UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

---------------------

 

FORM 10-Q/A

(Amendment No. 1)

 

[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934 for the quarterly period ended March 31, 2005

 

or

 

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange

Act of 1934

(For the transition period from ___ to ___ ).

 

Commission File Number: 001-16171

 

Beacon Power Corporation

(Exact name of registrant as specified in its charter)

 

 

|  
Delaware  

04-3372365

 
(State or other jurisdiction of  

(I.R.S. Employer

 
incorporation or organization)  

Identification No.)

 

 

 

234 Ballardvale Street

Wilmington, Massachusetts                                                                                           01887-1032

(Address of principal executive offices)                                                                             (Zip code)

 

(978) 694-9121

 (Registrant's telephone number, including area code)

------------------------

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes _X_  No ___

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes ____  No __X__

 

The number of shares of the Registrant's common stock, par value $.01 per share, outstanding as of May 6, 2005 was 43,665,143.

 

 

 

EXPLANATORY NOTE REGARDING THIS FORM 10-Q/A

 

Beacon Power Corporation (“the Company”) is filing this Amendment No. 1 (“Amendment”) to its quarterly report on Form 10-Q for the three months ending March 31, 2005 (“Original Filing”) to correct the following disclosure items in its originally filed quarterly report on Form 10-Q for the first quarter of 2005, filed May 16, 2005.  This Amendment does not change the Company’s consolidated balance sheets and consolidated statements of operations as originally filed. 

 

**•**

The Company has amended the language in Item 4, Controls and Procedures of its Original Filing to clarify management’s conclusions on the effectiveness of the Company’s disclosure controls and procedures and its internal control over financial reporting, pursuant to Item 307 and Item 308(a)(3) of Regulation S-K.  

 

**•**

This Amendment also clarifies language in its Original Filing describing the Company’s accounting method for government contracts under the percentage of completion method.

 

**•**

As a result of the above amendments, the certifications filed as Exhibits 31 and 32 have been re-executed as of the date of this Amendment.

 

 

 

1

 

 

 

**BEACON POWER CORPORATION AND SUBSIDIARIES**

**(A Development Stage Company)**

**Table of Contents**

 

 

Page

 

PART I.  Financial Information

 

Item 1.  Financial Statements.

 

Consolidated Balance Sheets at March 31, 2005 (unaudited) and December 31, 2004 (audited).

1

 

Unaudited Consolidated Statements of Operations for the three months ended

 
 
March 31, 2005 and 2004 and for the period from May 8, 1997 (date of inception) to

 
 
March 31, 2005.

2

 

Unaudited Consolidated Statements of Cash Flows for three months ended March 31, 2005

 
 
and 2004 and for the period from May 8, 1997 (date of inception) to March 31, 2005.

3

 

Notes to Unaudited Consolidated Financial Statements.

5-14

 

Item 2.  Management's Discussion and Analysis of Financial Condition and

 
 
Results of Operations.

16-27

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

30

 

Item 4.  Controls and Procedures.  

30

 

PART II.  Other Information

 

Item 1.  Legal Proceedings.

31

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

31

Item 3.  Defaults upon Senior Securities.

31

Item 4.  Submission of Matters to a Vote of Security Holders.

31

Item 5.  Other Information.

31

Item 6.  Exhibits.

32

 

Signatures

34

 

 

 

 

 

 

 

 

 

 

**BEACON POWER CORPORATION AND SUBSIDIARIES**

**(A Development Stage Company)**

**Consolidated Balance Sheets**

 

 

 

 

**March 31,**

 

**December 31,**

 

 

 

 

**2005**

**(unaudited)**

 

**2004**

**(audited)**

**Assets**

** **

** **

** **

** **

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$         3,334,595 

 

$         5,097,188 

 

Accounts receivable, trade, net

 

895 

 

52,105 

 

Inventory

 

--

 

222,593 

 

Unbilled costs on government contracts

 

416,705

 

--

 

Prepaid expenses and other current assets

 

599,658

 

817,396 

 

 

Total current assets

 

4,351,853

 

6,189,282 

 

 

 

 

 

 

 

Property and equipment, net

 

277,316 

 

258,647 

Restricted cash

 

310,011 

 

310,011 

Other assets and prepaid financing costs

 

354,484 

 

327,646 

 

 

 

 

 

 

 

Total assets

 

$         5,293,664

 

$         7,085,586 

 

 

 

 

 

 

 

**Liabilities and Stockholders' Equity**

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$            184,947 

 

$            389,189 

 

Accrued compensation and benefits

 

196,699 

 

130,609 

 

Other accrued expenses

 

466,196

 

393,569 

 

Accrued contract loss

 

320,646

 

--

 

Restructuring reserve

 

976,758 

 

1,062,644 

 

 

Total current liabilities

 

2,145,246

 

1,976,011 

 

 

 

 

 

 

 

Commitments (Note 5)

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred Stock, $.01 par value; 10,000,000 shares authorized

 

 

 

 

 

no shares issued or outstanding

 

-- 

 

-- 

 

Common stock, $.01 par value; 110,000,000 shares authorized;

 

 

 

 

 

43,797,143 and  43,788,810 shares issued and outstanding at 

 

 

 

 

 

March 31, 2005 and December 31, 2004, respectively

 

437,971 

 

437,888 

 

Deferred stock compensation

 

(435,712)

 

(707,167)

 

Additional paid-in-capital

 

134,424,216 

 

134,411,911 

 

Deficit accumulated during the development stage

 

(131,178,397)

 

(128,933,397)

 

Treasury stock, 132,000 shares at cost

 

(99,660)

 

(99,660)

 

 

Total stockholders' equity

 

3,148,418

 

5,109,575 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$        5,293,664

 

$         7,085,586 

 

See notes to unaudited consolidated financial statements.

