SatCon Technology 10-Q 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 3, 2009
Commission File Number 1-11512
SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value,
70,289,812 shares outstanding as of October 20, 2009.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
SATCON TECHNOLOGY CORPORATION
The accompanying notes are an integral part of these unaudited consolidated financial statements.
SATCON TECHNOLOGY CORPORATION
For the six months ended October 3, 2009
The accompanying notes are an integral part of these unaudited consolidated financial statements
SATCON TECHNOLOGY CORPORATION
The accompanying notes are an integral part of these unaudited consolidated financial statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(1) Includes $0 and $27,089, related to discontinued operations, for the nine month periods ended October 3, 2009 and September 27, 2008, respectively.
SATCON TECHNOLOGY CORPORATION
October 3, 2009 (2009) AND September 27, 2008 (2008)
Note A. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Satcon Technology Corporation and its wholly-owned subsidiaries (collectively, the Company) as of October 3, 2009 and for the three and nine months ended October 3, 2009 and September 27, 2008 and have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements, which, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation, should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008. Operating results for the three and nine months ended October 3, 2009 are not necessarily indicative of the results that may be expected for any future interim period or for the entire fiscal year.
Note 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 allow 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 may need to raise additional funds in the 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 2007 preferred stock financing. Such actions would likely require the consent of the investors in that financing (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.
Note C. Significant Accounting Policies and Basis of Consolidation
There have been no material changes from the Significant Accounting Policies and Basis of Presentation previously disclosed in Part II, Item 8, contained within Notes to Consolidated Financial Statements of the Companys Annual Report on Form 10-K for the fiscal year ending December 31, 2008 except for the adoption of the provisions described in ASC 815 (Formerly -EITF No. 07-05 Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock) as disclosed below.
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.). The results of operations include activity related to discontinued operations of Satcon Electronics, Inc. and Satcon Power Systems, Inc., see Note D. All intercompany accounts and transactions have been eliminated in consolidation.
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 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, 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 October 3, 2009 and December 31, 2008, the Company has accrued approximately $0 and $1.1 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.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, overnight repurchase agreements with Silicon Valley Bank (the 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 October 3, 2009, the Company had approximately $10.0 million invested in a money market account with a national bank. At October 3, 2009 and December 31, 2008, the Company had restricted cash as indicated in the table below.
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 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.
Foreign Currency Translation
The functional currency of the Companys 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 as follows for the three and nine month periods ended October 3, 2009 and September 27, 2008:
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.
The Company accounts for income taxes utilizing the asset and liability method for accounting and reporting for income taxes. Under this method, 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, the Company is required to establish 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 Company is required 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. In addition, the Company is required to provide 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.
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 Companys 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 Companys 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. 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 2008 remain open to examination by major taxing jurisdictions to which the Company is 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. 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, as well as stock options issued outside of such plans as an inducement to engage new executives. 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.
On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107, Share Based Payment (SAB 107). 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 the provisions of stock based compensation 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, the modification of employee share options prior to adoption, and disclosures in Managements Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption. 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).
The Company has elected to adopt the alternative transition method for calculating the tax effects (if any) of stock-based compensation expense. 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 the provisions of accounting for stock-based compensation.
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 for its plain-vanilla option grants. The simplified method for plain-vanilla options calculates the expected life based on a preset formula where the expected life is equal to the sum of vesting term of the option and the contractual term of the option divided by two. If the Company determines that another method used to estimate expected volatility is more reasonable than the Companys 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 compensation plans in the consolidated financial statements for the three and nine months ended October 3, 2009 and September 27, 2008 and did not capitalize any such costs on the consolidated balance sheets, as such costs that qualified for capitalization were not material. The following table presents share-based compensation expense included in the Companys consolidated statement of operations:
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. As of October 3, 2009, there was approximately $7.3 million of total unrecognized costs related to non-vested share-based compensation arrangements. The Company expects to recognize the cost over a weighted average period of approximately 2.5 years.
