price of our stock could decline.

        Provisions in our charter documents and Delaware law may delay, deter or prevent the acquisition of Satcon, which could decrease the value of your shares.

        Some provisions of our certificate of incorporation and bylaws may delay, deter or prevent a change in control of Satcon or a change in our management that you, as a stockholder, may consider favorable. These provisions include:

    authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and deter a takeover attempt;

    a board of directors with staggered, three-year terms, which may lengthen the time required to gain control of our board of directors;

    prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and

    limitations on who may call special meetings of stockholders.

        In addition, Section 203 of the Delaware General Corporation Law and provisions in some of our stock incentive plans may delay, deter or prevent a change in control of SatCon. Those provisions serve to limit the circumstances in which a premium may be paid for our common stock in proposed transactions, or where a proxy contest for control of our board may be initiated. If a change of control or change in management is delayed, deterred or prevented, the market price of our common stock could suffer.

        We are subject to stringent export laws and risks inherent in international operations.

        We market and sell our products and services both inside and outside the United States. We are currently selling our products and services throughout North America and in certain countries in South America, Asia and Europe. Certain of our products are subject to the International Traffic in Arms Regulations (ITAR) 22 U.S.C 2778, which restricts the export of information and material that may be used for military or intelligence applications by a foreign person. Additionally, certain products of ours are subject to export regulations administered by the Department of Commerce, Bureau of Industry Security, which require that we obtain an export license before we can export certain products or technology. Failure to comply with these laws could result in enforcement responses by the government, including substantial monetary penalties, denial of export privileges, debarment from government contracts and possible criminal sanctions.

        Revenue from sales to our international customers for the years ended December 31, 2008 and 2007 were approximately $7.9 million and $6.6 million, respectively. Our success depends, in part, on our ability to expand our market for our products and services to foreign customers and our ability to manufacture products that meet foreign regulatory and commercial requirements. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. We face numerous challenges in penetrating international markets, including unforeseen changes in regulatory requirements, export restrictions, fluctuations in

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currency exchange rates, longer accounts receivable cycles, difficulties in managing international operations, and the challenges of complying with a wide variety of foreign laws.

        We are exposed to credit risks with respect to some of our customers.

        To the extent our customers do not advance us sufficient funds to finance our costs during the execution phase of our contracts, we are exposed to the risk that they will be unable to accept delivery or that they will be unable to make payment at the time of delivery. Occasionally, we accept the risk of dealing with thinly financed entities. We attempt to mitigate this risk by seeking to negotiate more timely progress payments and utilizing other risk management procedures.

        Our loan agreement with Silicon Valley Bank subjects us to various restrictions, which may limit our ability to pursue business opportunities.

        Our loan agreement with Silicon Valley Bank subjects us to various restrictions on our ability to engage in certain activities without the prior written consent of the bank, including, among other things, our ability to:

    dispose of or encumber assets, other than in the ordinary course of business,

    incur additional indebtedness,

    merge or consolidate with other entities, or acquire other businesses, and

    make investments

        The agreement also subjects us to various financial and other covenants with which we must comply on an ongoing or periodic basis. The financial covenant requires us to maintain a minimum level of tangible net worth, as defined, which varies from month to month. If we violate this or any other covenant, any outstanding debt under this agreement could become immediately due and payable, the bank could proceed against any collateral securing indebtedness and our ability to borrow funds in the future may be restricted or eliminated. These restrictions may also limit our ability to pursue business opportunities or strategies that we would otherwise consider to be in the best interests of the Company.

         The holders of our Series B Preferred Stock are entitled to receive liquidation payments in preference to the holders of our common stock.

        As of March 1, 2009, 290 shares of our Series B Preferred Stock were outstanding. Pursuant to the terms of the certificate of designation creating the Series B Preferred Stock, upon a liquidation of our company, the holders of shares of the Series B Preferred Stock are entitled to receive a liquidation payment prior to the payment of any amount with respect to the shares of our common stock. The amount of this preferential liquidation payment is $5,000 per share of Series B Preferred Stock, plus the amount of any accrued but unpaid dividends on those shares. Dividends accrue on the shares of Series B Preferred Stock at a rate of 8% per annum.

        The holders of our certain of our outstanding warrants have the right to put those warrants to us for cash if we issue common stock or common stock equivalents at a price per share less than $1.65.

        As of March 1, 2009, we had outstanding Warrant As to purchase up to an aggregate of 2,090,911 shares of common stock and Warrant Cs to purchase up to an aggregate of 1,045,456 shares of common stock. The holder of those warrants may put those warrants to us for a cash amount equal to their Black-Scholes value if we issue common stock or common stock equivalents at a price per share less than $1.65, subject to certain exceptions. These rights are exercisable for the 45-day period following any such issuance. The existence of these rights could limit our ability to raise necessary

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capital in the future. Furthermore, the exercise of these rights could materially impact our capital resources and materially affect our ability to fund operations.

Risks Related to Our Private Placement of Series C Preferred Stock and Related Warrants

         The holders of our Series C Preferred Stock are entitled to receive liquidation payments in preference to the holders of our common stock.

        As of March 1, 2009, 25,000 shares of our Series C Preferred Stock were outstanding. Upon a liquidation of our company, the holders of shares of Series C Preferred Stock are entitled to receive a liquidation payment prior to the payment of any amount with respect to the shares of our common stock. The amount of this preferential liquidation payment is the greater of (i) $1,000 per share of Series C Preferred Stock, plus the amount of any accrued but unpaid dividends on those shares, or (ii) the amount per share that a holder would have received if, immediately prior to the liquidation, that holder's share had been converted to our common stock. Dividends accrue on the shares of Series C Preferred Stock at a rate of 5% per annum. Because of the substantial liquidation preference to which the holders of the Series C Preferred Stock are entitled, the amount available to be distributed to the holders of our common stock upon a liquidation of our company could be substantially limited or reduced to zero.

         We are responsible for having the resale of shares of common stock underlying the Series C Preferred Stock and related warrants registered with the SEC within defined time periods and will incur liquidated damages if the shares are not registered with the SEC within those defined time periods.

        Pursuant to our agreement with the investors in the Series C Preferred Stock financing transaction, we were obligated to (i) file a registration statement covering the resale of the common stock underlying the Series C Preferred Stock and related warrants with the SEC by the earlier of (x) five business days after we filed our 2007 Annual Report on Form 10-K and (y) April 7, 2008 (which we satisfied), (ii) use our best efforts to cause the registration statement to be declared effective within 60 days following the required filing date (which we satisfied), and are required to (iii) use our best efforts to keep the registration statement effective until the earlier of (x) the date all of the securities covered by the registration statement have been publicly sold and (y) the date all of the securities covered by the registration statement may be sold without restriction under SEC Rule 144. If we fail to comply with these or certain other provisions, then we will be required to pay liquidated damages of one twentieth of a percent (.05%) of the aggregate purchase price paid by the investors for the securities that can be registered on the registration statement for each day the failure continues. The total liquidated damages under this provision are capped at 9.9% of the aggregate purchase price paid by the investors in the private placement. Any such payments could materially affect our ability to fund operations.

         The certificate of designation governing the Series C Preferred Stock contains various covenants and restrictions which may limit our ability to operate our business.

        Under the certificate of designation governing the Series C Preferred Stock we are not permitted, without the affirmative vote or written consent of the holders of 50% of the Series C Preferred Stock, directly or indirectly, to take any of the following actions or agree to take any of the following actions:

    authorize, create or issue any shares of preferred stock or other equity securities ranking senior to or on a parity with the Series C Preferred Stock;

    increase or decrease the total number of authorized shares of Series C Preferred Stock;

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    amend or modify our certificate of incorporation (including the certificate of designation governing the Series C Preferred Stock) or bylaws that would adversely affect the rights, preferences, powers and privileges of the Series C Preferred Stock;

    incur any form of indebtedness for borrowed money in excess of $5,000,000 in the aggregate (other than indebtedness existing at November 8, 2007);

    repurchase or redeem any equity securities ranking junior to the Series C Preferred Stock, subject to certain exceptions;

    effect any distribution or declare, pay or set aside any dividend with respect to any equity securities ranking junior to the Series C Preferred Stock;

    effect a liquidation, consummate a reorganization event or dispose, transfer or license any material assets, technology or intellectual property, other than non-exclusive licenses in connection with sales of our products in the ordinary course of business;

    change the size of our board of directors;

    encumber or grant a security interest in all or substantially all or a material part of our assets except to secure indebtedness permitted above that is approved by our board of directors;

    acquire a material amount of assets of another entity, through a merger, purchase of assets or purchase of capital stock or otherwise; or

    enter into any agreement to do or cause to be done any of the foregoing.

These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities, any of which could have a material adverse impact on our business.

        The holders of the Series C Preferred Stock will have substantial voting power on matters submitted to a vote of stockholders.

        Generally, the holders of Series C Preferred Stock are entitled to vote on all matters on which the holders of our common stock are entitled to vote, voting together with the holders of our common stock as a single class. Each share of Series C Preferred Stock is entitled to 694 votes. Based on 51,549,472 shares of common stock outstanding as of March 1, 2009, the outstanding shares of Series C Preferred Stock represent, in the aggregate, 25.2% of the voting power of our stock. The voting percentage held by the investors would increase to the extent the shares of Series C Preferred Stock are converted or the warrants issued in the private placement are exercised. Because the investors will own a significant percentage of our voting power, they may have considerable influence in determining the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including the election of directors and approval of merger, consolidations and the sale of all or substantially all of our assets.

        In addition, the ownership by the investors of a substantial percentage of our total voting power and the terms of the Series C convertible preferred stock could make it more difficult and expensive for a third party to pursue a change of control of our company, even if a change of control would generally be beneficial to our stockholders.

         The Series C Preferred Stock is redeemable at the option of the holders under certain circumstances.

        On or after November 8, 2011, the holders of two-thirds of the outstanding shares of Series C Preferred Stock may require us to redeem all or any portion of the outstanding shares of Series C Preferred Stock. The redemption price is equal to 120% of the stated liquidation preference amount, to

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the extent that the redemption is made in cash, or 140% of the stated liquidation preference amount to the extent that, at our election, the redemption is made in shares of our common stock. If the redemption is made in shares of common stock, the shares will be based on the fair market value of the common stock, based on a 10 day volume weighted average, as of the redemption date. Depending on our cash resources at the time that this redemption right is exercised, we may or may not be able to fund the redemption from our available cash resources. If we were unable to fund the redemption from available cash we would need to find an alternative source of financing to do so. The can be no assurances that we would be able to raise such funds if they are required. If we were not able to finance the redemption in cash, we would have to make the redemption payment in shares of our common stock which would be dilutive to our common stockholders.

         The investors in our private placement of Series C Preferred Stock will have the right to designate up to four individuals to be elected to our board of directors.

        In the purchase agreement, we agreed that for as long as each investor beneficially owns at least 25% of the Series C Preferred Stock and warrants issued to them in the private placement, each investor would be entitled to designate one individual to be nominated to our board of directors. We also agreed that as long as either investor or both investors beneficially owns at least 25% of the Series C Preferred Stock and warrants issued to them in the private placement, we would include one investor designee in the corporate governance and nominating committee and one investor designee on the compensation committee of our board of directors. Upon the first closing, our board of directors elected Philip J. Deutch, as the designee of NGP Energy Technology Partners, L.P., and David J. Prend, as the designee of RockPort Capital Partners II, L.P., to serve on our board.

        Upon the second closing, as required under the purchase agreement, our board of directors was reduced from nine directors to seven directors, and the investors jointly had the right to designate one additional director who is "independent" (as that term is defined in the regulations of the Nasdaq Stock Market) to serve as a director. Accordingly, effective as of the second closing, three existing directors resigned and the board duly appointed Robert G. Schoenberger, Chairman of the Board and Chief Executive Officer of Unitil Corporation, as the investors' additional independent designee. However, in the event the size of our board of directors is increased to nine members in order to comply with Nasdaq rules, the investors will be entitled to designate an additional independent director.

        The number of investor designees will be appropriately adjusted to the extent required by the applicable rules of Nasdaq.

        Because the holders of Series C Preferred Stock will have the right to designate these members to of our board of directors, as well as designees to serve on our board committees, they will be able to exert considerable influence over the board level decision-making at our company.

         We have agreed to give the holders of Series C Preferred Stock the right to participate in subsequent stock issuances.

        We agreed that if we issue and sell any new equity securities prior to December 20, 2009, subject to some exceptions, we will give the investors the right to purchase all or some of those new securities so as we permit the investors to maintain their ownership percentage in our stock. The existence of this right may make it more difficult for us to obtain financing from third parties that do not wish to have the Series C Preferred Stock investors participating in their financing.

         The Series C Preferred Stock private placement had a substantial dilutive effect on our common stock, and subsequent anti-dilution adjustments could increase the dilutive effect.

        Consummation of the private placement had a substantial dilutive effect on our common stockholders. The aggregate number of shares issued pursuant to the private placement substantially

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increased the number of shares of our capital stock outstanding on an as converted basis. As a result, the percentage ownership of our common stockholders significantly declined as a result of the private placement. As a result of the private placement, the investors own approximately 46.77% of the outstanding shares of our capital stock, on an as converted basis assuming conversion of all the shares of Series C Preferred Stock and exercise of all warrants (excluding the additional warrants that may be issued from time to time upon the exercise of certain existing warrants).

        Furthermore, the anti-dilution protection provided to both the Series C Preferred stock and the warrants could substantially increase the number of shares of our common stock currently outstanding. Upon a dilutive issuance, the conversion price or exercise price will be adjusted down and the number of shares issuable upon conversion or exercise of the Series C Preferred Stock and warrants will increase. Accordingly, if any shares of our capital stock are issued below the current conversion price, there will be additional dilution.