 

1

 

 

 

**BEACON POWER CORPORATION AND SUBSIDIARIES**

**(A Development Stage Company)**

**Consolidated Statements of Operations (Unaudited)**

 

 

 

 

 

 

 

 

 

 

Cumulative from

 

 

 

 

 

** **

 

** **

 

May 8, 1997

 

 

 

 

 

 

 

 

 

(date of inception)

 

 

 

 

 

Three months ended March 31,

 

through March 31,

 

 

 

 

 

2005

 

2004

 

2005

Revenue

 

$    636,134 

 

$      57,408 

 

$           1,512,012 

Cost of goods sold

 

670,507

 

75,779 

 

2,128,376

Gross profit

 

(34,373)

 

(18,371)

 

(616,364)

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

1,172,379 

 

1,076,262 

 

33,428,353 

 

Research and development

 

486,238 

 

1,048,240 

 

54,361,783 

 

Loss on sales and contract commitments

 

547,707

 

-- 

 

923,681

 

Depreciation and amortization

 

18,191 

 

46,587 

 

4,156,157 

 

Restructuring charges

 

-- 

 

-- 

 

2,159,280 

 

Loss on impairment of assets

 

--

 

-- 

 

4,663,916

 

 

 

Total operating expenses

 

2,224,515

 

2,171,089 

 

99,693,170

Loss from operations

 

(2,258,888)

 

(2,189,460)

 

(100,309,534)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

Interest income

 

14,888 

 

40,583 

 

3,897,763 

Interest expense

 

-- 

 

-- 

 

(1,093,703)

Gain on sale of investment

 

-- 

 

-- 

 

3,562,582 

Other income (expense)

 

(1,000)

 

150 

 

(229,311)

 

Total other income (expense), net

 

13,888 

 

40,733 

 

6,137,331 

Net loss

 

(2,245,000)

 

(2,148,727)

 

(94,172,203)

 

 

 

 

 

 

 

 

 

 

Preferred stock dividends

 

-- 

 

-- 

 

(36,825,680)

Accretion of convertible preferred stock

 

-- 

 

-- 

 

(113,014)

Loss to common shareholders

 

$(2,245,000)

 

$(2,148,727)

 

$    (131,110,897)

Loss per share, basic and diluted

 

$         (0.05)

 

$         (0.05)

 

 

Weighted-average common shares outstanding

43,792,791 

 

43,121,702 

 

 

 

See notes to unaudited consolidated financial statements.

 

2

 

 

 

**BEACON POWER CORPORATION AND SUBSIDIARIES**

**(A Development Stage Company)**

**Consolidated Statements of Cash Flows (Unaudited)**

 

 

 

 

 

 

**Cumulative from**

 

 

 

 

 

**May 8, 1997**

 

 

 

 

 

**(date of inception)**

 

 

 

**Three months ended March 31,**

**through March**

 

 

 

**2005**

**2004**

**31, 2005**

Cash flows from operating activities:

 

 

 

 

Net loss

$      (2,245,000)

$      (2,148,727)

$       (94,172,203)

 

Adjustments to reconcile net loss to net cash used in

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

18,191 

46,587 

4,156,158 

 

 

Loss on sale of fixed assets

--

--

196,169 

 

 

Impairment of assets

--

--

4,654,213 

 

 

Restricted cash

--

--

(310,011)

 

 

(Expenses paid) restructuring charge

(85,886)

(85,886)

976,758 

 

 

Reserve for officers note

--

--

102,044 

 

 

Interest expense relating to issuance of warrants

--

--

371,000 

 

 

Non-cash charge for change in option terms

--

--

346,591 

 

 

Non-cash charge for settlement of lawsuit

--

--

303,160 

 

 

Amortization of deferred consulting expense, net

--

--

1,160,784 

 

 

Amortization of deferred stock compensation

278,010 

349,401 

2,268,868 

 

 

Options and warrants issued for consulting services

--

--

1,585,654 

 

 

Services and interest expense paid in preferred stock

--

--

11,485 

 

 

Gain on sale of investments

--

--

(3,562,582)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

51,210 

30,161 

(895)

 

 

Inventory

222,593 

(368,102)

-

 

 

Unbilled costs under government contracts

(416,705)

--

(416,705)

 

 

Prepaid expenses and other current assets

217,738

178,887 

(801,362)

 

 

Accounts payable

(204,242)

217,084 

184,947 

 

 

Accrued compensation and benefits

66,090 

60,563 

196,699 

 

 

Accrued interest

--

--

275,560 

 

 

Dividend receivable

--

(23,742)

-

 

 

Accrued contract loss

320,646

--

320,646

 

 

Other accrued expenses and current liabilities

72,627

(81,863)

474,866

 

 

Net cash used in operating activities

(1,704,728)

(1,825,637)

(81,678,156)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Purchase of investments

--

--

(1,190,352)

 

Sale of investments

--

--

4,752,934 

 

Increase in other assets

--

--

(412,072)

 

Purchases of property and equipment

(36,860)

(14,082)

(8,489,413)

 

Sale of property and equipment

--

--

71,240 

 

 

Net cash used in investing activities

(36,860)

(14,082)

(5,267,663)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

3

 

 

 

 

 

Initial public stock offering, net of expenses

--

--

49,341,537 

 

Payment of dividends

--

--

(1,159,373)

 

Shares issued under employee stock purchase plan

--

--

128,150 

 

Exercise of employee stock options

5,833 

26,700 

1,442,100 

 

Cash paid for financing costs

(26,838)

--

(354,484)

 

Issuance of preferred stock

--

--

32,868,028 

 

Repayment of subscription receivable

--

--

5,000,000 

 

Proceeds from capital leases

--

--

495,851 

 

Repayment of capital leases

--

--

(1,031,395)

 

Proceeds from notes payable issued to investors

--

--

3,550,000 

 

 

Net cash (used in) provided by financing activities

(21,005)

26,700 

90,280,414 

 

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

(1,762,593)

(1,813,019)

3,334,595 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

5,097,188 

8,909,261 

-   

Cash and cash equivalents, end of period

$       3,334,595 

$       7,096,242 

$          3,334,595 

 

 

 

 

 

 

Supplemental disclosure of non--cash transactions:

 

 

 

 

Cash paid for interest

$                      -- 

$                      -- 

$             488,126 

 

Cash paid for taxes

$                      -- 

$              1,956 

$               32,000 

 

Assets acquired through capital lease

$                      -- 

$                      -- 

$             535,445 

 

See notes to unaudited consolidated financial statements.