The weighted average grant date fair value of options granted during the three and nine months ended October 3, 2009 and September 27, 2008 were $1.83 and $1.44 and $2.44 and $2.04, 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:
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 Companys 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 three and nine months ended October 3, 2009, there were three and two customers, respectively, that were deemed significant with regards to revenue. For the three months ended October 3, 2009, these customers accounted for approximately 38%, or approximately $4.5 million, of revenue. For the nine months ended October 3, 2009, these customers accounted for approximately 26%, or approximately $9.5 million, of revenue. At October 3, 2009, there are three customers that were deemed significant with regards to trade accounts receivable. At October 3, 2009, these customers accounted for approximately 22%, or approximately $2.6 million, of trade 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 Companys financial instruments consist of cash equivalents, accounts receivable, unbilled contract costs and fees, warrants to purchase shares of common stock, accounts payable and debt instruments. The estimated fair values of these financial instruments approximate their carrying values at October 3, 2009 and December 31, 2008. The estimated fair values have been determined through information obtained from market sources and management estimates. The Companys warrant liability is recorded at fair value. See Fair Value Measurement section below.
Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of October 3, 2009 are as follows:
Fair Value Measurements at Reporting Date Using
(1) Level 1 - Quoted prices in active markets for identical assets or liabilities.
(2) 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.
(3) 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.
(4) Within the Companys Level 2 financial assets, which consists of long term investor warrant liabilities comprised of the Warrant As, Warrant Cs, the Series C Preferred Warrants 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 and the Series C Preferred Warrants are being fair valued using the Black-Scholes option pricing model. (see Note J. Convertible Debt Instruments and Warrant Liabilities-Valuation Methodology and Significant Assumptions and Note K - Redeemable Convertible Series B and Series C Preferred Stock and warrant liabilities below).
(5) Included as a component of cash and cash equivalents on accompanying consolidated balance sheets.
Upon the Companys adoption of ASC 815-40 on January 1, 2009, the Companys evaluation of the Series C Preferred Stock Warrants determined that the 19,799,022 Series C Preferred Stock Warrants did not qualify for a scope exception under ASC 815-10-15 as they were determined to not be indexed to the Companys stock as prescribed by ASC 815-40-55. As a result, on the date of adoption the Company reclassified these warrants from additional paid in capital to warrant liabilities through a cumulative effect of a change in accounting principle. The initial value of the warrant liability at adoption was $22,041,541.
For the nine months ended October 3, 2009, the Company recorded a charge to change in fair value of warrants of approximately $3.2 million for the increase in the fair value related to these warrants during the period. The warrants did not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants were to be recognized currently in earnings until such time as the warrants were modified in the manner described below, exercised or expired. These common stock purchase warrants do not trade in an active securities market, and as such, we estimated the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:
On July 3, 2009, the Company modified certain provisions contained within the Series C Preferred Stock Warrants. Under the terms of the original Series C Preferred Stock Warrants (prior to their modification), in addition to standard anti-dilution protection for stock splits or dividends, stock combinations, mergers, liquidation or similar events, the exercise price and number of shares issuable upon exercise of these warrants were subject to adjustment in the event of certain dilutive issuances (the Dilutive Issuance Provision). Upon each adjustment of the exercise price pursuant to the Dilutive Issuance Provision, the number of shares subject to the warrant were also to be adjusted by multiplying the current exercise price prior to the adjustment by the number of shares subject to the warrant and dividing the product by the exercise price resulting from the adjustment. The Dilutive Issuance Provision was modified to (i) limit the instances in which a dilutive issuance will cause an adjustment to the exercise price of the warrants and (ii) eliminate the provision that correspondingly increased the number of shares underlying the warrants in the event of a dilutive issuance that causes an adjustment to the exercise price. As a result of this modification these warrants will now accounted for as equity by the Company, as they now qualify for the scope exemption under ASC 815-10-15. Previously the warrants, due to the adoption of the provisions of ASC 815-40, were accounted for as a derivative liability. In addition, as a result of this modification, the Company will no longer be required to mark these warrants to fair value each quarter. (See Note J. Convertible Debt Instruments and Warrant Liabilities)
In addition, the Company determined the fair values of the investor warrants (the Warrant As and Warrant Cs) and placement agent warrants using valuation models it considers to be appropriate. The Companys stock price has the most significant influence on the fair value of its warrants. An increase in the Companys common stock price would cause the fair values of the warrants to increase, because the exercise price of the warrants is fixed at $1.815 per share and result in a charge to our statement of operations. A decrease in the Companys stock price would likewise cause the fair value of the warrants to decrease and result in a credit to our statement of operations. See Note J for valuation discussion.