        Finally, sales in the public market of the common stock acquired upon conversion of the Series C Preferred Stock or exercise of the warrants, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock and impair our ability to raise funds in additional stock financings.

Item 1B.    UNRESOLVED STAFF COMMENTS

        None.

Item 2.    PROPERTIES

        We lease office, manufacturing and research and development space in the following locations:

Location
  Primary Use   Approximate
Number of
Square Feet
  Expiration
of Lease
 

Boston, MA

  Corporate headquarters and research and development     28,000     2011  

Freemont, CA

  Sales and marketing     8,000     2011  

Baltimore, MD

  Research and development     16,000     2009  

Burlington, Ontario, Canada

  Manufacturing     60,000     2009  

        We believe our facilities are adequate for our current needs and that adequate facilities for expansion, if required, are available.

Item 3.    LEGAL PROCEEDINGS

        From time to time, we are a party to routine litigation and proceedings in the ordinary course of business.

        On May 9, 2008, Advanced Energy Industries, Inc. ("AE") filed a civil action in Colorado state court against us and our Chief Executive Officer, Charles S. Rhoades, seeking to enjoin Mr. Rhoades from employment by the Company based upon its claim that Mr. Rhoades was subject to a non-competition agreement with AE. On March 3, 2009, the parties agreed to settle this case. The settlement of the case will not have a material financial impact on the Company and Mr. Rhoades will be free to continue to serve as the Company's President and Chief Executive Officer.

        We are not aware of any other current or pending litigation to which we are or may be a party that we believe could materially adversely affect our results of operations or financial condition or net cash flows.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our common stock is publicly traded on the Nasdaq Capital Market under the symbol "SATC."

        The following table sets forth the range of high and low sales prices of our common stock as reported on the Nasdaq Capital Market for our years ended December 31, 2007 and 2008:

 
  High   Low  

Year ended December 31, 2007

             

First Quarter

  $ 1.58   $ 1.14  

Second Quarter

  $ 1.31   $ 1.08  

Third Quarter

  $ 1.65   $ 1.02  

Fourth Quarter

  $ 1.81   $ 1.09  

Year ended December 31, 2008

             

First Quarter

  $ 2.14   $ 1.39  

Second Quarter

  $ 3.32   $ 1.77  

Third Quarter

  $ 2.84   $ 1.80  

Fourth Quarter

  $ 1.93   $ 1.44  

        On March 2, 2009, the last reported sale price of our common stock as reported on the Nasdaq Capital Market was $1.14 per share. As of March 2, 2009, there were 51,549,472 shares of our common stock outstanding held by approximately 232 holders of record. The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Dividend Policy

        We have never paid cash dividends on our common stock. We currently intend to retain earnings, if any, to fund the development and growth of our business and do not anticipate paying cash dividends for the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, under the terms of our Series B Preferred Stock, we may not pay dividends on our common stock without the consent of the holders of at least 75% of the outstanding shares of Series B Preferred Stock. Furthermore, under the terms of our Series C Preferred Stock, we may not pay dividends on our common stock without the consent of the holders of at least 67% of the outstanding Series C Preferred Stock. In addition, we may not pay dividends on our common stock, unless we have paid all dividends owing on the Series B Preferred Stock and Series C Preferred Stock. Finally, under our credit facility with Silicon Valley Bank, we may not pay dividends on our common stock without the consent of the Bank.

Recent Sales of Unregistered Securities

        None

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Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA

        You should read the data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data set forth below for the years ended December 31, 2008 and 2007, and the consolidated balance sheet data as of December 31, 2008 and 2007 are derived from our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the year ended December 31, 2006, the three month transition period ended December 31, 2005 and our fiscal years ended September 30, 2005 and 2004 and the consolidated balance sheet data as of December 31, 2006 and 2005 and September 30, 2005 and 2004 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. All data set forth below has been adjusted to reflect the sale of our Electronics and Power Systems US business units, which were finalized in the third quarter of 2008. The results of operations for both the Electronics and Power Systems US business units are captured in the line item "Loss from discontinued operations" below. See Note D (Discontinued Operations) to the Consolidated Financial Statements.

 
  Year Ended
December 31,
  Three Months
Ended
December 31,
  Fiscal Year Ended
September 30,
 
 
  2008   2007   2006   2005   2005   2004  
 
  (in thousands)
 

Statement of Operations Data

                                     

Product revenue

    54,293     33,033     14,164     1,817     11,556     6,049  

Funded research and development revenue

    8,229     8,994     4,990     1,079     6,064     7,187  
                           

Total revenue

  $ 62,522   $ 42,027   $ 19,154   $ 2,896   $ 17,620   $ 13,236  
                           

Cost of product revenue

    45,818     33,456     13,545     1,888     10,462     5,503  

Cost of funded research and development revenue

    6,500     6,727     4,041     1,111     5,412     5,982  
                           

Total cost of revenue

  $ 52,318   $ 40,183   $ 17,586   $ 2,999   $ 15,874   $ 11,485  
                           

Gross margin

  $ 10,204   $ 1,844   $ 1,568   $ (104 ) $ 1,747   $ 1,751  
                           

Operating expenses:

                                     
 

Research and development

    5,061     2,256     611     10     56     1  
 

Selling, general and administrative

    16,633     9,601     9,321     1,737     7,289     6,532  
 

Restructuring charges

    1,398         1,419         (256 )    
 

Amortization of intangibles

    314     314     306     81     322     322  
 

Gain on sale of assets

            (406 )   (0 )   (318 )    
 

Write-off of impaired long-lived assets

            (1,612 )       (0 )    
                           

Total operating expenses from continuing operations

  $ 23,407   $ 12,171   $ 9,639   $ 1,828   $ 7,093   $ 6,854  
                           

Operating loss

  $ (13,203 ) $ (10,327 ) $ (8,071 ) $ (1,931 ) $ (5,346 ) $ (5,104 )
                           

Net unrealized gain (loss) on warrants to purchase common stock

                    (7 )   (90 )

Unrealized loss on Series B warrants

                        35  

Change in Fair Value of Notes and Warrants

    265     (2,252 )   (4,192 )            

Other income (loss)

    707     (546 )   (26 )   (4 )   (120 )   (1 )

Interest income

    216     280     384     47     42     12  

Interest expense

    (329 )   (3,788 )   (1,432 )   (134 )   (621 )   (6,799 )
                           

Net loss from continuing operations

  $ (12,344 ) $ (16,633 ) $ (13,337 ) $ (2,022 ) $ (6,052 ) $ (11,946 )
                           

Income (loss) from discontinued operations, net

    (1,135 )   (1,133 )   (6,441 )   714     (4,194 )   987  

Gain on sale of discontinued operations, net

    274                      
                           

Net loss

  $ (13,205 ) $ (17,766 ) $ (19,778 ) $ (1,308 ) $ (10,246 ) $ (10,959 )
                           

Accretion on Series C Preferred Stock to redemption value

    (2,849 )                    

Deemed dividend on Series C Preferred Stockholders

    (1,250 )   (11,948 )                

Dividend on Series C Preferred Stock

    (126 )   (100 )                
                           

Net loss attributable to common stockholders

  $ (17,429 ) $ (29,814 ) $ (19,778 ) $ (1,308 ) $ (10,246 ) $ (10,959 )
                           

Net loss attributable to common stockholders per weighted average share, basic and diluted

  $ (0.34 ) $ (0.66 ) $ (0.50 ) $ (0.03 ) $ (0.31 ) $ (0.41 )
                           

Weighted average number of common shares, basic and diluted

    50,685     45,434     39,290     38,356     32,900     26,834  
                           

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  Year Ended
December 31,
  Three Months
Ended
December 31,
  As of
September 30,
 
 
  2008   2007   2006   2005   2005   2004  
 
  (in thousands)
 

Balance Sheet Data

                                     

Cash and cash equivalents, including restricted cash and cash equivalents

  $ 10,042   $ 12,700   $ 8,275   $ 9,279   $ 6,711   $ 2,183  

Total assets

    36,897     46,609     30,577     28,328     27,732     25,586  

Working capital

    12,005     19,616     6,007     10,690     11,393     5,141  

Redeemable convertible Series A preferred stock

                           

Redeemable convertible Series B preferred stock

    1,450     1,700     1,725     2,125     2,125     2,125  

Redeemable convertible Series C preferred stock

    17,249     13,276                  

Convertible subordinated debentures

            12,740              

Investor warrant and Placement Agent Warrant Liability

    2,407     3,244     2,921              

Other long-term liabilities, net of current portion

    2,571     1,679     108     452     460     875  

Stockholders' equity (deficit)

  $ (9,185 ) $ 4,363   $ (2,468 ) $ 14,501   $ 15,602   $ 11,659  

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Information

        This Annual Report on Form 10-K, including, without limitations, this Item 7, contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. You can identify these forward-looking statements by our use of the words "believes," "anticipates," "plans," "expects," "may," "will," "intends," "estimates," and similar expressions, whether in the negative or in the affirmative. Although we believe that these forward-looking statements reasonably reflect our plans, intentions and expectations, our actual results could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements under the heading "Risk Factors" under Item 1A above that we believe could cause our actual results to differ materially from the forward-looking statements that we make. Forward-looking statements contained in this Annual Report speak only as of the date of this report. Subsequent events or circumstances occurring after such date may render these statements incomplete or out of date. We undertake no obligation and expressly disclaim any duty to update such statements.

Overview

        Satcon Technology Corporation ("Satcon" or "Company") is a leading clean energy technology provider of utility grade power solutions for the renewable and distributed energy markets. We deliver power conversion solutions and system design services for large-scale renewable energy plants. Our products are utilized by businesses and utility companies to efficiently convert renewable energy sources into stable and reliable electrical power.

        Our PowerGate® Plus suite of photovoltaic and fuel cell power inverters, which are sold through the Company's Renewable Energy Solutions division, offer rugged and reliable solutions that enhance the total output and power production of the solar installation. We also offer system design services and solutions for management, monitoring, and performance measurement to maximize capital investment and improve overall quality and performance over the entire lifespan of the installation.

        In addition to our core power conditioning solutions, we also develop, design and build power conversion electronics, power management and distribution systems for a variety of defense and commercial applications through our Applied Technology division.

Critical Accounting Policies and Significant Judgments and Estimates

        Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, receivable reserves, inventory reserves, goodwill and intangible assets, contract losses and income taxes. Management bases its estimates on historical experience and on various other factors that are 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. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting estimates were discussed with our Audit Committee.

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        The significant accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

        We recognize revenue from product sales in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and we have determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, except for certain foreign shipments. If the product requires installation to be performed by us, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless we can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate, we provide for a warranty reserve at the time the product revenue is recognized. If a contract involves the provisions of multiple elements and the elements qualify for separation under EITF 00-21 Revenue Arrangements with Multiple Deliverables, total estimated contact revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.

        We perform funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fee depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each type of contract, we receive periodic progress payments or payment upon reaching interim milestones and retain the rights to the intellectual property developed in government contracts. All payments to us for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. The Defense Contract Audit Agency has agreed-upon the final indirect cost rates for the fiscal year ended September 30, 2004. When the current estimates of total contract revenue and contract costs for product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. As of December 31, 2008 and 2007, we have accrued approximately $1.1 million and $1.3 million, respectively, for anticipated contract losses on commercial contracts.

        Cost of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements are included in funded research and development and other revenue expenses.

        Deferred revenue consists of payments received from customers in advance of services performed, product shipped or installation completed.

        Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not yet been recognized as revenue or billed to the customer.

Accounts Receivable

        Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis

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of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Inventory

        We value our inventory at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory within cost of sales based primarily on our historical usage, as well as based on estimated forecast of product demand . A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

Warranty

        We offer warranty coverage for our products for periods typically ranging from 1 to 5 years after shipment. We estimate the anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are reevaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and quantity of product returns. Our determination of the appropriate level of warranty accrual is based on estimates of the percentage of units affected and the repair costs. Estimated warranty costs are recorded at the time of sale of the related product, and are recorded within cost of sales in the consolidated statements of operations.

Long-Lived Assets

        We have adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The statement requires that long-lived assets be reviewed for possible impairment, if certain conditions exist, with impaired assets written down to fair value.

        We determine the fair value of certain of the long-lived assets based on a discounted cash flow income approach. The income approach indicates the fair value of a long-lived assets based on the discounted value of the cash flows that the long-lived asset can be expected to generate in the future over the life of the long-lived asset. This analysis is based upon projections prepared by us. These projections represent management's best estimate of future results. In making these projections, we consider the markets we are addressing, the competitive environment and our advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. In addition, we perform a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

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Convertible Debt Instruments and Warrant Liabilities

        We accounted for our senior secured convertible notes (the "Convertible Notes"), which were paid off on November 7, 2007, and associated warrants in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Convertible Notes included features that qualify as embedded derivatives, such as (i) the holders' conversion option, (ii) our option to settle the Convertible Notes at the scheduled dates in cash or shares of our common stock and (iii) premiums and penalties we would be liable to pay in the event of default. As permitted under SFAS 155, we irrevocably elected, as of January 1, 2007, to measure the Convertible Notes in their entirety at fair value with changes in fair value recognized as either gain or loss. Subsequent to the pay-off of the Convertible Notes, we will continue to account for the associated warrants as described above.