 

 

4

 

 

 

**BEACON POWER CORPORATION AND SUBSIDIARIES**

**(A Development Stage Company)**

**Notes to Unaudited Consolidated Financial Statements**

 

**Note 1.  Nature of Business and Operations**

 

*Nature of Business.*  Beacon Power Corporation (“Beacon” or “the Company”) is a development stage company that was incorporated on May 8, 1997.  Since its inception, Beacon Power Corporation and its subsidiaries have been primarily engaged in the development of flywheel devices for storing and transmitting kinetic energy.  Because the Company has not yet generated a significant amount of revenue from its principal operations, it is accounted for as a development stage company under Statement of Financial Accounting Standards No. 7.  The Company has a single operating segment, developing alternative power sources.  The Company’s organizational structure has no divisions or subsidiaries dictated by product lines, geography or customer type.

 

The Company has experienced net losses since its inception and, as of March 31, 2005, had an accumulated deficit of approximately $131 million and does not expect to become cash flow positive until at least 2009 and must raise additional funds to execute its business plan and continue as a going concern.  

 

On May 24, 2005 and July 26, 2005 Perseus 2000 Expansion, L.L.C., an affiliate of then one of the Company’s largest shareholders, invested $2.9 million and received 3,452,381 shares of the Company’s Common Stock, and a warrant to purchase 800,000 shares of the Company’s Common Stock at $1.008, and another affiliate, Perseus Capital, L.L.C. paid $0.1 million for an extension to an existing warrant extending its term for two additional years.

 

On November 8, 2005, the Company distributed 9,868,421 newly issued shares of its common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended.  The number of shares was determined by dividing the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date.  The Company also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21.  Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction.  This transaction resulted in net proceeds to the Company of approximately $14 million net of expenses and commissions in the amount of approximately $1 million.  The Company has agreed to use these proceeds for working capital purposes only.  Forfurther details, please see the Securities Purchase Agreement which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2005.  

 

Based on the Company’s current cash usage rates and additional expenditures expected in support of its business plan, the Company has adequate cash to fund operations through approximately the first quarter of 2007.  The Company will seek to pursue additional funding during 2006 to complete the development of its *Smart Energy Matrix* and therefore execute its business plan.

 

The Company is continuing, on a reduced level, production of its *Smart Power M5* inverter product for solar energy applications. Although it is continuing to support the product, the Company does not believe that inverters will be a significant portion of the Company’s business going forward. The Company’s inverter inventory valuation was fully reserved during 2004 in the amount of approximately $1,025,000 and a provision for future inverter warranty expenditures of approximately $28,000 was also recorded.

 

The Company designs, develops, configures and offers for sale, advanced products and services to support more reliable electricity grid operation.  Its sustainable energy storage and power conversion solutions can help provide reliable electric power for the utility, renewable energy, and distributed generation markets. The Company’s *Smart Energy Matrix* is a design concept for a megawatt-level, utility-grade flywheel-based energy storage solution that would provide sustainable power quality services for frequency regulation, and support the demand for reliable, distributed electrical power. The Company has the following products, which are in varying stages of development, production readiness or low volume production:  

 

 

5

 

 

 

**•**

*Smart Energy( Matrix* – A design concept for a high-power flywheel-based system combining several flywheels with power electronics. The Company believes the *Smart Energy Matrix* can provide frequency regulation services for use by independent system operators and regional transmission operators to regulate electrical power.  The Company also believes that the *Smart Energy Matrix* can regulate the frequency of electricity produced by a distributed generation facility and compensate for temporary differences between the demand for electricity and the amount being produced.  The Company has a preliminary design for the *Smart Energy Matrix* and has been awarded contracts by the California State EnergyResources Conservation and Development Commission (CEC) and the New York State Energy Research and Development Authority (NYSERDA) for programs demonstrating the viability of the Company’s flywheel based system for frequency regulation of electricity on the power grid.  The Company has shifted virtually all of its development spending towards meeting the requirements of these two programs.  To successfully provide frequency regulation, the Company will seek to obtain additional funding to complete development of its *Smart Energy Matrix*, integrate and test the matrix and establish manufacturing capability for the production of commercial products.

 

**•**

*Smart Energy* system - High-energy flywheel-based systems of 2kWh and 6kWh that store electricity for telecommunications, cable systems, computer networks, and Internet market applications have been produced in limited quantities and the Company has sufficient capacity to return to production if market demand occurs.  The Company believes that, based on existing *Smart Energy* technology, it could develop a higher energy 25kWh flywheel system for renewable applications if market interest were sufficient to justify development.  The Company has been unable to successfully market its *Smart Energy* 2kWh and 6kWh at commercially acceptable prices.  At this time, the Company expects to use the results of its *Smart Energy Matrix*demonstration unit to assess market interest in its 25kWh design product and determine whether there is sufficient market demand at prices that would support the additional development activity required for the Company to bring this high energy product to market.

 

**•**

*Smart PowerTM M5* inverter system - An electronic system that converts direct current electricity produced by photovoltaic panels into alternating current electricity for residential and commercial use.  This product is in low volume production and the Company has sufficient capacity to ramp production if market demand increases.  As a result of the market interest in the Company’s *Smart Energy Matrix* design, the Company has redeployed virtually all of its research and development effort from further inverter development to its *Smart Energy Matrix* flywheel technologies.  As a result of this change in focus and lower than anticipated sales volumes of the *Smart Power M5*, the Company has alsoreduced its marketing efforts on the *Smart Power M5* and has established reserves on its balance sheet for inventories and open purchase commitments.  Although it is continuing to support the product, the Company does not believe that inverters will be a significant portion of the Company’s business going forward.