Redeemable Convertible Series B Preferred Stock
The Company accounts for its Series B Preferred Stock and associated warrants in accordance with ASC 470-20, 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 Companys balance sheet. To the extent that the Series B Preferred Stock is subject to a remeasurement event pursuant to ASC 480-10, or is otherwise modified, the Series B Preferred Stock will be reclassified to temporary equity.
Redeemable Convertible Series C Preferred Stock
The Company accounted for its issuance of Convertible Series C Preferred Stock (the Series C Preferred Stock), and associated warrants in accordance with in accordance with ASC 470-20, 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 classifying the Series C Preferred Stock as temporary equity on the balance sheet between the captions for liabilities and permanent shareholders 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 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.
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 three and nine months ended September 27, 2008. The effect of the reclassification was approximately $0.1 million and $0.3 million of translation related gains being accounted for in other income for the three and nine month periods ended September 27, 2008, respectively.
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.
There were no sales and no loss from discontinued operations during the three and nine month periods ended October 3, 2009. Net sales from discontinued operations were $3.9 million and $11.0 million for the three and nine months ended September 27, 2008, respectively. Loss from discontinued operations was $1.0 million and $3.0 million for the three and nine months ended September 27, 2008. Net sales and net loss from discontinued operations for the three and nine months ended September 27, 2008 is broken out by division as follows:
The Company has not allocated interest to discontinued operations. The Company has also eliminated all intercompany activity associated with discontinued operations.
The sale of the Electronics and Power Systems US divisions resulted in a gain on sale of discontinued operations for the period ended September 27, 2008 as follows:
There were no net assets of the Electronics and Power Systems US divisions at October 3, 2009 and December 31, 2008.
Note E. Loss per Share
The following is the reconciliation of the numerators and denominators of the basic and diluted loss per share computations:
As of October 3, 2009 and September 27, 2008, shares of common stock issuable upon the exercise of options and warrants were excluded from the diluted average common shares outstanding, as their effect would have been antidilutive. In addition, shares of common stock issuable upon the conversion of Series B Preferred Stock and Series C Preferred Stock were excluded from the diluted weighted average common shares outstanding as their effect would also have been anti-dilutive. 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.
The table below summarizes the option and warrants and convertible preferred stock that were excluded from the calculation above due to their effect being antidilutive:
The table below details out shares of common stock underlying securities for which the securities would have been considered dilutive at October 3, 2009 and September 27, 2008, had the Company not been in a loss position:
Note F. Inventory
Inventory components at the end of each period were as follows:
Note G. Legal Matters
From time to time, the Company is a party to routine litigation and proceedings in the ordinary course of business. The Company is not aware of any current or pending litigation in which the Company is or may be a party that it believes could materially adversely affect the results of operations or financial condition.
Note H. Commitments and Contingencies
The Company leases its facilities under various operating leases that expire through 2016.
Future minimum annual rentals under lease agreements at October 3, 2009 are as follows:
Letters of Credit:
The Company utilizes a standby letter of credit to satisfy a security deposit requirement and in some instances to satisfy warranty commitments. Outstanding standby letters of credit as of October 3, 2009 and December 31, 2008 were $34,000. The Company is required to pledge cash as collateral on these outstanding letters of credit. As of October 3, 2009 and December 31, 2008, the cash pledged as collateral for these letters of credit was $34,000, and is included in restricted cash and cash equivalents on the balance sheet.
The Companys employment arrangement with its current Chief Executive Officer provides that if his employment is terminated by the Company without cause or is constructively terminated within one year following a change of control transaction, his salary and medical benefits will be continued for one year thereafter subject to his execution of a release agreement with the Company.