        We recorded interest expense under the Convertible Notes based on the greater of (i) 7% or (ii) the six-month LIBOR, in effect at the time plus 350 basis points, as well as the amortization of the debt discount, which we computed using the effective interest method. The debt discount represents the difference between our gross proceeds of $12.0 million and the fair value of the convertible debt upon issuance, after separately valuing the investor warrants, the placement agent warrants and the Convertible Notes on a relative fair value basis. By amortizing the debt discount to interest expense, rather than recognizing it as a change in fair value of the Convertible debt instrument and warrants, which is a separate line item in our statement of operations, we believe our interest expense line item more appropriately reflects the cost of the debt associated with the Convertible Notes.

        We determined the fair values of the Convertible Notes, investor warrants and placement agent warrants using valuation models we consider to be appropriate. Our stock price has the most significant influence on the fair value of the Convertible Notes and related warrants. An increase in our common stock price would cause the fair values of both the Convertible Notes and warrants to increase, because the conversion and exercise prices, respectively, of such instruments are fixed at $1.65 and $1.815 per share, respectively, and result in a charge to our statement of operations. A decrease in our stock price would likewise cause the fair value of the Convertible Notes and the warrants to decrease and result in a credit to our statement of operations. If the price of our common stock were to decline significantly, however, the decrease in the fair value of the Convertible Notes would be limited by the instrument's debt characteristics. Under such circumstances, our estimated cost of capital would become another significant variable affecting the fair value of the Convertible Notes.

Income Taxes

        The preparation of our consolidated financial statements requires us to estimate our income taxes in each of the jurisdictions in which we operate, including those outside the United States, which may be subject to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. We must then record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.

        Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We have recorded a full valuation allowance against our deferred tax assets of approximately $47.9 million and $51.9 million as of December 31, 2008 and 2007, respectively, due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future

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periods we may need to adjust our valuation allowance which could materially impact our financial position and results of operations.

        We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In addition, SFAS No. 109 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

        The tax years 2003 through 2008 remain open to examination by major taxing jurisdictions to which we are subject, which are primarily in the United States, as carry forward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. We are currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. We did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying financial statements. We would record any such interest and penalties as a component of interest expense. We do not expect any material changes to the unrecognized benefits within 12 months of the reporting date.

Redeemable Convertible Series B Preferred Stock

        We account for our Series B Preferred Stock and associated warrants in accordance with in accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities. We determined the initial value of the Series B Preferred Stock and investor warrants using valuation models it considers to be appropriate. The Series B Preferred Stock is classified within the liability section of our balance sheet. To the extent that the Series B Preferred Stock is subject to a remeasurement event under EITF Topic D-98 or is otherwise modified, the Series B Preferred Stock will be reclassified to temporary equity.

Convertible Series C Preferred Stock

        We account for our Series C Preferred Stock and associated warrants in accordance with in accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities. We determined the initial value of the Series C Preferred Stock and investor warrants using valuation models we consider to be appropriate.

        The re-pricing of the exercise price of the first tranche warrants from $1.44 to $1.25, as described in the footnotes to the financial statements, was treated as a cancellation of the original warrants issued on November 8, 2007 and a re-issuance or new warrants on December 21, 2007. The difference in fair value of the warrant was included in the allocation of net proceeds associated with the second closing of the Series C Preferred Stock on December 21, 2007. We treated this as a deemed dividend on the Series C Preferred Stock. As of December 31, 2007 we recorded $11,947,881 as a deemed dividend to the holders of the Series C Preferred Stock, which included the beneficial conversion feature of $11,762,887 and $184,994 related to the accretion of the Series C Preferred Stock to its redemption value through the date that the holders of the Series C Preferred Stock may first exercise their redemption right. We are using the effective interest method to accrete the carrying value of the

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Series C Preferred stock through November 8, 2011, at which time the value of the Series C Preferred Stock would be $30.0 million, 120% of its face value.

Recent Accounting Pronouncements

        See Note V of our Notes to Consolidated Financial Statements for information regarding recently issued accounting pronouncements.

Results of Operations

        All data set forth below has been adjusted to reflect the sale of our Electronics and Power Systems US business units, which were finalized in the third quarter of 2008. The results of operations for both the Electronics and Power Systems US business units were captured in "Loss from discontinued operations." See Note D (Discontinued Operations) to the Consolidated Financial Statements.

Fiscal Year Ended December 31, 2008 ("2008") Compared to the Fiscal Year Ended December 31, 2007 ("2007").

        Revenue.    Total Company revenue increased $20.5 million, or 49%, from $42.0 million in 2007 to $62.5 million in 2008.

 
  Year Ended
December 31,
   
   
 
(Amounts in Millions)
  2008   2007   Change $   % Change  

Product Revenue

                         

Alternative Energy Products

  $ 52.2   $ 25.4   $ 26.8     106 %

Other Legacy

    2.1     7.6   $ (5.5 )   -72 %
                   

Total Product Revenue

  $ 54.3   $ 33.0   $ 21.3     65 %
                   

Funded Research and Development and other revenue

  $ 8.2   $ 9.0   $ (0.8 )   -9 %
                   

Total Revenue

  $ 62.5   $ 42.0   $ 20.5     49 %
                   

        Product revenue increased by $21.3 million, or 65%, from $33.0 million in 2007 to $54.3 million in 2008. This was driven by the commercial adoption of our utility grade inverters, resulting in an annual increase of $26.8 million, or 106%. This increase was partially offset by a decrease in our legacy power products offerings of $5.5 million, or 72%, as we continue to focus efforts on our renewable energy solutions.

        Funded research and development revenue decreased $0.8 million, or 8.5%, from $9.0 million in 2007 to $8.2 million in 2008. The decline in revenue is due to the decrease in revenue from commercial customers by $2.2 million offset by and an overall increase in revenue from our government contracts of $1.4 million.

        Gross Margin.    Total Company gross margin increased from 5% in 2007 to 16% in 2008. Gross margins on product revenue improved from 0% in 2007 to approximately 15.6% in 2008 due to material cost reduction programs, increased labor efficiency and increased photovoltaic inverter unit volumes. In 2007, gross margins included an additional $1.3 million in cost over runs on a Navy project, for which we are seeking some economic relief due to design changes, increases in major component costs and increases in anticipated exchange rates; we have not booked any benefit for such relief as of December 31, 2008 or 2007.

        Gross margins on funded research and development revenue decreased slightly from 25% in 2007 to 21% in 2008 due to lower revenue levels and the composition of revenue as compared to that of 2007.

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        Research and development expenses.    We expended approximately $5.1 million on research and development in 2008 compared with $2.3 million spent in 2007. The increase in spending during 2008 was driven by an increase in technical staffing. These additional resources are developing the new products, features and customer solutions which we believe will allow us to take advantage of both short-term and long-term market opportunities. This investment in research and development is critical to both our current and future success and we anticipate this level of investment to continue.

        Selling, general and administrative expenses.    Selling, general and administrative expenses increased by approximately $7.0 million from $9.6 million in 2007 to $16.6 million in 2008. Approximately $1.1 million of the increase is directly attributable to compensation costs related to the issuance of stock options to our employees and directors pursuant to SFAS 123(R) charged to operations during 2008. Approximately $2.7 million of the increase was associated with increased corporate costs and approximately $3.2 million of the increase was due to the higher sales and marketing costs directly related to the increase in product revenue, international business development, company re-branding and our increased outbound marketing efforts in 2008 compared to 2007.

        Amortization of intangibles.    Amortization of intangibles remained unchanged at $0.3 million in 2007 and 2008.

        Restructuring costs.    In 2008 we successfully executed a restructuring of our Company. In connection with the restructuring, we eliminated the positions of the presidents of the Applied Technology and Renewable Energy Solutions divisions, formalized the release of our Vice President of Finance and former Chief Executive Officer. In addition, we completed the sale of our Electronics and Power Systems US divisions. As a result of these significant changes in 2008, we recorded a charge of approximately $1.4 million in salary-related costs and costs associated with the modification of existing options held by certain of the severed employees. The cash component of this severance will be paid out over the next 12 months. Other costs associated with the restructuring that were related to the Electronics and Power Systems US divisions were recorded in the respective divisions and are included in the loss from discontinued operations for the periods presented, as discussed below. During 2007 we recorded approximately $0.1 million in restructuring costs associated with the 2006 restructuring of one of our business units.

        Change in fair value of the Convertible Notes and related warrants.    The change in fair value of the Convertible Notes and warrants for 2008 was a credit of approximately $0.3 million. The change in fair value of the Convertible Notes and warrants for 2007 was a charge of approximately $2.3 million. The most significant factor that contributes to the change in fair value of the Convertible Notes and related warrants is our stock price. The Convertible Notes were paid off in November 2007. (See Note G—Convertible Debt Instrument and Warrant Liabilities)

        Other Income (expense).    Other income was approximately $0.7 million for 2008 compared to other expense of approximately $0.5 million for 2007. Other income, net for 2008 consists primarily of approximately $0.7 million related to foreign exchange impact of operations and translation of inter-company balances. Other expense for 2007 consists primarily of a charge of approximately $0.4 million related to foreign exchange impact of operations and translation of inter-company balances and $0.1 million in consulting services related to the valuation of our Convertible Notes and other expenses not related to ongoing operations.

        Interest income.    Interest income decreased slightly from approximately $0.3 million in 2007 to approximately $0.2 million in 2008. The decrease is directly attributable to our cash on hand.

        Interest expense.    Interest expense for 2008 was approximately $0.3 million, which is comprised primarily of the following:

    $0.2 million in cash interest relating to our credit facility and

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    $0.1 million of non-cash interest associated with dividends on the Series B Preferred Stock, which were paid in shares of common stock.

        In 2007 interest expense was approximately $3.8 million and was comprised of the following:

    $0.7 million in non-cash interest related to the Convertible Notes, which was paid in shares of common stock,

    $0.1 million in cash interest paid related to the Convertible Notes,

    $0.2 million paid related to the short-term notes issued in November 2007, which were repaid in full on December 20, 2007,

    $2.1 million in amortization of the debt discount related to the valuation of the Convertible Notes,

    $0.3 million of non-cash interest associated with dividends on the Series B Preferred Stock, which were paid in shares of common stock, and

    $0.5 million related to the change in the Series B Preferred Stock conversion price as a result of subsequent issuances of equity-based securities due to its anti-dilution provisions.

        Loss from discontinued operations.    Loss from discontinued operations represents the results of operations of our Power Systems US and Electronics divisions which were sold during the third quarter of 2008. The loss from discontinued operations for 2008 was approximately $1.1 million as compared to approximately $1.1 million in 2007. See Note D "Discontinued Operations" for more information related to the sale of these divisions.

        Gain on sale of discontinued operations.    As a result of the sale of the Power Systems US and Electronics divisions, we recorded income of approximately $0.3 million. See Note D "Discontinued Operations" for more information related to the sale of these divisions and the composition of the net gain calculated for each division.

        Deferred Revenue.    Total deferred revenue was $6.7 million at December 31, 2008, comprised of $4.2 million of current deferred revenue and $2.5 million of long-term deferred revenue, a decrease of $1.0 million from the $7.7 million balance at December 31, 2007. During 2008 we recognized previously deferred revenue in our Applied Technology division of approximately $1.8 million and had an increase of approximately $2.2 million primarily related to a large contract with a commercial customer in our Renewable Energy Solutions division and an increase of $0.9 million related to our extended warranty in our Renewable Energy Solutions division. We record deferred revenue (i) when a customer pays in advance or (ii) when provisions for revenue recognition on items shipped have not been achieved or the items have not yet been received by the customer due to shipping terms such as FOB destination. Currently deferred revenue is composed of approximately $3.4 million in our Renewable Energy Solutions division related to pre-payments received on an order which has been shipped but not recognized, $0.7 million related to pre-payments on orders currently being manufactured and $2.5 million on deferred revenue related to extended warranties sold to customers that purchased our products.

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Quarterly Results of Operations (Unaudited)

        The following table presents unaudited quarterly statement of operations data for the eight quarters ended December 31, 2008. This data has been prepared on a basis consistent with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. This data includes all adjustments, consisting solely of normal recurring adjustments, which we believe necessary for a fair presentation of this information. The operating results for any quarter are not necessarily indicative of results to be expected for any future period. In addition, all data set forth below has been adjusted to reflect the sale of our Electronics and Power Systems US business units, which were finalized in the third quarter of 2008. The results of operations for both the Electronics and Power Systems US business units are captured in the line item "Loss from discontinued operations" below. See Note D (Discontinued Operations) to the Consolidated Financial Statements.