 

 

*Smart Energy Matrix*

 

The Company has identified an application for its *Smart Energy Matrix* in a well-established market with attractive pricing characteristics.  This market is the sale of frequency regulation services for the electrical power grid.  In order to maintain a constant frequency alternating current, the power grid must continuously balance the supply of power generated with the varying demand for it.  This balance is maintained today by constant, small adjustments in the output of some of the generators operating on the grid.  Not all generators can be successfully operated with constantly varying output, but all generators that are able to operate this way incur higher operating costs due to increased fuel consumption and maintenance.  Using the Company’s *Smart Energy Matrix*, frequency regulation can, for the firsttime, be provided separately with higher performance and lower operating costs.  The *Smart Energy Matrix*is the first product specifically designed to address this application.

 

Separate from the frequency regulation of the power grid market identified above, the Company has identified an additional application for its *Smart Energy Matrix.* That application is providing a high-power, flywheel-based system that continuously regulates the frequency of electricity produced by a distributed generation facility and compensates for temporary differences between the demand for electricity and the amount being produced.  A distributed generation facility is any electrical power source other than the power grid, including advanced 

 

6

 

 

generators such as fuel cells, natural gas engines, wind turbines, photovoltaic arrays and microturbines which usually supply local power to facilities such as hospitals or manufacturing plants.  

 

The Company has finished the preliminary designs for the *Smart Energy Matrix* and has begun full scale development of the 25kWh flywheel, which is the core component of the *Smart Energy Matrix*.  The development cycle for completion of this product is expected to be 18 to 24 months and achieving significant volume production capability will take an additional six to 12 months.  Therefore, the Company will not generate revenues from this product for approximately two to three years after development has commenced.

 

*Smart Energy*

 

The Company has offered for sale its *Smart Energy* flywheel products, which deliver a low level of power for a long period of time (typically measured in hours).  These products include the 2kWh and 6kWh *Smart Energy* systems, which have demonstrated quality performance and reliability at numerous sites.  The *Smart Energy* products are tailored to the telecommunications, cable systems, computer networks, and Internet markets.  The Company believes that its *Smart Energy* products offer life cycle cost advantages and significant performance improvements over conventional, battery-based back-up power sources.  The Company is not actively marketing these products and does not have orders for its *SmartEnergy* products or any inventory of finished products and does not have purchase orders in place with vendors for components.  In the event that the Company identifies potential customers and then receives significant customer orders for these products, it will need to place orders for components with vendors and hire and train manufacturing personnel to assemble, inspect and assist in the installation of deliverable units. 

 

*Smart Power M5*

 

The *Smart Power M5* inverter system for the photovoltaic energy market converts direct current generated by solar cells from sunlight into alternating current required by residential and commercial users for operating electrical devices and reducing the amount of purchased power when it is connected to a power grid.  The Company has not been successful in selling a significant number of units of its *Smart Power M5* and therefore has shifted virtually all of its development and sales activities from the *Smart Power M5* to its flywheel based products.  The Company does not believe that inverters will be a significant portion of the Company’s business going forward and is uncertain as to when or at what price it will be able to sell its inventories.  In 2004, theCompany established a reserve for its *Smart Power M5* inventory.

 

*Revenues, Cost of Goods Sold and Operations*

 

*Revenue*  Although the Company has shipped a limited number of commercial products, its operations have not yet reached a level that would qualify it to emerge from the development stage.  Therefore it continues to be accounted for as a development stage company under Statement of Financial Accounting Standards No. 7 “Accounting and Reporting by Development Stage Enterprises.”  

 

The Company recognizes revenues in accordance with accounting principles generally accepted in the United States of America. Revenues on its flywheel development contracts are recognized on the percentage of completion basis.  The Company’s method of revenue recognition on commercial product sales contracts is to recognize revenues when products are delivered to end users. The Company is not currently delivering commercial flywheel products.  The Company has been awarded contracts by the California State Energy Resources Conservation and Development Commission (CEC) and the New York State Energy Research and Development Authority (NYSERDA) for programs demonstrating the viability of the Company’s flywheel based system for frequency regulation of electricity on the power grid.

 

NYSERDA - On February 10, 2005 the Company was awarded a research and development contract from the New York State Energy Research and Development Authority (NYSERDA) under a joint initiative between the U.S. Department of Energy (DOE) Energy Storage Research Program and NYSERDA, entitled “Grid Frequency Regulation by Recycling Energy in Flywheels,” to demonstrate an advanced energy storage solution for frequency regulation and grid stability in New York State.  The contract requires the Company’s flywheel based system to be delivered and 

 

7

 

 

installed during the second half of 2005. The contract is expected to cost approximately $1.4 million, of which, approximately $385,000 consists of inventories the Company had previously expensed, and will produce approximately $645,000 of revenue.  Under the contract, the Company will demonstrate a one-tenth-power prototype of the Company’s planned megawatt-level system, known as the *Smart Energy Matrix*.  The demonstration will integrate the Company’s flywheels and associated power electronics into the distribution power grid.  Due to a change in the scope of the project agreed to by both the Company and NYSERDA, delivery of the unit and the majority of the revenue will not occur until the first half of 2006.

 

CEC - On February 14, 2005 the Company was awarded a contract with the California State Energy Resources Conservation and Development Commission (CEC) entitled “Flywheel Energy Storage System for Grid Frequency Regulation,” to demonstrate a one-tenth power prototype version of its *Smart Energy Matrix* advanced energy storage solution for frequency regulation and grid stability.  Under the contract, the Company will develop and install a one-tenth scale prototype of the Company’s megawatt-level system to demonstrate the potential benefits of using flywheel energy storage to provide frequency regulation of the grid.  A successful demonstration of frequency regulation will also serve to demonstrate the system’s technical and market feasibility in the grid stabilization market.  The contract requires the Company’s flywheel based system to bedelivered and installed during the second half of 2005.  The contract is expected to cost approximately $1.8 million, of which, approximately $140,000 consists of inventories the company had previously expensed, and is expected to produce approximately $1.2 million of revenue, with the majority of it in 2005.