Line of Credit
On February 26, 2008, the Company entered into a Loan and Security Agreement (the Loan Agreement) with Silicon Valley Bank (the Bank). Under the terms of the Loan Agreement, the Bank agreed to provide the Company with a credit line up to $10.0 million. The Companys obligations under the Loan Agreement are secured by substantially all of the assets of the Company and advances under the Loan Agreement are limited to 80% of eligible receivables and the lesser of 25% of the value of the Companys eligible inventory, as defined, or $1.0 million. Interest on outstanding borrowings accrues at a rate per annum equal to the Prime Rate plus one percent (1.0%) per annum, as defined, or the LIBOR Rate plus three and three quarter percent (3.75%) per annum. The Loan Agreement contains certain financial covenants relating to tangible net worth, as defined, which the Company must satisfy in order to borrow under the agreement. In addition, the Company agreed to pay to the Bank a collateral monitoring fee of $750 per month and agreed to the following additional terms: (i) $50,000 commitment fee, $25,000 to be paid at signing of the Loan Agreement and $25,000 to be paid on the one year anniversary of the Loan Agreement; (ii) an unused line fee in the amount of 0.5% per annum of the average unused portion of the revolving line; and (iii) an early termination fee of 0.5% of the total credit line if the Company terminates the Loan Agreement prior to 12 months from the Loan Agreements effective date. The Loan Agreement, if not sooner terminated in accordance with its terms, expires on February 25, 2010.
On September 24, 2008, the Company entered into the Second Loan Modification Agreement with the Bank. The Second Loan Modification modified certain of the financial covenants related to the Loan Agreement. The Company paid legal fees of approximately $15,000 related to the Second Loan Modification Agreement.
On September 29, 2009, the Company entered into the Third Loan Modification Agreement with the Bank. The Third Loan Modification modified certain of the financial covenants related to the Loan Agreement. The Company paid legal fees of $10,000 related to the Third Loan Modification Agreement. As of October 3, 2009, the Company had $3.0 million outstanding under the Loan Agreement and the Banks prime rate was 4.0%. The rate used was the Banks prime rate of 4% plus 1% or (5% at October 3, 2009).
The Company has certain financial covenants under the Loan Agreement. At October 3, 2009, the Companys most restrictive covenant under the line of credit was a tangible net worth covenant, as defined, which was set at approximately $16.0 million. At October 3, 2009, the Companys tangible net worth, as defined, was approximately $17.6 million, which exceeded the covenant requirement. The Company also has a liquidity covenant, as defined, which was set at approximately $4.0 million. As of October 3, 2009, the Companys liquidity, as defined, was approximately $19.4 million, which exceeded the covenant requirement. As of October 3, 2009, the Company had availability of $3.1 million under the line of credit.
At October 3, 2009, in addition to the amounts outstanding under it line of credit with the Bank, the Company had a secured short term note payable to the Bank in the amount of $1.3million. The short term note payable was due 20 days after issuance and was secured by a letter of credit covering a receivable from a customer. Subsequent to the October 3, 2009 the Company has satisfied its obligation to the Bank.
Note I. Product Warranties
In its Renewable Energy Solutions division the Company provides a warranty to its customers for most of its products sold. In general the Companys warranties are for one year after the sale of the product and five for photovoltaic inverter product sales. The Company reviews its warranty liability quarterly. The Companys estimate for product warranties is based on an analysis of actual expenses by specific product line and estimated future costs related to warranty. Factors taken into consideration when evaluating the Companys warranty reserve are (i) historical claims for each product, (ii) the development stage of the product, (iii) volume increases, (iv) life of warranty and (v) other factors. To the extent actual experience differs from the Companys estimate, the provision for product warranties will be adjusted in future periods. Such differences may be significant.
The following is a summary of the Companys accrued warranty activity for the following periods:
Note J. 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 Companys 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 Companys 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
· Warrant Bs to purchase up to an aggregate of 3,636,368 shares of the Companys 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. 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.
On November 7, 2007, the Convertible Notes were retired by cash redemption.
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 as such registration statement 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.
The Warrant As originally entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of the Companys 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, subject to certain exceptions. 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 K 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 October 3, 2009 and December 31, 2008, Warrant As to purchase 2,090,911 shares of common stock were outstanding, respectively.
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