 
  Three Months Ended  
 
  Dec. 31,
2008
  Sept. 27,
2008
  June 28,
2008
  Mar. 29,
2008
  Dec. 31,
2007
  Sept. 29,
2007
  June 30,
2007
  Mar. 31,
2007
 
 
  (in thousands, except per share data)
 

Statement of Operations Data

                                                 

Product revenue

  $ 17,346   $ 17,215   $ 9,556   $ 10,176   $ 9,486   $ 14,699   $ 5,245   $ 3,604  

Funded research and development revenue

    1,936     1,301     3,807     1,184     2,710     2,725     1,775     1,785  
                                   

Total revenue

  $ 19,282   $ 18,517   $ 13,363   $ 11,360   $ 12,196   $ 17,424   $ 7,019   $ 5,389  
                                   

Cost of product revenue

    12,976     13,964     9,167     9,710     10,539     13,093     6,189     3,634  

Cost of funded research and development revenue

    1,672     1,146     2,667     1,016     2,069     1,990     1,312     1,357  
                                   

Total cost of revenue

  $ 14,648   $ 15,110   $ 11,834   $ 10,726   $ 12,608   $ 15,083   $ 7,501   $ 4,991  
                                   

Gross margin

  $ 4,634   $ 3,407   $ 1,530   $ 633   $ (412 ) $ 2,341   $ (482 ) $ 398  
                                   

Operating expenses:

                                                 
 

Research and development

    1,442     1,642     1,109     868     827     619     401     409  
 

Selling, general and administrative

    4,802     4,586     4,786     2,459     2,842     2,344     2,358     2,057  
 

Restructuring charges

    279     513     607                      
 

Amortization of intangibles

    79     79     79     79     79     79     79     79  
 

Gain on sale of assets

                                 
                                   

Total operating expenses from continuing operations

  $ 6,601   $ 6,819   $ 6,580   $ 3,406   $ 3,748   $ 3,041   $ 2,837   $ 2,546  
                                   

Operating loss

  $ (1,967 ) $ (3,412 ) $ (5,051 ) $ (2,772 ) $ (4,160 ) $ (701 ) $ (3,319 ) $ (2,148 )
                                   

Change in Fair Value of Notes and Warrants

    1,087     2,042     (2,397 )   (467 )   (1,829 )   (1,008 )   385     200  

Other income (loss)

    313     153     (18 )   259     182     (239 )   (392 )   (96 )

Interest income

    19     57     71     69     101     57     37     86  

Interest expense

    (88 )   (98 )   (98 )   (46 )   (2,058 )   (496 )   (625 )   (608 )
                                   

Net loss from continuing operations

  $ (636 ) $ (1,259 ) $ (7,492 ) $ (2,958 ) $ (7,764 ) $ (2,387 ) $ (3,915 ) $ (2,567 )
                                   

Income (loss) from discontinued operations, net

    823     (990 )   (524 )   (443 )   (237 )   (257 )   179     (818 )

Gain (loss) on sale of discontinued operations, net

    (54 )   328                          
                                   

Net loss

  $ 134   $ (1,922 ) $ (8,016 ) $ (3,401 ) $ (8,001 ) $ (2,644 ) $ (3,736 ) $ (3,385 )
                                   

Accretion on Series C Preferred Stock to redemption value

    (786 )   (745 )   (680 )   (637 )   (11,948 )            

Dividend on Series C Preferred Stock

    (324 )   (311 )   (311 )   (304 )   (100 )            

Deemed dividend on Series C Preferred Stock

        (10 )   (116 )                    
                                   

Net loss attributable to common stockholders

  $ (977 ) $ (2,988 ) $ (9,122 ) $ (4,342 ) $ (20,049 ) $ (2,644 ) $ (3,736 ) $ (3,385 )
                                   

Net loss attributable to common stockholders per weighted average share, basic and diluted

  $ (0.02 ) $ (0.06 ) $ (0.18 ) $ (0.09 ) $ (0.40 ) $ (0.06 ) $ (0.09 ) $ (0.08 )
                                   

Weighted average number of common shares, basic and diluted

    51,375     50,013     50,415     49,935     49,629     47,841     42,869     41,395  

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Liquidity and Capital Resources

        As of December 31, 2008, we had $10.0 million of cash, of which approximately $0.1 million was restricted.

        Based upon our current working capital position, current operating plans and expected business conditions, we believe that our current cash, as well as the availability from our line of credit with Silicon Valley Bank, will be adequate to fund our operations through December 31, 2009. Beyond 2009, we expect to fund our working capital needs and other commitments primarily through our operating cash flow, which we expect to improve as our product costs continue to decrease and as our unit volumes grow. We also expect to rely on our credit facility to fund a portion of our capital needs and other commitments.

        Our funding plans for our working capital needs and other commitments may be adversely impacted if we fail to realize our underlying assumed levels of revenues and expenses, or if we fail to remain in compliance with the covenants of our bank line. If either of those events occur, we may need to raise additional funds in order to sustain operations by selling equity or taking other actions to conserve our cash position, which could include selling of certain assets, delaying capital expenditures and incurring additional indebtedness, subject to the restrictions in the preferred stock financing with the Investors and in the credit facility with Silicon Valley Bank. Such actions would likely require the consent of the Investors and/or Silicon Valley Bank, and there can be no assurance that such consents would be given. Furthermore, there can be no assurance that we will be able to raise such funds if they are required

        If additional funds are raised in the future through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and our stockholders will experience additional dilution. The terms of additional funding may also limit our operating and financial flexibility. There can be no assurance that additional financing of any kind will be available to us on terms acceptable to us, or at all. Failure to obtain future funding when needed or on acceptable terms would materially, adversely affect our results of operations.

        We have incurred significant costs to develop our technologies and products. These costs have exceeded total revenue. As a result, we have incurred losses in each of the past five years. As of December 31, 2008, we had an accumulated deficit of approximately $190 million. Since inception, we have financed our operations and met our capital expenditure requirements primarily through the sale of private equity securities and convertible debt, public security offerings, borrowings under our lines of credit and capital equipment leases.

        As of December 31, 2008, our cash and cash equivalents were $10.0 million, including restricted cash and cash equivalents of $0.1 million; this represents a decrease in our cash and cash equivalents of approximately $2.7 million from the $12.7 million on hand at December 31, 2007. Cash used in operating activities from continuing operations for the year ended December 31, 2008 was $8.7 million as compared to $9.0 million for the year ended December 31, 2007. Cash used in operating activities from continuing operations during the year ended December 31, 2008 was primarily attributable to the net loss from continuing operations of approximately $13.2 million offset by non-cash items such as the change in the fair value of the Convertible Notes and placement agent fees, depreciation and amortization, deferred revenue, increases in allowances for uncollectible accounts and excess and obsolete inventory, non-cash compensation and consulting expense, non-cash interest expense and decreases in working capital.

        Cash provided by investing activities from continuing operations during the year ended December 31, 2008 was $4.0 million as compared to cash used in investing activities from continuing operations of $1.2 million for the year ended December 31, 2007. Cash provided by investing activities during the fiscal year ended December 31, 2008 was a result of net proceeds from the sale of two of

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our divisions of $5.1 million offset by capital expenditures of $1.2 million. Cash used in investing activities from continuing operations during the fiscal year ended December 31, 2007 was a result of capital expenditures.

        Cash provided by financing activities from continuing operations for the year ended December 31, 2008 was $4.1 million as compared to $18.0 million for the year ended December 31, 2007. Net cash provided by financing activities from continuing operations during 2008 includes borrowings under our line of credit of $3.0 million, approximately $1.7 million received from the exercise of stock options and warrants to purchase common stock, offset by approximately $0.6 million related to payments to certain Warrant A and Warrant C holders that exercised their redemption rights under these warrants. Net cash provided by financing activities from continuing operations during 2007 includes net proceeds from the sale of Series C Preferred Stock of approximately $23.9 million, approximately $4.7 million in net proceeds related to cash received upon the exercise of the Warrant Bs in July 2007 and $1.0 million decrease in restricted cash, offset by approximately $9.5 million related to monthly principal payments and final settlement of our Convertible Notes and approximately $2.1 million related to payments to certain Warrant A and Warrant C holders that exercised their redemption rights under these warrants.

        Cash used in discontinued operations was $1.9 million for the year ended December 31, 2008 as compared to $1.5 million for the year ended December 31, 2007. Net cash used in operating activities from discontinued operations was $1.6 million in 2008 compared to $1.3 million in 2007. Net cash used in investing activities from discontinued operations was $0.2 million in 2008 compared to $0.1 million in 2007. Net cash used in financing activities from discontinued operations was $0 in 2008 compared to $0.1 million in 2007.

Payments Due Under Contractual Obligations

        The following table summarizes the payments due under our contractual obligations at December 31, 2008, and the effect such obligations are expected to have on liquidity and cash flow in future periods:

Calendar Years Ending December 31,
  Capital
Leases
  Operating
Leases
 

2009

  $   $ 825,323  

2010

      $ 344,713  

2011

      $ 224,712  
           

Total

  $   $ 1,394,748  
           

        We lease equipment and office space under non-cancelable capital and operating leases. The future minimum rental payments, as of December 31, 2008, under the capital and operating leases with non-cancelable terms are included in the table above.

Off-Balance Sheet Arrangements

        We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

Effects of Inflation

        We believe that inflation and changing prices over the past three years have not had a significant impact on our net revenue or on our income from continuing operations.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Not Required.

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Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of SatCon Technology Corporation:

        We have audited the accompanying consolidated balance sheets of SatCon Technology Corporation and its subsidiaries (the Company) (a Delaware corporation) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and comprehensive loss and cash flows for each of the years ended December 31, 2008 and 2007. We have also audited the financial statement schedule for the years ended December 31, 2008 and 2007 listed in the accompanying table of contents as Schedule II. We also have audited SatCon Technology Corporation and its subsidiaries' internal control over financial reporting as of December 31, 2008, 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 the 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 the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and schedule and an opinion on the company's internal control over financial reporting based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the 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.

        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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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.

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        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SatCon Technology Corporation and its subsidiaries as of December 31, 2008 and 2007, and the consolidated results of its operations, changes in stockholders' equity (deficit), and its cash flows for each of the years ended December 31, 2008 and 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 table of contents as Schedule II 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, SatCon Technology Corporation and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

    /s/ Vitale, Caturano & Company, P.C.

Boston, Massachusetts
March 10, 2009

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

 
  December 31, 2008   December 31, 2007  

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 9,957,716   $ 12,615,566  
 

Restricted cash and cash equivalents

    84,000     84,000  
 

Accounts receivable, net of allowance of $168,219 and $124,279 at December 31, 2008 and 2007, respectively

    11,471,671     8,532,141  
 

Unbilled contract costs and fees

    398,707     536,567  
 

Inventory

    11,457,532     13,807,201  
 

Prepaid expenses and other current assets

    1,040,441     1,002,187  
 

Current assets of discontinued operations

        5,384,412  
           
 

Total current assets

  $ 34,410,067   $ 41,962,074  

Property and equipment, net

    1,964,968     1,765,453  

Goodwill, net

    123,714     123,714  

Intangibles, net

    398,526     793,739  

Other long-term assets

        32,931  

Non-current assets of discontinued operations

        1,930,766  
           
 

Total assets

  $ 36,897,275   $ 46,608,677  
           

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

             

Current liabilities:

             
 

Line of credit

  $ 3,000,000   $  
 

Accounts payable

    8,588,313     7,631,486  
 

Accrued payroll and payroll related expenses

    2,042,786     1,838,792  
 

Other accrued expenses

    2,825,255     3,182,157  
 

Accrued contract loss

    1,131,370     1,300,000  
 

Accrued restructuring costs

    602,782      
 

Deferred revenue

    4,214,389     6,127,401  
 

Current liabilities of discontinued operations

        2,266,191  
           

Total current liabilities

  $ 22,404,895   $ 22,346,027  

Warrant liability

 
$

2,407,438
 
$

3,244,316
 

Deferred revenue, net of current portion

    2,512,794     1,545,050  

Redeemable convertible Series B preferred stock (290 and 340 shares issued and outstanding at December 31, 2008 and 2007, respectively; face value $5,000 per share; liquidation preference $1,450,000 and $1,700,000, respectively)

    1,450,000     1,700,000  

Other long-term liabilities

    58,282     70,075  

Non-current liabilities of discontinued operations

        63,825  
           
 

Total Liabilities

  $ 28,833,409   $ 28,969,293  

Commitments and contingencies (Note L)

             

Redeemable convertible Series C preferred stock (25,000 shares issued and outstanding at December 31, 2008 and 2007, face value $1,000 per share, liquidation preference $26,350,000 and 25,100,000 at December 31, 2008 and 2007, respectively)

    17,248,593     13,276,091  

Stockholders' equity (deficit):

             
 

Common stock; $0.01 par value, 200,000,000 shares authorized; 51,479,822 and 49,803,979 shares issued and outstanding at December 31, 2008 and 2007, respectively

    514,798     498,040  
 

Additional paid-in capital

    182,222,762     180,933,100  
 

Accumulated deficit

    (189,962,435 )   (176,757,615 )
 

Accumulated other comprehensive loss

    (1,959,852 )   (310,232 )
           
 

Total stockholders' equity (deficit)

  $ (9,184,727 ) $ 4,363,293  
           
 

Total liabilities and stockholders' equity (deficit)

  $ 36,897,275   $ 46,608,677  
           

The accompanying notes are an integral part of these consolidated financial statements.

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Year Ended
December 31,
 
 
  2008   2007  

Revenue:

             
 

Product revenue

  $ 54,293,334   $ 33,032,641  
 

Funded research and development and other revenue

    8,228,769     8,994,582  
           

Total revenue

  $ 62,522,103   $ 42,027,223  
           

Cost of revenue:

             
 

Cost of product revenue

  $ 45,818,090   $ 33,455,956  
 

Cost of funded research and development and other revenue

    6,500,232     6,727,122  
           

Total cost of revenue

  $ 52,318,322   $ 40,183,078  
           

Gross margin

  $ 10,203,781   $ 1,844,145  
           

Operating expenses:

             
 

Research and development

  $ 5,061,472   $ 2,256,088  
 

Selling, general and administrative

    16,632,869     9,601,195  
 

Restructuring charges

    1,398,140      
 

Amortization of intangibles

    314,288     314,289  
           

Total operating expenses from continuing operations

  $ 23,406,769   $ 12,171,572  
           

Operating loss from continuing operations

  $ (13,202,988 ) $ (10,327,427 )
           
 

Change in fair value of notes and warrants

    264,628     (2,252,264 )
 

Other (loss) income, net

    707,450     (545,895 )
 

Interest income

    216,238     280,392  
 

Interest expense

    (329,459 )   (3,787,380 )
           

Net loss from continuing operations

  $ (12,344,131 ) $ (16,632,574 )
           
 

Loss from discontinued operations, net

  $ (1,134,732 ) $ (1,133,203 )
 

Gain on sale of discontinued operations, net

    274,043      
           

Net loss

  $ (13,204,820 ) $ (17,765,777 )
           

Deemed dividend and accretion on Series C preferred stock

  $ (2,974,502 ) $ (11,947,881 )

Dividend on Series C preferred stock

    (1,250,000 )   (100,000 )
           

Net loss attributable to common stockholders

  $ (17,429,322 ) $ (29,813,658 )
           

Net loss per weighted average share, basic and diluted:

             
 

From loss on continuing operations attributable to common stockholders

  $ (0.33 ) $ (0.64 )
 

From loss on discontinued operations

  $ (0.02 ) $ (0.02 )
 

From gain on sale of discontinued operations

  $ 0.01      
           

Net loss attributable to common stockholders per weighted average share, basic and diluted

  $ (0.34 ) $ (0.66 )
           

Weighted average number of common shares, basic and diluted

    50,684,564     45,433,539  

The accompanying notes are an integral part of these consolidated financial statements.