 

For the Company’s inverter products which are sold to distributors, the Company recognizes revenues based on the sales by its distributors to their customers.

 

The Company may enter into contracts to research and develop or manufacture products with a loss anticipated at the date the contract is signed. These contracts are entered into in anticipation that profits will be obtained from future contracts for the same or similar products. These loss contracts may provide the Company with intellectual property rights that, in effect, establish it as the sole producer of these products. Anticipated losses on these contracts are recognized at the date the Company becomes contractually obligated.  Future losses on contracts are charged to earnings as soon as these losses are known. Estimated costs in excess of revenues are classified under current liabilities as “Accrued contract loss.”  The Company accounts for its long-term government contracts using the percentage of completion method. Under this method, percentage of completion is measured principally bythe percentage of labor hours incurred to date for each contract to the estimated total labor hours for each contract at completion. Costs incurred in excess of amounts billed are classified as current assets under “Unbilled costs under government contracts” and amounts billed to clients in excess of revenues recognized to date are classified as current liabilities under “Advance billings on contracts” in the Company’s consolidated balance sheets.

 

*Cost of goods sold.*The Company costs its products at the lower of cost or market.  Any cost in excess of this measurement is expensed in the period in which it is incurred.  In addition, the Company continuously evaluates inventory and purchase commitments to insure that levels do not exceed the expected deliveries for the next twelve months.  As the Company is in the early stages of production, its actual manufacturing costs incurred currently exceed the fair market value of its products. The Company provides a five-year limited product warranty for its *Smart Power M5* product line and accrues for estimated future warranty costs in the period in which the revenue is recognized.

 

*Operations*.  The Company has experienced net losses since its inception and, as of March 31, 2005, had an accumulated deficit of approximately $131 million.The Company’s business strategy is to continue to seek Government contracts to demonstrate the application of its flywheel technologies and identify and review possible acquisitions or mergers of companies with complementing technologies or markets.  The Company expects to use the results of its Government contracts to validate its technologies and expand relationships it is developing to gain market access for the Company’s future products for the renewable energy industry.  

 

On May 24, 2005 and July 26, 2005 Perseus 2000 Expansion, L.L.C., an affiliate of then one of the Company’s largest shareholders, invested $2.9 million and received 3,452,381 shares of the Company’s Common Stock, and a warrant to purchase 800,000 shares of the Company’s Common Stock at $1.008, and another affiliate, Perseus Capital, L.L.C., paid $0.1 million for an extension to an existing warrant extending its term for two additional years.  

 

8

 

 

 

On November 8, 2005, the Company distributed 9,868,421 newly issued shares of its common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended.  The number of shares was determined by dividing the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date.  The Company also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21.  Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction.  This transaction resulted in net proceeds to the Company of approximately $14 million net of expenses and commissions in the amount of approximately $1 million.  The Company has agreed to use these proceeds for working capital purposes only.For further details, please see the Securities Purchase Agreement which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2005.  

 

Even with these investments, the Company must raise additional equity to complete the development of its *Smart Energy Matrix* and therefore execute its business plan.  Based on the Company’s rate of expenditure of cash and the additional expenditures expected in support of its business plan the Company has sufficient cash to fund operations into the first quarter of 2007.  The Company will seek to obtain an equity investment during 2006 to fund:

 

**•**

continuing as a going concern;

 
**•**

ongoing research and development of the *Smart Energy Matrix*;

**•**

working capital requirements; and

 
**•**

developing new business.

 
 

The Company has begun full-scale development of its 25kWh flywheel, which is the core component of the *Smart Energy Matrix*.  For other contemplated flywheel-based system*s*the Company will continue to evaluate market size, growth potential and competitive advantages that its products could provide and the probable market penetration that could be achieved.  If markets are identified in which the Company believes its flywheel products will be successful, and those markets express a tangible interest in the Company’s products, the Company will seek to obtain additional funds to complete prototype development and production of identified products.  The Company does not expect to obtain positive operating cash flow before 2009 and may not achieve positive cash flow even at that point or beyond.  

 

**Note 2.  Basis of Presentation and Summary of Significant Accounting Policies**

 

The accompanying unaudited consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America except that certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q/A.  It is suggested that these consolidated financial statements presented herein be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A, for the year ended December 31, 2004.  In the opinion of the Company’s management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included in the accompanying unaudited financial statements.  Operating results for the threemonths ended March 31, 2005 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005.

 

Going concern.  

 

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has had minimal revenues and incurred losses of approximately $131 million since its inception and losses in the three months ending March 31, 2005 in the amount of approximately $2,245,000.  At March 31, 2005, the Company had approximately $3,335,000 of cash and cash equivalents on hand.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 

 

 

9

 

 

 

On May 24, 2005 and July 26, 2005 Perseus 2000 Expansion, L.L.C., an affiliate of then one of the Company’s largest shareholders, invested $2.9 million and received 3,452,381 shares of the Company’s Common Stock, and a warrant to purchase 800,000 shares of the Company’s Common Stock at $1.008, and another affiliate, Perseus Capital, L.L.C., paid $0.1 million for an extension to an existing warrant extending its term for two additional years.  

 

On November 8, 2005, the Company distributed 9,868,421 newly issued shares of its common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended.  The number of shares was determined by dividing the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date.  The Company also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21.  Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction.  This transaction resulted in net proceeds to the Company of approximately $14 million net of expenses and commissions in the amount of approximately $1 million.  The Company has agreed to use these proceeds for working capital purposes only.  Forfurther details, please see the Securities Purchase Agreement which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2005.  

 

See Note 11 “Subsequent events” for a more detailed description of these financing arrangements.

 

Based on the Company’s current cash usage rates and additional expenditures expected in support of its business plan, the Company’s existing cash balances, which includes approximately $17 million received from the 2005 investments, are adequate to fund operations into the first quarter of 2007.  The Company will seek to pursue additional funding during 2006 to further support its continuing operations, working capital, flywheel prototype development and new business development.  