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SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2008

 
  Common
Shares
  Common
Stock
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Stockholders'
Equity (Deficit)
  Comprehensive
Loss
 

Balance, December 31, 2007

    49,803,979   $ 498,040   $ 180,933,100   $ (176,757,615 ) $ (310,232 ) $ 4,363,293   $  

Net loss

                (13,204,820 )       (13,204,820 ) $ (13,204,820 )

Issuance of warrants to Series C Preferred Stockholders

            126,000             126,000        

Beneficial conversion feature on Series C preferred stock

            126,000             126,000        

Series C preferred stock deemed dividend

            (126,000 )           (126,000 )      

Accretion of Series C preferred stock to its redemption value

            (2,848,502 )           (2,848,502 )      

Dividend on Series C preferred stock

            (1,250,000 )           (1,250,000 )      

Issuance of common stock to 401(k) Plan

    279,831     2,798     575,434             578,232        

Issuance of common stock in connection with the exercise of stock options to purchase common stock

    891,168     8,912     1,435,607             1,444,519        

Issuance of common stock in lieu of six-month cash dividend on redeemable convertible Series B preferred stock. 

    86,241     862     132,804             133,666        

Issuance of common stock in connection with the exercise of warrants to purchase common stock

    174,967     1,750     239,560             241,310        

Issuance of restricted stock to employees

    82,346     823     144,930             145,753        

Issuance of common stock in connection with the conversion of Series B preferred stock

    161,290     1,613     248,387             250,000        

Issuance of warrants to purchase common stock to contractor

            121,000             121,000        

Employee stock-based compensation

            2,364,442             2,364,442        

Foreign currency translation adjustment

                    (1,649,620 )   (1,649,620 )   (1,649,620 )
                                           

Comprehensive loss

                          $ (14,854,440 )
                               

Balance, December 31, 2008

    51,479,822   $ 514,798   $ 182,222,762   $ (189,962,435 ) $ (1,959,852 ) $ (9,184,727 )      
                                 

The accompanying notes are an integral part of these consolidated financial statements.

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SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2007

 
  Common
Shares
  Common
Stock
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Stockholders'
Equity (Deficit)
  Comprehensive
Loss
 

Balance, December 31, 2006

    40,105,073   $ 401,051   $ 156,379,193   $ (158,991,838 ) $ (256,486 ) $ (2,468,080 )      

Net loss

                (17,765,777 )       (17,765,777 ) $ (17,765,777 )

Beneficial conversion feature on Series C preferred stock

            11,762,887             11,762,887        

Series C preferred stock deemed dividend

            (11,762,887 )           (11,762,887 )      

Issuance of warrants and re-pricing of warrants to Series C Preferred Stock holders

            10,092,623             10,092,623        

Accretion of Series C preferred stock to its carrying value

            (184,994 )           (184,994 )      

Dividend on Series C preferred stock

            (100,000 )           (100,000 )      

Issuance of common stock to 401(k) Plan

    474,379     4,744     562,417             567,161      

Issuance of common stock in connection with the exercise of stock options to purchase common stock

    27,205     272     20,420             20,692      

Issuance of common stock in connection with the termination of Worcester lease

    850,000     8,500     1,113,500             1,122,000      

Issuance of common stock in lieu of cash principal payments on the Convertible Notes

    3,163,186     31,632     3,777,814             3,809,446      

Issuance of common stock in lieu of cash interest on the Convertible Notes

    396,522     3,965     514,200             518,165      

Issuance of common stock in connection with the exercise of Warrant Bs

    3,636,368     36,364     5,525,006             5,561,370      

Issuance of common stock to Convertible Note holders as incentive to accelerate pay-off of the Convertible Notes

    749,999     7,500     907,499             914,999      

Issuance of common stock upon conversion of a portion of the Convertible Notes

    318,182     3,182     521,818                 525,000        

Employee stock-based compensation

            1,112,099             1,112,099      

Issuance of common stock in lieu of six-months cash dividend on redeemable convertible Series B preferred stock

    70,045     700     137,156             137,856      

Issuance of common stock in connection with the conversion of Series B preferred stock

    13,020     130     24,870             25,000      

Adjustment to conversion price of Series B preferred stock, due to anti-dilution provisions

            529,479             529,479      

Foreign currency translation adjustment

                    (53,746 )   (53,746 )   (53,746 )
                                           

Comprehensive loss

                          $ (17,819,523 )
                               

Balance, December 31, 2007

    49,803,979   $ 498,040   $ 180,933,100   $ (176,757,615 ) $ (310,232 ) $ 4,363,293        
                                 

The accompanying notes are an integral part of these consolidated financial statements.

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SATCON TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Years Ended
December 31,
 
 
  2008   2007  

Cash flows from operating activities:

             
 

Net loss

  $ (13,204,820 ) $ (17,765,777 )
   

Net loss from discontinued operations

    1,134,732     1,133,203  
   

Net gain on sale of discontinued operations

    (274,043 )    

Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:

             
 

Depreciation and amortization

    1,032,803     981,555  
 

Provision for uncollectible accounts

    80,142     47,019  
 

Provision for excess and obsolete inventory

    360,035     206,780  
 

Non-cash compensation expense related to issuance of stock options and warrants to employees and non-employees and issuance of common stock to 401(k) Plan, including stock based compensation costs of $2,183,801 and $1,008,022 for the years ended December 31, 2008 and 2007, respectively. 

    2,725,481     2,482,165  
 

Change in fair value of Senior Secured Convertible Notes and investor and placement agent warrant liability

    (264,628 )   2,252,264  
 

Non-cash interest expense

    130,334     3,581,760  
 

Non-cash restructuring charges

    274,552      

Changes in operating assets and liabilities:

             
 

Accounts receivable

    (5,205,155 )   (2,132,106 )
 

Unbilled contract costs and fees

    137,860     (269,320 )
 

Prepaid expenses and other assets

    (44,412 )   (1,078,868 )
 

Inventory

    (1,965,474 )   (7,914,938 )
 

Other long-term assets

    32,931     (17,469 )
 

Accounts payable

    2,392,434     3,806,333  
 

Accrued expenses and payroll

    744,089     2,165,030  
 

Accrued restructuring

    602,782      
 

Accrued contract losses

    94,700     1,447,161  
 

Deferred revenue, current and long portion

    2,510,183     1,992,591  
 

Other current liabilities

    (11,793 )   70,075  
           
   

Total adjustments

    3,626,864     7,620,032  
           

Net cash used in operating activities in continuing operations

    (8,717,267 )   (9,012,542 )

Cash flows from investing activities:

             
 

Purchases of property and equipment

    (1,167,332 )   (1,203,475 )
 

Net proceeds from sale of business segments

    5,136,881      
           

Net cash provided by (used in) investing activities in continuing operations

    3,969,549     (1,203,475 )
           

Cash flows from financing activities:

             
 

Net borrowings under line of credit

    3,000,000      
 

Proceeds from short-term loan

        10,000,000  
 

Repayment of short-term loan

        (10,000,000 )
 

Net proceeds from issuance of convertible redeemable Series C preferred stock

        23,856,281  
 

Repayment of Senior Secured Convertible Notes

        (9,477,293 )
 

Payments related to warrant holder redemption rights

    (572,250 )   (2,099,958 )
 

Decrease (increase) in restricted cash

        1,000,000  
 

Net proceeds from exercise of warrants to purchase common stock

    241,310     4,688,642  
 

Net proceeds from exercise of options to purchase common stock

    1,444,519     20,692  
           

Net cash provided by financing activities in continuing operations

    4,113,579     17,988,364  
           
 

Net cash used in operating activities of discontinued operations

    (1,660,704 )   (1,307,293 )
           
 

Net cash used in investing activities of discontinued operations

    (211,297 )   (63,959 )
           
 

Net cash used in financing activities of discontinued operations

        (123,219 )
           
 

Net decrease in cash and cash equivalents from discontinued operations

    (1,872,001 )   (1,494,471 )
           
 

Effects of foreign currency exchange rates on cash and cash equivalents

    (151,710 )   (853,137 )
           
 

Net increase (decrease) in cash and cash equivalents

    (2,657,850 )   5,424,739  
 

Cash and cash equivalents at beginning of year

  $ 12,615,566   $ 7,190,827  
           
 

Cash and cash equivalents at end of year

  $ 9,957,716   $ 12,615,566  
           

The accompanying notes are an integral part of these consolidated financial statements.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 and 2007

A. THE COMPANY

        Satcon Technology Corporation (the "Company" or "Satcon") was organized as a Massachusetts corporation in February 1985 and reincorporated in Delaware in 1992. The Company is a leading clean energy technology provider of utility grade power solutions for the renewable and distributed energy markets. The Company delivers power conversion solutions and system design services for large-scale renewable energy plants. The Company's products are utilized by businesses and utility companies to efficiently convert renewable energy sources into stable and reliable electrical power. In addition to its core power conditioning solutions, the Company also develops, designs and builds power conversion electronics, power management and distribution systems for a variety of defense and commercial applications through its Applied Technology division.

        The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.

B. REALIZATION OF ASSETS AND LIQUIDITY

        The Company anticipates that its current cash, along with the availability under its credit facility with Silicon Valley Bank, will be sufficient to fund its operations through at least December 31, 2009. The Company has developed a business plan that envisions a significant increase in revenue and significant reductions in the cost structure and the cash burn rate from the results experienced in the recent past and allows the Company to remain in compliance with the covenants of the credit facility. Although the Company believes it has developed a realistic business plan, there is no assurance that it can achieve these objectives. Accordingly, if the Company is unable to realize its business plan or does not remain in compliance with the covenants of the credit facility, the Company would need to raise additional funds in the near future in order to sustain operations by selling equity or taking other actions to conserve its cash position, which could include selling of certain assets and incurring additional indebtedness, subject to the restrictions in the preferred stock financing with the Investors. Such actions would likely require the consent of the Investors, and there can be no assurance that such consent would be given. Furthermore, there can be no assurance that the Company will be able to raise such funds if they are required.

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Basis of Consolidation

        The consolidated financial statements include the accounts of Satcon and its wholly-owned subsidiaries (Satcon Applied Technology, Inc. and Satcon Power Systems Canada, Ltd., and its discontinued operating divisions Satcon Electronics, Inc. and Satcon Power Systems, Inc.). All intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

        The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, except

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)


for certain foreign shipments. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate the Company provides for a warranty reserve at the time the product revenue is recognized. If a contract involves the provisions of multiple elements and the elements qualify for separation under EITF 00-21, Revenue Arrangements with Multiple Deliverables, total estimated contact revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.

        The Company performs funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Product development revenue is included in product revenue. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or decreases in the fees depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. All payments to the Company for work performed on contracts with agencies of the U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue for commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. As of December 31, 2008 and 2007, the Company has accrued approximately $1.1 million and $1.3 million, respectively, for anticipated contract losses on commercial contracts.

        Cost of product revenue includes materials, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements are included in cost of research and development and other revenue.

        Deferred revenue consists of payments received from customers in advance of services performed, product shipped, or installation completed. Deferred revenue also consists of cash received for extended product warranties.

Unbilled Contract Costs and Fees and Funded Research and Development Costs in Excess of Billings

        Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not been recognized as revenue or billed to the customer.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Cash and Cash Equivalents

        Cash and cash equivalents include demand deposits, overnight repurchase agreements with Silicon Valley Bank and highly-liquid investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. At December 31, 2008 and 2007, the Company has restricted cash as indicated in the table below. In addition, at December 31, 2007, the Company had overnight repurchase agreements with Silicon Valley Bank of $1,763,502. There were no overnight repurchase agreements outstanding at December 31, 2008.

 
  December 31,  
Restricted Cash
  2008   2007  

Security deposits

  $ 34,000   $ 34,000  

Certificates of deposit

    50,000     50,000  
           

Total restricted cash

  $ 84,000   $ 84,000  
           

Accounts Receivable

        Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.

Inventory

        Inventory is stated at the lower of cost or market and costs are determined based on the first-in, first-out method of accounting and include material, labor and manufacturing overhead costs. The Company periodically reviews quantities of inventory on hand and compares these amounts to expected usage of each particular product or product line. The Company records, as a charge to cost of sales, any amounts required to reduce the carrying value to net realizable value.

Property and Equipment

        Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the asset's estimated useful life. The estimated useful lives of property and equipment are as follows:

 
 
Estimated Lives

Machinery and equipment

  2-10 years

Furniture and fixtures

  7-10 years

Computer software

  3 years

Leasehold improvements

  Lesser of the remaining life of the lease or the useful life of the improvement

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

        When assets are retired or otherwise disposed of, the cost and related depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in operating expenses.

Long-Lived Assets

        The Company has adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The statement requires that long-lived assets be reviewed for possible impairment, if certain conditions exist, with impaired assets written down to fair value.

        The Company determine the fair value of certain of the long-lived assets based on a discounted cash flow income approach. The income approach indicates the fair value of a long-lived assets based on the discounted value of the cash flows that the long-lived asset can be expected to generate in the future over the life of the long-lived asset. This analysis is based upon projections prepared by management. These projections represent management's best estimate of future results. In making these projections, the Company considered the markets the Company is addressing, the competitive environment and the Company's advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. In addition, the Company performs a macro assessment of the overall likelihood that the Company would achieve the projected cash flows and performed sensitivity analysis using historical data as the basis for projected cash flows.

Goodwill and Other Intangible Assets

        The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. This statement affects the Company's treatment of goodwill and other intangible assets. The statement requires that goodwill be reviewed for possible impairment and that impairment tests be periodically repeated (at least annually), with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods.

        The Company performs a goodwill impairment test as of the beginning of its fiscal fourth quarter, as required by SFAS No. 142 on an annual basis. The Company determines the fair value of each of the reporting units based on a discounted cash flow income approach.

        Goodwill by reporting segment consists of the following:

 
  December 31,  
Reporting Unit
  2008   2007  

Applied Technology

  $ 123,714   $ 123,714  
           

  $ 123,714   $ 123,714  
           

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

        The Company performed its annual goodwill impairment test as of the beginning of its fiscal fourth quarter 2008. The Company determined the fair value of the Applied Technology unit based on a discounted cash flow income approach. Based on the results of the first step of the annual goodwill impairment test, the Company determined that the fair value of this reporting unit exceeded the carrying amount and, therefore, no goodwill impairment existed as of December 31, 2008. As a result, the second step of the annual goodwill impairment test was not required. The Company will continue to perform a goodwill impairment test on the Applied Technology reporting unit on an annual basis and on an interim basis, if certain conditions exist.

        The Company has determined that all of its intangible assets have finite lives and, therefore, the Company has continued to amortize its intangible assets. The Company recorded expense related to the amortization of its intangible assets for the periods presented below as follows:

 
  Year Ended
December 31,
 
 
  2008   2007  

Amortization expense

  $ 395,289   $ 394,288  

        Intangible assets consist of the following:

 
   
   
  As of December 31, 2008    
  As of December 31, 2007    
 
Reporting Unit
  Description   Estimated
Useful
Life
  Gross
Carrying
Value
  Accumulated
Amortization
  Net
Book
Value
  Gross
Carrying
Value
  Accumulated
Amortization
  Net
Book
Value
 

Applied Technology

  Patents     10   $ 744,780   $ 620,343   $ 124,437   $ 744,780   $ 540,343   $ 204,437  

Applied Technology

  Completed Technology     10     3,142,882     2,868,793     274,089     3,142,882     2,554,505     588,377  

Applied Technology

  Favorable Lease     5     36,999     36,999     0     36,999     36,074     925  
                                     

            $ 3,924,661   $ 3,526,135   $ 398,526   $ 3,924,661   $ 3,130,922   $ 793,739  
                                     

        The estimated remaining amortization expense for each of the five succeeding years:

Fiscal Years ended December 31,
   
 

2009

    354,090  

2010

    44,436  

2011

     

2012

     

2013

     

Thereafter

     

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Foreign Currency Translation

        The functional currency of the Company's foreign subsidiary is its local currency. Assets and liabilities of foreign subsidiaries are translated at the rates in effect at the balance sheet date, while stockholders' equity (deficit) including the long-term portion of intercompany advances is translated at historical rates. Statements of operations and cash flow amounts are translated at the average rate for the period. Translation adjustments are included as a component of accumulated other comprehensive income (loss). Foreign currency gains and losses were approximately income of $0.7 million for the year ended December 31, 2008 and charge of approximately $0.4 million for the year ended December 31, 2007. All foreign currency transaction gains and losses are recorded as a component of other income (expense) and all periods presented have been adjusted to reflect this classification.

Use of Estimates

        The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period reported. Management believes the most significant estimates include the net realizable value of accounts receivable and inventory, warranty provisions, the recoverability of long-lived assets and intangible assets, the accrued contract losses on fixed-price contracts, the recoverability of deferred tax assets and the fair value of equity and financial instruments. Actual results could differ from these estimates.

Income Taxes

        The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In addition, SFAS No. 109 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

        In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. The amount recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalties (if applicable) on that excess. FIN 48 requires a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to the accrued interest and penalties for unrecognized tax benefits. Discussion is also required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next twelve months.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

        The Company adopted the provisions of FIN 48 on January 1, 2007. The Company did not recognize any change in the liability for unrecognized tax benefits as a result of the adoption.

        As of December 31, 2008, the Company had federal and state net operating losses ("NOL") carry forwards and federal and state R&D credit carry forwards, which may be available to offset future federal and state income tax liabilities which expire at various dates through 2029. Utilization of the NOL and R&D credit carry forwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a rolling three-year period. Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions (both pre and post initial public offering) which, combined with the purchasing shareholders' subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. The Company has not currently completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since the Company's formation due to the significant complexity and cost associated with such study and that there could be additional changes in control in the future. If the Company has experienced a change of control at any time since Company formation, utilization of its NOL or R&D credit carry forwards would be subject to an annual limitation under Section 382 which is determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the NOL or R&D credit carry forwards before utilization. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position under FIN 48. The Company does not expect to have any taxable income for the foreseeable future. The Company has a full valuation allowance against the net operating losses and credits.

        The tax years 2005 through 2007 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying financial statements. The Company would record any such interest and penalties as a component of interest expense. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date.

Accounting for Stock-based Compensation

        The Company has several stock-based employee compensation plans. On October 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123R ("SFAS 123R") Accounting for Stock-based Compensation, using the modified prospective method, which results in the provisions of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)


SFAS 123R only being applied to the consolidated financial statements on a going-forward basis (that is, the prior period results have not been restated). At the time of adoption the Company had no unvested outstanding options. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period. Previously, the Company had followed Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, which resulted in the accounting for employee share options at their intrinsic value in the consolidated financial statements.

        On March 29, 2005, the SEC issued SAB 107 which expresses the view of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations concerning the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under shares-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R, and disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. The Company has accounted for its stock option grants in compliance with SAB 107 and Staff Accounting Bulletin No. 110, Year-End Help for Expensing Employee Stock Option (SAB No. 110).

        On November 10, 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position SFAS 123R-3 "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." The Company has elected to adopt the alternative transition method provided the FASB Staff Position for calculating the tax effects (if any) of stock-based compensation expense pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact to the additional paid-in capital pool and the consolidated statements of operations and cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.

        The Company uses historical volatility as it believes it is more reflective of market conditions and a better indicator of volatility. The Company uses the simplified calculation of expected life described in SAB No. 107 and SAB No. 110. If the Company determines that another method used to estimate expected volatility is more reasonable than the Company's current methods, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and longer expected lives result in an increase to share-based compensation determined at the date of grant.

        The Company recognized the full impact of its share-based payment plans in the consolidated financial statements for the year ended December 31, 2008 and 2007 under SFAS 123R and did not capitalize any such costs on the consolidated balance sheets, as such costs that qualified for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)


capitalization were not material. The following table presents share-based compensation expense included in the Company's consolidated statement of operations:

 
  Year Ended
December 31,
 
 
  2008   2007  

Cost of product revenue

  $ 96,249   $ 97,664  

Funded research and development and other revenue expense

    109,095     120,248  

Un-funded research and development and other revenue expenses

    158,341     60,779  

Selling, general and administrative expenses

    1,973,667     729,331  
           

Share based compensation expense from continuing operations before tax

  $ 2,337,352   $ 1,008,022  

Share based compensation expense from discontinued operations

    27,090     104,077  
           

Total share based compensation expense before tax

  $ 2,364,442   $ 1,112,099  

Income tax benefit

         
           

Net share-based compensation expense

  $ 2,364,442   $ 1,112,099  
           

        Compensation expense associated with the granting of stock options to employees is being recognized on a straight line basis over the service period of the option. In instances where the actual compensation expense would be greater than that calculated using the straight line method, the actual compensation expense is recorded in that period.

        At December 31, 2008 approximately $8.3 million in unrecognized compensation expense remains to be recognized in future periods. The table below summaries the recognition of the deferred compensation expense associated with employee stock options over the next five years as follows:

Calendar Years Ending December 31,
  Non Cash Stock-Based
Compensation Expense
 

2009

  $ 2,553,851  

2010

  $ 2,430,282  

2011

  $ 2,339,895  

2012

  $ 905,167  

2013

  $ 21,315  
       

Total

  $ 8,250,510  

        During the year ended December 31, 2008, the Company accelerated unvested options for two of its senior executives in connection with their departures. In addition, the Company extended the time to exercise these options, normally ninety days, to two years from the date of their respective last days of employment. As a result, the Company recorded a non-cash restructuring charge of approximately $0.3 million, of which approximately $0.1 million related to the acceleration of unvested options and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)


$0.2 million related to the extension of time to exercise these options. The Company valued these changes using the Black-Scholes option pricing model.

        The weighted-average grant-date fair value of options granted during the year ended December 31, 2008 and 2007 were $2.03 and $1.39, respectively, per option. The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following range of assumptions:

 
  Year Ended
December 31,
Assumptions:
  2008   2007

Expected life

  5.0 years to 6.25 years(1)   5.0 years to 6.25 years(1)

Expected volatility ranging from

  80.0%—89.5%(2)   81.9%—89.9%(2)

Dividends

  none   None

Risk-free interest rate

  2.70%—3.38%(3)   3.23%—4.83%(3)

(1)
The option life was determined using the simplified method for estimating expected option life, which qualify as "plain-vanilla" options.

(2)
The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company's common stock over the most recent period equal to the expected option life of the grant, the historical short term trend of the option and other factors, such as expected changes in volatility arising from planned changes in the Company's business operations.

(3)
The risk-free interest rate for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

(4)
The estimated forfeiture rate for each option grant is 6.25%. At the time SFAS 123R was adopted, all outstanding stock options were vested. The Company periodically reviews the estimated forfeiture rate, in light of actual experience.

Net Loss per Basic and Diluted Common Share

        The Company reports net loss per basic and diluted common share in accordance with SFAS No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, except when the effect would be anti-dilutive. See Note R, Loss Per Share, for more information related to options, warrants, convertible Preferred Stock and Convertible Notes which would be considered anti-dilutive.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Concentration of Credit Risk

        Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, trade accounts receivable, unbilled contract costs and deposits in bank accounts. The Company deposits its cash and invests in short-term investments primarily through a national commercial bank. Deposits in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) are exposed to loss in the event of nonperformance by the institution. The Company has had cash deposits in excess of the FDIC insurance coverage.

        The Company's trade accounts receivable and unbilled contract costs and fees are primarily from sales to U.S. government agencies and commercial customers. The Company does not require collateral and has not historically experienced significant credit losses related to receivables, letters of credit or unbilled contract costs and fees from individual customers or groups of customers in any particular industry or geographic area.

        Significant customers are defined as those customers that account for 10% or more of total net revenue in a fiscal year or 10% or more of accounts receivable and unbilled contract costs and fees at the end of a fiscal period. For the year ended December 31, 2008, there were two customers that were deemed significant with regards to revenue and accounts receivable. For the year ended December 31, 2007, there was one customer that was deemed significant with regards to revenue. For the year ended December 31, 2008, these customers accounted for approximately 25%, or approximately $15.4 million, of revenue. At December 31, 2008, both customers had a balance greater than 10%, or approximately $3.3 million, of the Company's outstanding gross accounts receivable. For the year ended December 31, 2007, two customers accounted for approximately 26%, or approximately $11.1 million, of revenue. At December 31, 2007, three customers had a balance greater than 10%, or approximately $4.4 million, of the Company's outstanding gross accounts receivable.

Research and Development Costs

        The Company expenses research and development costs as incurred. Cost of research and development and other revenue includes costs incurred in connection with both funded research and development and other revenue arrangements and unfunded research and development activities.

Comprehensive Income (Loss)

        Comprehensive income (loss) includes net loss and foreign currency translation adjustments.

Fair Value of Financial Instruments

        The Company's financial instruments consist of cash equivalents, accounts receivable, unbilled contract costs and fees, warrants to purchase shares of common stock, accounts payable, debt instruments and convertible notes. The estimated fair values of these financial instruments approximate their carrying values at December 31, 2008 and 2007. The estimated fair values have been determined through information obtained from market sources and management estimates. The Company's warrant liability is recorded at fair value. See "Fair Value Measurement" section below.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

Fair Value Measurements

        Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, "Effective Date of FASB Statement No. 157," which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

    Level 1—Quoted prices in active markets for identical assets or liabilities.

    Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

    Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The adoption of this statement did not have a material impact on the Company's consolidated results of operations and financial condition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)

        Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2008 are as follows:

 
  Fair Value Measurements at Reporting Date Using  
Description
  Balance as of
December 31,
2008
  Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 
 
  (Dollars in Thousands)
 

Assets

                         

Money market funds(2)

  $ 4,243,989   $ 4,243,989   $   $  
                   
 

Total Assets

  $ 4,243,989   $ 4,243,989   $   $  
                   

Liabilities

                         

Long-term warrant liability(1)

  $ 2,407,438   $   $ 2,407,438   $  
                   
 

Total Liabilities

  $ 2,407,438   $   $ 2,407,438   $  
                   

(1)
Within the Company's Level 2 financial assets, which consists of long term investor warrant liabilities comprised of the Warrant As, Warrant Cs and the placement agent warrants. the Warrant As and Warrant Cs are being fair valued utilizing a binomial lattice model and the placement agent warrants are being fair valued using the Black-Scholes option pricing model. (see Note G. Convertible Debt Instruments and Warrant Liabilities-Valuation—Methodology and Significant Assumptions).