 

The Company recognizes that its continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow it to satisfy its obligations on a timely basis.  The generation of sufficient cash flow is dependent, in the short term, on the Company’s ability to obtain additional funding, and in the long term, on the success of the Company’s identified products to obtain a share of the target market and the establishment of new markets in which its technologies could provide competitive products.  The Company believes that the successful achievement of these initiatives should provide it with sufficient resources to meet its cash requirements.  In addition, the Company is also considering a number of other strategic financing alternatives, and has incurred substantial costs in these efforts; however, no assurance can be made with respect to the success of these efforts orthe viability of the Company. 

 

There have been no significant additions to or changes in accounting policies of the Company since December 31, 2004.  For a complete description of the Company's accounting policies, see Note 2 to Consolidated Financial Statements in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2004.

 

**Note 3. Inventory**

 

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in process and finished goods held for resale.  Inventory balances include the following amounts:

 

** **

** **

**March 31, 2005**

** **

**December 31, 2004**

Raw materials

 

$                           - 

 

$               176,349 

Work in progress

 

- 

 

46,244 

Finished goods

 

- 

 

- 

Inventories, net

 

$                           - 

 

$               222,593 

As of March 31, 2005, inventory of approximately $348,000 is included as part of “Unbilled costs on government contracts” in the Company’s consolidated balance sheet.  Any inventories not associated with the Company’s government contracts were previously reserved.

 

 

10

 

 

 

**Note 4.  Property and Equipment**

 

Property and equipment are stated at cost and consist of the following:

 

 

Estimated

 

 

 

 

 

 

Useful

 

March 31,

 

December 31,

 

 

Lives

 

2005

 

2004

Machinery and equipment

5 years

 

$          573,435 

 

$          571,198 

Service vehicles

5 years

 

16,762 

 

16,762 

Furniture and fixtures

7 years

 

296,652 

 

296,652 

Office equipment

3 years

 

1,431,184 

 

1,396,562 

Leasehold improvements

Lease term

 

533,352 

 

533,352 

Equipment under capital lease obligations

Lease term

 

918,285 

 

918,285 

 

Total

 

 

$       3,769,670 

 

$       3,732,811 

Less accumulated depreciation and amortization

 

 

(3,492,354)

 

(3,474,164)

 

Property and equipment, net

 

 

$          277,316 

 

$          258,647 

 

**Note 5.  Commitments**

 

The Company’s principal contractual obligations as of March 31, 2005 are as follows:

 

 

 

Nine months ending

 

Cash payments due during the year ended December 31,

 

 

 

 

Description of commitment

 

December 31, 2005

 

2006

 

2007

 

Thereafter

 

Total

Operating leases

 

375,269 

 

529,413 

 

397,059 

 

- 

 

1,301,741 

Non-cancelable purchase orders

 

215,295 

 

- 

 

- 

 

- 

 

215,295 

Total commitments

 

590,564 

 

529,413 

 

397,059 

 

- 

 

1,517,036 

 

The Company leases office and light manufacturing space under an operating lease through September 30, 2007.  At March 31, 2005, the Company has provided the lessor with an irrevocable letter of credit with a balance of $310,011 which is reduced annually during the lease term.  This letter of credit is secured by a cash deposit, which is included in restricted cash in the accompanying consolidated balance sheets.

 

The Company has firm non-cancelable purchase commitments with its suppliers to fulfill its *Smart Power M5*production requirements and to satisfy contractual obligations for its research and development programs in the amount of approximately $215,295.  In the fourth quarter of 2004 the Company fully reserved all contractual obligations related to its *Smart Power M5*purchase commitments*.*

 

*Legal Proceedings.*  The Company may be subject to various legal proceedings, many involving routine litigation incidental to its business.  The outcome of any legal proceeding is not within the complete control of the Company, is often difficult to predict and may be resolved over very long periods of time.  Estimating probable losses associated with any legal proceedings or other loss contingencies are very complex and require the analysis of many factors including assumptions about potential actions by third parties.  Loss contingencies are recorded as liabilities in the consolidated financial statements when it is both (1) probable and known that a liability has been incurred and (2) the amount of the loss is reasonably estimable.  If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recordedas a liability. If a loss contingency is not probable or not reasonably estimable, a liability is not recorded in the consolidated financial statements. 

 

 

11

 

 

 

On August 16, 2004, Ricardo and Gladys Farnes, and TLER Associates, Ltd. a Bahamas corporation ("TLER"), delivered a complaint to the Company, naming as defendants, the Company, John Doherty, Richard Lane, and unidentified individuals and corporations.  The case was filed in District Court in Clark County, Nevada on or about June 1, 2004, and later was removed to the United States District Court for the District of Nevada.  The complaint alleged that in 2001, defendants (a) forged the signature of plaintiff Ricardo Farnes (a principal of TLER) to a document purporting to extend the performance period on a purchase order issued by TLER to the Company, and (b) thereafter, posted on the internet defamatory and personal information concerning the plaintiffs.  The plaintiffs did not allege any specific amount of damages, and instead asserted that damages exceed $10,000.  The Company answeredthe complaint and denied its material allegations and filed a motion for summary judgment seeking dismissal of all counts against the Company in the complaint.  On July 31st of 2005, the Company agreed to make a payment in final settlement of this suit in the amount of $5,000.

**Note 6.  Common Stock**

 

*Shareholder Rights Agreement.*In September 2002, and amended as of December 27, 2002 the Company’s Board of Directors approved a Rights Agreement, under which, each holder of common stock on October 7, 2002 automatically received a distribution of one Right for each share of common stock held.  Each Right entitles the holder to purchase 1/100th of a share of the Company’s newly issued preferred stock for $22.50 in the event that any person not approved by the board of directors acquires more than 15% (35% in the case of one large shareholder that already owned more than 15%) of the outstanding common stock, or in the event that the Company is acquired by another company, $22.50 worth of the common stock of the other company at half its market value (in each case any rights held by the acquiring person are notexercisable and become void).