(2)
Included as a component of cash and cash equivalents on accompanying consolidated balance sheets.

Convertible Debt Instruments and Warrant Liabilities

        The Company accounted for its senior secured convertible notes (the "Convertible Notes"), which were paid off on November 7, 2007, and continues to account for the associated warrants in accordance with SFAS 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140, and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (SFAS 155). The Convertible Notes included features that qualified as embedded derivatives, such as (i) the holders' conversion option, (ii) the Company's option to settle the Convertible Notes at the scheduled dates in cash or shares of its common stock, and (iii) premiums and penalties the Company would be liable to pay in the event of default. As permitted under SFAS 155, the Company has irrevocably elected, as of January 1, 2007, to measure the Convertible Notes and embedded derivatives in their entirety at fair value with changes in fair value recognized as either a gain or loss.

        The Company recorded interest expense under the Convertible Notes based on the greater of (i) 7% or (ii) the six-month LIBOR in effect at the time plus 350 basis points, as well as the amortization of the debt discount, which the Company computed using the effective interest method. The debt discount represented the difference between the Company's gross proceeds from the sale of the Convertible Notes in July 2006 of $12.0 million and the fair value of the convertible debt upon

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)


issuance, after separately valuing the investor warrants, the placement agent warrants and the Convertible Notes on a relative fair value basis. By amortizing the debt discount to interest expense, rather than recognizing it as a change in fair value of the convertible debt instrument and warrants, which is a separate line item in the Company's statement of operations, the Company believes its interest expense line item more appropriately reflects the cost of the debt associated with the Convertible Notes.

        The Company determined the fair values of the Convertible Notes, investor warrants and placement agent warrants using valuation models it considers to be appropriate. The Company's stock price has the most significant influence on the fair value of its Convertible Notes and related warrants. An increase in the Company's common stock price would cause the fair values of both the Convertible Notes and warrants to increase, because the conversion and exercise prices, respectively, of such instruments are fixed at $1.65 and $1.815 per share, respectively, and result in a charge to our statement of operations. A decrease in the Company's stock price would likewise cause the fair value of the Convertible Notes and the warrants to decrease and result in a credit to our statement of operations. If the price of the Company's common stock were to have declined significantly, however, the decrease in the fair value of the Convertible Notes would have been limited by the instrument's debt characteristics. Under such circumstances, the Company's estimated cost of capital would have become another significant variable affecting the fair value of the Convertible Notes.

Redeemable Convertible Series B Preferred Stock

        The Company accounts for its Series B Preferred Stock and associated warrants in accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities. The Company determined the initial value of the Series B Preferred Stock and investor warrants using valuation models it considers to be appropriate. The Series B Preferred Stock is classified within the liability section of the Company's balance sheet. To the extent that the Series B Preferred Stock is subject to a remeasurement event under EITF Topic D-98, Classification and Measurement of Redeemable Securities, or is otherwise modified, the Series B Preferred Stock will be reclassified to temporary equity.

Redeemable Convertible Series C Preferred Stock

        The Company accounts for its Convertible Series C Preferred Stock (the "Series C Preferred Stock"), and associated warrants in accordance with in accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities and in accordance with EITF Topic D-98, classifying the Series C Preferred Stock as temporary equity on the balance sheet between the captions for liabilities and permanent shareholder's equity. The Company determined the initial value of the Series C Preferred Stock and investor warrants using valuation models it considers to be appropriate. The Company is using the effective interest method to accrete the carrying value of the Series C Preferred

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION (Continued)


stock through the earliest possible redemption date (November 8, 2011), at which time the value of the Series C Preferred Stock would be $30.0 million or 120% of its face value.

Reclassifications

        Certain prior-year balances have been reclassified to conform to current-year presentations. The Company reclassified the effects of foreign currency translation, of which a portion was previously accounted for in cost of sales, to other income (expense) in its statement of operations for the year ended December 31, 2007. The effect of the reclassification was approximately $0.4 million of translation related gains being accounted for in other income for the period ended December 31, 2007.

D. DISCONTINUED OPERATIONS

        On September 26, 2008, the Company sold its Electronics and Power Systems US business segments to two unrelated companies, for approximately $5.6 million in cash and $0.5 million in non-cash consideration consisting of the accounts receivable balance for the Power Systems US division. Prior to the sale, each of these divisions were reported by the Company as its own operating segment. Operations associated with these discontinued segments have been classified as loss from discontinued operations in the accompanying consolidated statements of operations, and cash flows associated with these segments are included in cash flows from discontinued operations in the consolidated statements of cash flows.

        Net sales from discontinued operations were $13.3 million and $14.5 million for the year ended December 31, 2008 and December 31, 2007, respectively. Loss from discontinued operations was $1.1 million and $1.1 million for the year ended December 31, 2008 and December 31, 2007, respectively. Net sales and net loss from discontinued operations is broken out by division as follows:

 
  Year Ended  
Division
  December 31,
2008
  December 31,
2007
 

Electronics

             
 

Net Sales

  $ 8,250,768   $ 9,581,788  
 

Net Loss

  $ (1,094,326 ) $ (500,370 )

Power Systems, US

             
 

Net Sales

  $ 5,021,022   $ 4,962,172  
 

Net Loss

  $ (40,406 ) $ (632,833 )

Discontinued Operations

             

Total Net Sales

  $ 13,271,790   $ 14,543,960  

Total Net Loss

  $ (1,134,732 ) $ (1,133,203 )

        In accordance with EITF Issue No. 87-24, Allocation of Interest to Discontinued Operations, the Company has not allocated interest to discontinued operations. The Company has also eliminated all intercompany activity associated with discontinued operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

D. DISCONTINUED OPERATIONS (Continued)

        The net assets of the Electronics and Power Systems US divisions at December 31, 2008 and December 31, 2007 consisted of the following, which have been reclassified in the accompanying consolidated balance sheet:

 
  December 31,
2008
  December 31,
2007
 

Accounts receivable, net

  $   $ 1,930,182  

Inventory

      $ 3,383,223  

Prepaid expenses

      $ 71,007  
           

Current assets of discontinued operations

  $   $ 5,384,412  
           

Property and equipment, net

      $ 1,294,198  

Goodwill other long-term assets

      $ 636,568  
           

Non-current assets of discontinued operations

  $   $ 1,930,766  
           

Accounts payable

      $ 1,521,748  

Deferred revenue

      $ 430,642  

Accrued payroll and related expenses

      $ 42,075  

Other current liabilities

      $ 271,726  
           

Current liabilities of discontinued operations

  $   $ 2,266,191  
           

Long-term Liabilities of discontinued operations

  $   $ 63,825  
           

        The sale of the Electronics and Power Systems US divisions resulted in a gain on sale of discontinued operations for the year ended December 31, 2008 as follows:

 
  Electronics   Power Systems, US   Total  

Net current assets sold

  $ 3,417,632   $ 404,474   $ 3,822,106  

Long-term assets sold

    1,120,176     45,556     1,165,732  
               

Total net assets sold

  $ 4,537,808   $ 450,030   $ 4,987,838  
               

Consideration, net

  $ 4,994,137   $ 267,744   $ 5,261,881  
               

Gain (loss) on sale of discontinued operations

  $ 456,329   $ (182,286 ) $ 274,043  
               

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

E. INVENTORY

        Inventory includes material, labor and overhead and consisted of the following:

 
  December 31,  
 
  2008   2007  

Raw material

  $ 4,920,780   $ 3,503,057  

Work-in-process

    6,182,835     8,765,015  

Finished goods

    353,917     1,539,129  
           

  $ 11,457,532   $ 13,807,201  
           

        The provision for excess and obsolete inventory, from continuing operations, net of usage, for the years ended December 31, 2008 and 2007 was $360,035 and $206,780, respectively.

F. PROPERTY AND EQUIPMENT

        Property and equipment consisted of the following:

 
  December 31,  
 
  2008   2007  

Machinery and equipment

  $ 5,795,744   $ 5,240,624  

Furniture and fixtures

    371,262     347,435  

Computer software

    823,662     803,499  

Leasehold improvements

    986,592     748,597  
           

    7,977,260     7,140,155  

Less: accumulated depreciation and amortization

    (6,012,292 )   (5,374,702 )
           

  $ 1,964,968   $ 1,765,453  
           

        Depreciation and amortization expense from continuing operations relating to property and equipment for the years ended December 31, 2008 and 2007 was $0.9 million and $0.5 million, respectively.

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES

Features of the Convertible Notes and Warrants

        On July 19, 2006, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with the purchasers named therein (the "Purchasers") in connection with the private placement (the "Private Placement") of:

    $12,000,000 aggregate principal amount of senior secured convertible notes (the "Convertible Notes"), convertible into shares of the Company's common stock at a conversion price of $1.65 per share;

    Warrant As to purchase up to an aggregate of 3,636,368 shares of the Company's common stock at a price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants; and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

    Warrant Bs to purchase up to an aggregate of 3,636,368 shares of the Company's common stock at a price of $1.68 per share for a period of 90 trading days beginning the later of six months from the date of such warrants and the date the Securities and Exchange Commission (the "SEC") declares effective a shelf registration statement covering the resale of the common stock underlying the securities issued in the Private Placement (the "Registration Statement"); to the extent the Warrant Bs are exercised, the Purchasers were entitled to receive additional warrants (the Warrant Cs), as described below. Because the registration statement was declared effective on September 27, 2006, these warrants were originally exercisable for the 90 trading day period beginning six months from the date of such warrants (i.e. until May 30, 2007). On December 20, 2006 the Warrant Bs were amended to extend the expiration date of the Warrant Bs issued in the Private Placement from May 30, 2007 to August 31, 2007. In addition, this amendment amended the definition of "Excluded Stock" set forth in the Purchase Agreement to enable the Company to issue up to 1.1 million shares of the Company's common stock in connection with the early termination of the lease for the Company's facility located in Worcester, Massachusetts, without such shares being subject to the Purchasers' right of participation set forth in the Purchase Agreement and certain prohibitions set forth in the Convertible Notes and related warrants (as discussed in Note T below, the Company ultimately settled the lease for 850,000 shares). The Warrant Bs were exercised in full on July 17, 2007 for $1.31 per share. See below for a discussion related to the exercise of the Warrant Bs and the issuance of Warrant Cs to the holders as a result of such exercise.

        In connection with the Private Placement, the Company also entered into a Security Agreement, dated July 19, 2006, with the Purchasers, pursuant to which the Company granted the Purchasers a security interest in all of its rights, title and interest in, to and under all of the Company's personal property and other assets, including its ownership interest in the capital stock of its subsidiaries, as security for the prompt payment in full of all amounts due and owing under the Convertible Notes. The following is a summary of the material provisions of the Purchase Agreement, the Notes, the Warrant As, the Warrant Bs and the Warrant Cs.

        As noted above, the Purchase Agreement provided for the issuance and sale to the Purchasers of the Convertible Notes, the Warrant As and the Warrant Bs for an aggregate purchase price of $12,000,000. Other significant provisions of the Purchase Agreement include:

    the requirement that the Company pay off all amounts outstanding under our previous credit facility with Silicon Valley Bank;

    for so long as the Convertible Notes were outstanding, the obligation that the Company offer to the Purchasers the opportunity to participate in subsequent securities offerings (up to 50% of such offerings), subject to certain exceptions for, among other things, certain underwritten public offerings and strategic alliances;

    for so long as the Convertible Notes were outstanding, the obligation that the Company not incur any indebtedness that is senior to, or on parity with, the Convertible Notes in right of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

      payment, subject to limited exceptions for purchase money indebtedness and capital lease obligations.

        On November 7, 2007, the Convertible Notes were retired by cash redemption.

        Under the Purchase Agreement, the Company was also obligated to (i) file the Registration Statement with the SEC within 30 days following the closing of the Private Placement (which it has satisfied with respect to the securities issued in July 2006), (ii) use its best efforts to cause the Registration Statement to be declared effective within 90 days following the closing of the Private Placement, (which it has satisfied with respect to the securities issued in July 2006, as the Registration Statement was declared effective on September 27, 2006) and (iii) use its best efforts to keep the Registration Statement effective until the earlier of (x) the fifth anniversary of the effective date of the registration statement, (y) the date all of the securities covered by the Registration Statement have been publicly sold and (z) the date all of the securities covered by the Registration Statement may be sold without restriction under SEC Rule 144.

        Additionally, with respect to the common stock underlying the Warrant Cs issued in July 2007 upon exercise of the Warrant Bs, the Company was also obligated to (i) file a registration statement covering the resale of such common stock with the SEC within 30 days following the issuance of the Warrant Cs (which it has satisfied), (ii) use its best efforts to cause such registration statement to be declared effective within 60 days following the issuance of the Warrant Cs (or 90 days in the event of a review of such registration statement by the SEC) (which it has satisfied and was declared effective on September 11, 2007) and (iii) use its best efforts to keep such registration statement effective until the earlier of (x) the fifth anniversary of the effective date of the registration statement, (y) the date all of the securities covered by the registration statement have been publicly sold and (z) the date all of the securities covered by the registration statement may be sold without restriction under SEC Rule 144.

        If the Company fails to comply with these or certain other provisions, then the Company will be required to pay liquidated damages of 1% of the aggregate purchase price paid by the Purchasers in the Private Placement for the initial occurrence of such failure and 1.5% of such amount for each subsequent 30 day period the failure continues. The total liquidated damages under this provision are capped at 24% of the aggregate purchase price paid by the Purchasers in the Private Placement.