 

*Reserved Shares*.  At March 31, 2005 and December 31, 2004, 11,593,470 and 11,601,803 shares of common stock were reserved for issuance under the Company's stock option plan and for outstanding warrants, respectively.  The following schedule shows warrants outstanding as of March 31, 2005:

 

**Warrant Class**

**Grant Date**

**Expiration Date**

**Strike Price**

**Issued and Outstanding**

 

 

 

 

 

Class E

4/7/2000

4/7/2005

$   1.25 

510,672 

Class F

5/23/2000

5/23/2005

$   2.25 

3,222,221 

Class F (extended)

5/23/2000

5/23/2007

$   2.25 

1,333,333 

F Financing (Bridge)

4/21/2000

4/21/2005

$   2.10 

58,000 

Consultants

8/2/2000

8/2/2005

$   6.00 

20,000 

GE (CR&D)

10/24/2000

10/24/2005

$   2.10 

120,000 

**Total Warrants**

** **

** **

** **

**5,264,226**

 

**Note 7.  Related Party Transactions**

 

***Loan to Officer.*** During 2001, the Company advanced approximately $565,000 to an officer of the Company, Mr. William Stanton, its former CEO and President and currently a director of and consultant to the Company.  This advance is interest bearing and secured by Mr. Stanton’s holdings of Beacon common stock and was provided to him to allow the exercise of stock options and the payment of related taxes.  In 2004, Mr. Stanton was paid approximately $80,000 of consulting fees by the Company, of which, Mr. Stanton paid the Company $20,000 to reduce his outstanding loan balance.  Through March 31, 2005, the Company collected approximately $464,000 in principal payments on this advance.  The balance of this loan as of March 31, 2005 is $101,000 including current year interest of approximately $1,000.  On August 5, 2005, Mr. Stanton surrendered vested options to purchase76,752 shares of the Company’s common stock, which were granted to him on October 13, 2004.  The Company gave Mr. Stanton credit for $100,544 as a result of such surrender, which equaled the excess of the value of the shares issuable upon exercise of the options, based on the mid-point of the high and the low trading prices per share of the Company’s common stock on August 5, 2005, over the exercise price of the options, to repay in full the outstanding principal of and interest on the loan advanced by the Company to Mr. Stanton as described above.

 

 

12

 

 

 

***Perseus Investment.*** On May 24, 2005 Perseus 2000 Expansion, L.L.C. invested $1.4 million and on July 26, 2005 Perseus 2000 Expansion, L.L.C. invested $1.5 million for a total of $2.9 million in the Company in exchange for 1,666,667 and 1,785,714 shares of common stock, respectively, and paid $0.1 million for the extension for two years of an existing warrant already owned by Perseus Capital.  

 

**Note 8. Restructuring Charges**

 

*Restructuring and asset impairment charges.* The Company’s initial products were focused on the telecom industry.  As a result of the overall economic downturn and in particular the significant decline in capital and maintenance spending in telecom as well as the low price of lead-acid batteries, the Company has not been successful in selling products into this market.  Therefore, in December, 2003, the Company recorded a non-cash asset impairment charge of $0.4 million in order to reduce the carrying amount of its flywheel related patents and patents pending as the estimated future cash flows anticipated from these assets were substantially in doubt.  Also, in July, 2002, in an effort to reduce its monthly cash-spending rate, the Company implemented a number of cost-cutting measures to ensure the availability of resources necessary to pursue its business strategy for areasonable period but at a significantly lower cash expenditure rate.  As a result, a substantial portion of its long-term assets were idled, including machinery and equipment, tooling, office furniture and fixtures, and equipment and leasehold improvements.  The Company evaluated all of its property and equipment as required by Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” and, in 2002, incurred a restructuring and impairment charge of $6.5 million of which $4.3 million represents impaired capital equipment and leasehold improvements, $.3 million relates to severance costs and $1.9 million relates to a reserve against future lease payments and related facility costs.  The reserve against future lease payments is classified as “Restructuring Reserve” in the current liabilities section of the balance sheet.

 

A summary of the restructuring reserves is as follows:

 

 

 

March 31, 

 

 

2005

 

2004

Beginning balance

 

$   1,062,644 

 

$   1,406,191 

Charges for the period

 

- 

 

- 

Payments

 

(85,886)

 

(85,886)

Ending balance

 

$      976,758 

 

$   1,320,305 

 

 

**Note 9.  Stock-Based Compensation**

 

The Company's stock option plan provides for the granting of stock options to purchase up to 9,000,000 shares of the Company's common stock. Options may be granted to employees, officers, directors and consultants of the Company with terms of up to 10 years.  Under the terms of the option plan, incentive stock options ("ISOs") are to be granted at fair market value of the Company's stock at the date of grant, and nonqualified stock options (“NSOs”) are to be granted at a price determined by the Board of Directors. ISOs and NSOs generally vest ratably over 36 months from the grant date and have contractual lives of up to 10 years.

 

The Company accounts for stock based employee compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees) and related interpretations.  In 2002 the Company implemented FASB Statement of Financial Accounting Standards No. 148 (“SFAS 148"), “Accounting for Stock-Based Compensation-Transition and Disclosure.”  SFAS 148 amends current disclosure requirements and requires prominent disclosures on both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  This statement is effective for financial reports containing financial statements for interim periods beginning after December 15, 2002.  SFAS 148 also provides alternative methods of transition for a voluntary change to fair-value based methods ofaccounting, which the Company has not adopted at this time.  

 

 

13

 

 

 

Deferred compensation expense associated with stock awards to non-employees is measured using the fair-value method and is amortized over the vesting period using a calculation under FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans."

 

No stock-based compensation is reflected in net earnings for stock options granted to employees as all options granted under the plan had an exercise price equal to or greater than the market price of the underlying stock at the date of the grant.  The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation” to stock-based employee compensation.