        The Convertible Notes originally had an aggregate principal amount of $12.0 million and were convertible into shares of the Company's common stock at a conversion price of $1.65, subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.

        The Convertible Notes bore interest at the higher of (i) 7.0% per annum or (ii) the six-month LIBOR plus 3.5% (the "Stated Rate 6-Month LIBOR Condition"). Interest was payable quarterly, beginning on October 31, 2006, and could be paid in cash or, at the Company's option if certain equity conditions ("Equity Conditions") were satisfied, in shares of the Company's common stock. If interest was paid in shares of common stock, the price per share was at a 10% discount to the volume weighted average price for the 20 trading days preceding the payment date. The Equity Conditions included

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)


(1) the Company had sufficient authorized shares for issuance, (2) such shares were registered for resale or may be sold without volume restrictions pursuant to Rule 144(k) under the Securities Act, (3) the common stock was listed or quoted (and was not suspended from trading) on an eligible exchange and such shares were approved for listing upon issuance, (4) the issuance did not violate Section 6(c) of the Convertible Note or the rules and regulations of any trading market, (5) there had been no event of bankruptcy by the Company, (6) the Company was not in default with respect to any material obligation under any documents associated with issuance of the Convertible Notes and Warrants, and (7) there had been no public announcement of a pending or proposed change of control that has not been consummated.

        Seventy-five percent (75%) of the original principal amount of the Convertible Notes was to be repaid in 18 equal monthly installments ($500,000 per month) beginning on February 28, 2007. Such principal payments could be made in cash or, at the Company's option if certain equity conditions were satisfied, in shares of common stock. If principal was paid in shares of common stock, the price per share was the lesser of (i) the conversion price or (ii) a 10% discount to the volume weighted average price for the 20 trading days preceding the payment date. At any time following the 24-month anniversary of the issuance of the Convertible Notes, the holders had the right to elect to require the Company to redeem for cash all or any portion of the outstanding principal on the Convertible Notes; provided, however, that on the 60 month anniversary of the issuance of the Convertible Notes, the Company would have been required to redeem any remaining outstanding principal and unpaid interest. Notwithstanding the foregoing, at any time following the one year anniversary of the effective date of the Registration Statement, the Company had the right, under certain circumstances, including satisfaction of the Equity Conditions with respect to the underlying shares, redeem the Convertible Notes for cash equal to 120% of the aggregate outstanding principal amount plus any accrued and unpaid interest.

        The Convertible Notes were convertible at the option of the holders into shares of the Company's common stock at any time at the conversion price. If at any time following the one year anniversary of the effective date of the Registration Statement, the volume weighted average price per share of common stock for any 20 consecutive trading days exceeded 175% of the conversion price, then, if certain conditions were satisfied, including the Equity Conditions, the Company could require the holders of the Convertible Notes to convert all or any part of the outstanding principal into shares of common stock at the conversion price. The Convertible Notes contained certain limitations on optional and mandatory conversion, including that, absent stockholder approval of the transaction, the Company could not issue shares of common stock under the Convertible Notes or the Warrant Bs, in the aggregate, in excess of 19.99% of our outstanding shares on the closing date (or 7,901,276 shares of common stock). On October 19, 2007, the Company received stockholder approval allowing for the issuance of additional shares of the Company's common stock sufficient to allow for the full conversion of the Company's outstanding Convertible Notes, as well as the full payment of interest and principal on such notes, all in accordance with the terms of such notes.

        In July 2007, $533,895 of the Convertible Notes and accrued interest were converted into shares of common stock. The Convertible Notes and accrued interest converted at $1.65 per share. The Company issued 318,182 shares of common stock related to the conversion of the principal on the Convertible

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)


Notes and 5,391 shares of common stock related to the accrued interest due through the date of conversion as a result of the Convertible Note holders' conversions.

        As noted above, on November 7, 2007, the remaining balance of the Convertible Notes was retired by cash redemption.

        The Warrant As originally entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of the Company's common stock at a price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter referred to as the "non-exercise period." The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.

        If a change of control of the Company occurs, as defined, the holders may elect to require us to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A.

        For so long as any Warrant As remain outstanding, we may not issue any common stock or common stock equivalents at a price per share less than $1.65. In the event of a breach of this provision, the holders may elect to require us to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A. As a result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note I below, the holders were entitled for a limited period of time (45 days after each issuance) to exercise this right. During the fourth quarter of fiscal 2007, the Company paid approximately $1.4 million to redeem Warrant As representing 1,242,426 shares of common stock. During the first quarter of fiscal 2008, the Company paid approximately $0.4 million to redeem Warrant As representing 303,031 shares of common stock. (See table below for assumptions used in valuing the warrants redeemed). As of December 31, 2008, Warrant As to purchase 2,090,911 shares of common stock were outstanding.

        If following the later of (i) the effective date of the Registration Statement and (ii) the six month anniversary of the issuance date, the volume weighted average price per share of our common stock for any 20 consecutive trading days exceeds 200% of the exercise price, then, if certain conditions are satisfied, including the Equity Conditions, we may require the holders of the Warrant As to exercise up to 50% of the unexercised portions of such warrants. If following the 24 month anniversary of the issuance date, the volume weighted average price per share of our common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, we may require the holders of the Warrant As to exercise all or any part of the unexercised portions of such warrants.

        The Warrant Bs entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of our common stock at a price of $1.68 per share for a period of 90 trading days beginning the later of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

six months from the date of such warrants and the date the SEC declares effective the Registration Statement. As noted above, as a result of an amendment, the expiration date of the Warrant Bs was extended to August 31, 2007.

        On July 17, 2007, the holders of the Warrant Bs exercised such warrants in full, acquiring 3,636,638 shares of common stock at $1.31 per share. The Company received proceeds of approximately $4.8 million. To entice the holders of the Warrant Bs to exercise such warrants the Company reduced the exercise price from $1.68 to $1.31 per share. As a result of reducing the exercise price the Company recorded a charge to operations in its fiscal third quarter ending September 29, 2007 related to the warrant modification of approximately $0.9 million to change in fair value of the Convertible Notes and warrants on the accompanying statement of operations. Pursuant to the original terms of the Warrant Bs, upon exercise of the Warrant Bs, the warrant holders were entitled to receive additional warrants ("Warrant Cs") to purchase a number of shares of common stock equal to 50% of the number of shares of common stock purchased upon exercise of the Warrant Bs. As a result of the full exercise of the Warrant Bs, the holders received Warrant Cs to purchase 1,818,187 shares of common stock at an exercise price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants.

        As discussed above, upon the exercise of the Warrant Bs, the holders were entitled to receive additional warrants (the "Warrant Cs"). The Warrant Cs originally entitled the holders thereof to purchase up to an aggregate of 1,818,187 shares of our common stock at a price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter referred to as the "non-exercise period." The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.

        If a change of control of the Company occurs, as defined, the holders may elect to require us to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant C.

        For so long as any Warrant Cs remain outstanding, the Company may not issue any common stock or common stock equivalents at a price per share less $1.65. In the event of a breach of this provision, the holders may elect to require the Company to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant C. As a result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note I below, the holders were entitled for a limited period of time (45 days after each issuance) to exercise this right. During the fourth quarter of fiscal 2007, the Company paid approximately $0.7 million to redeem Warrant Cs representing 621,215 shares of common stock. During the quarter ended March 29, 2008, the Company paid approximately $0.2 million to redeem Warrant Cs representing 151,516 shares of common stock. (See table below for assumptions used in valuing the warrants redeemed). As of December 31, 2008, Warrant Cs to purchase 1,045,456 shares of common stock were outstanding.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

        The table below summarizes Black-Scholes option pricing model range of assumptions that were used in valuing the warrants redeemed for both the Warrant As and Warrant Cs.

Assumptions:
  Warrant As   Warrant Cs

Expected life

  5.68 years to 5.69 years   6.67 years to 6.68 years

Expected volatility ranging from

  83.0%   85.0%

Dividends

  none   none

Risk-free interest rate

  3.75%–3.84%   3.85%–3.93%

        If following the later of (i) the effective date of the Registration Statement and (ii) the six month anniversary of the issuance date, the volume weighted average price per share of the Company's common stock for any 20 consecutive trading days exceeds 200% of the exercise price, then, if certain conditions are satisfied, including the Equity Conditions, the Company may require the holders of the Warrant Cs to exercise up to 50% of the unexercised portions of such warrants. If following the 24 month anniversary of the issuance date, the volume weighted average price per share of our common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, the Company may require the holders of the Warrant Cs to exercise all or any part of the unexercised portions of such warrants.

        First Albany Capital ("FAC") acted as placement agent in connection with the Private Placement. In addition to a cash transaction fee, FAC or its designees were entitled to receive five-year warrants to purchase 218,182 shares of the Company's common stock at an exercise price of $1.87 per share. These warrants will be callable after the second anniversary of the closing of the Private Placement if the 20-day volume weighted average price per share of the Company's common stock exceeds 175% of the exercise price. At the direction of FAC, these warrants were issued to First Albany Companies Inc., the parent of FAC.

Accounting for the Convertible Debt Instrument and Warrants

        The Company determined that the Convertible Notes constituted a hybrid instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The Company identified all of the derivatives associated with the July 19, 2006 financing, and concluded that two of the derivatives could not be reliably measured nor reliably associated with another derivative that could be reliably measured. As such, the Company valued these derivatives as a single hybrid contract together with the Convertible Notes. The contract was remeasured at each period at the fair value with the changes in fair value recognized in the statement of operations until settlement of the Convertible Notes. As permitted under SFAS 155, the Company irrevocably elected, as of January 1, 2007, to continue to measure the Convertible Notes and embedded derivatives in their entirety at fair value with changes in fair value recognized as either gain or loss. The Company determined that this election had no impact on the accounting for the Convertible Notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

        Upon issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together the "Warrants"), did not meet the requirements for equity classification set forth in EITF Issue 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock, because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale registration of the shares and (c) there is a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted for as freestanding derivative instruments pursuant to the provisions of SFAS 133. Changes in fair value are recognized as either a gain or loss in the statement of operations under the caption "change in fair value of Notes and warrants." In addition, prior to their exercise by the holders, the Warrant Bs had been classified as a current liability on the balance sheet as they are outstanding for less than one year.

        Upon issuance of the Convertible Notes and Warrants, the Company allocated the proceeds received from the Convertible Notes and Warrants on a relative fair value basis. As a result of such allocation, the Company determined the initial carrying value of the Convertible Notes to be $9.4 million. The Convertible Notes were immediately marked to fair value, resulting in a derivative liability in the amount of $16.3 million. The Convertible Notes were paid off in full in November 2007. The net credit to Change in Fair Value of Convertible Notes and Warrants, related to the Convertible Notes, for the year ended December 31, 2007 was approximately $1.1 million.

        Upon issuance, the Company allocated $2.7 million of the initial proceeds to the Warrants and immediately marked them to fair value resulting in a derivative liability of $4.9 million and a charge to other expense of $2.2 million. As of December 31, 2008 and 2007, the remaining outstanding Warrants have been marked to fair value resulting in a derivative liability of $2.4 million and $3.2 million, respectively. The credit to Change in Fair Value of Convertible Notes and Warrants, related to the Warrants, for the year ended December 31, 2008 and 2007 was $0.3 million and $0.6 million ($1.5 million and $ (0.9) million, including warrant modification, discussed above), respectively. The transaction costs were immediately expensed as part of the fair value adjustment.

        The debt discount in the amount of $2.6 million (resulting from the allocation of proceeds) was being amortized to interest expense using the effective interest method over the expected term of the Convertible Notes. During 2007, as a result of the payment in full of the Convertible Notes, the Company amortized the remaining balance resulting in approximately $2.1 million, which is a component of interest expense.

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SATCON TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2008 and 2007

G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES (Continued)

        A summary of the changes in the fair value of the Convertible Notes and the Warrants:

 
  Fair Value
of Notes
  Fair Value
of Warrant
Liabilities
  Total  

Balance December 31, 2006

  $ 12,740,482   $ 2,920,553   $ 15,661,035  

Amortization of debt discount

    2,115,442         2,115,442  

Fair value adjustment(4)

    (1,044,185 )   (1,451,903 )   (2,496,088 )

Redemptions:

                   
 

—Cash(2)

    (8,057,852 )       (8,057,852 )
 

—Cash paid related to pre-payment premium of 20%(2)

    (1,419,440 )       (1,419,440 )
 

—Stock(1)

    (3,809,447 )       (3,809,447 )

Note holder conversion @ $1.65 per share

    (525,000 )       (525,000 )

Modification charge of Warrant Bs(4)

        872,728     872,728  

Exercise of Warrant Bs and reclassification to equity

        (872,728 )   (872,728 )

Charge related to the initial issuance of Warrant Cs(4)

        1,775,666     1,775,666  

Change in fair value of redeemed Warrant As and Cs at redemption(3)(4)

        2,099,958     2,099,958  

Warrant Redemptions:

                   
 

—Cash Paid for Warrant A redemption(3)

        (1,363,622 )   (1,363,622 )
 

—Cash paid for Warrant C redemption(3)

        (736,336 )   (736,336 )
               

Balance at December 31, 2007

  $   $ 3,244,316   $ 3,244,316  
               

Fair value adjustment(4)

        (836,878 )   (836,878 )

Change in fair value of redeemed Warrant As and Cs at redemption(3)(4)

        572,250     572,250  

Warrant Redemptions:

                   
 

—Cash Paid for Warrant A redemption(3)

        (387,591 )   (387,591 )
 

—Cash paid for Warrant C redemption(3)

        (184,659 )   (184,659 )
               

Balance at December 31, 2008

  $   $ 2,407,438   $ 2,407,438