 

 

 

 

**Three months ended March 31,**

 

 

**2005**

 

**2004**

 

 

 

 

 

Net loss to common shareholders as reported

 

$    (2,245,000)

 

$    (2,148,727)

Pro forma compensation expense

 

82,686 

 

92,867 

Net loss--pro forma

 

$    (2,327,686)

 

$    (2,241,594)

Loss per share--as reported

 

$             (0.05)

 

$             (0.05)

Loss per share--pro forma

 

$             (0.05)

 

$             (0.05)

 

Restricted Stock Units

 

In 2003****the Company put into place a long-term incentive plan (LTIP) for all executives and employees for 2003 and 2004.  Based on the Company’s need to conserve cash and the desire to retain its professional staff, the Company determined that it would be in the best interest of it, its employees, and its stockholders to implement a stock-based Deferred Compensation Plan. 

 

The LTIP has eliminated the previous cash bonus structure for successful performance and replaced it with a program whereby the Company establishes goals that are strategically aligned to the Company’s performance and, therefore, shareholder value.  The LTIP agreement is intended to provide employees deferred compensation in the form of restricted stock units (or “RSUs”) at no cost to the recipient, that can be converted into shares of Company's common stock through establishing and evaluating quarterly, or in some cases yearly, targets for the employee and, following each quarter, determining the number of RSUs to accrue and to be granted in four equal installments in the fiscal year following the fiscal year with respect to which employee accrued the RSUs.  Employees have the right to convert their RSUs into shares at any time after such grant, subject to a quarterly vesting schedule.  TheCompany’s employees earned 738,921 and 667,151 RSUs for the fiscal years ended December 31, 2004 and 2003, respectively, which are not available for exercise until satisfaction of the quarterly vesting period during the following calendar year.  The grants are recorded as deferred stock compensation until they are earned over the vesting schedule, at which time, the value of the RSUs will be recorded as compensation expense in the Company’s Income Statement.  Compensation expense recorded for the three months ending March 31 was $278,010 and $349,401 for 2005 and 2004, respectively.

 

**Note 10.  Income Taxes**

 

At December 31, 2004 the Company had approximately $81 million of net operating loss carry forwards which begin to expire in 2012 and additional research and development tax credits.  Valuation allowances have reduced the potential benefits from the use of these carry forwards to zero as their future utilization is not assured.  

 

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may limit, in the future, the amount of net operating loss carry forwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based upon the Company's value prior to an ownership change.

 

 

14

 

 

 

**Note 11.  Subsequent Events**

 

**Business Combination**

 

On April 22, 2005, the Company entered into an agreement to acquire NxtPhase T&D Corporation (“NxtPhase”), a privately held Canadian corporation.  On November 22, 2005, the Company and NxtPhase agreed to terminate the agreement and to pay NxtPhase $150,000 as a release from any and all liabilities related to the agreement.  The Company also expensed approximately $850,000 of related deferred professional fees in the 3rd quarter of 2005.

 

Under terms of the agreement, the Company would have acquired NxtPhase by issuing approximately 18.6 million new shares of common stock of the Company to NxtPhase stockholders and employees.  The agreement was scheduled to expire on December 31, 2005 unless the acquisition of NxtPhase had occurred by that date.  On September 29, 2005, the Company filed a preliminary joint proxy statement for the purpose of obtaining a shareholder vote on this proposed transaction and withdrew its joint proxy statement as of November 22, 2005.

 

**Fundraising**

 

On November 8, 2005, the Company distributed 9,868,421 newly issued shares of its common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended.  The number of shares was determined by dividing the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date.  The Company also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21.  Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction.  This transaction resulted in net proceeds to the Company of approximately $14 million net of expenses and commissions in the amount of approximately $1 million.  The Company has agreed to use these proceeds for working capital purposes only.  Forfurther details, please see the Securities Purchase Agreement which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2005.  

 

On May 24, 2005 and July 26, 2005 the Company received an investment of $2.9 million in the aggregate from Perseus 2000 Expansion, L.L.C., an affiliate of one of the Company’s then largest shareholders, and in return issued 3,452,381 shares of the Company’s Common Stock and a warrant to purchase 800,000 shares of the Company’s Common Stock at $1.008 per share.  Another affiliate, Perseus Capital, L.L.C., paid $0.1 million for an extension by two years to an existing warrant already held by Perseus Capital.  This warrant entitles Perseus Capital to purchase 1,333,333 shares of the Company’s Common Stock, exercisable at $2.25 per share.

 

15

 

 

 

**Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations**

 

**Note Regarding Forward Looking Statements:**

 

This Quarterly Report on Form 10-Q/A contains forward-looking statements concerning, among other things, the Company's expected future revenues, operations and expenditures and estimates of the potential markets for the Company's services. Such statements made by the Company fall within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. All such forward-looking statements are necessarily only estimates of future results and the actual results achieved by the Company may differ materially from these projections due to a number of factors as discussed in the section entitled "Certain Factors Affecting Future Operating Results" of this Form 10-Q/A.

 

Critical accounting policies and estimates

 

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an ongoing basis, management evaluates the Company's estimates and assumptions including but not limited to those related to revenue recognition, asset impairments, inventory valuation, warranty reserves, contract losses and other assets and liabilities.  Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

*Revenue Recognition*.  Although the Company has shipped products, and recorded contract revenues, its operations have not yet reached a level that would qualify it to emerge from the development stage.  Therefore it continues to be accounted for as a development stage company under Statement of Financial Accounting Standards No. 7 “Accounting and Reporting by Development Stage Enterprises.”  

 

The Company recognizes shipped product revenues, in accordance with accounting principles generally accepted in the United States of America.  Generally, revenue is recognized on transfer of title, typically when products are shipped and all related costs are estimable.  For sales to distributors, the Company makes an adjustment to defer revenue until they are subsequently sold by distributors to their customers.  

 

*Government Contract Revenue Recognized on the Percentage-of-Completion Method*.  The Company recognizes contract revenues using the percentage-of-completion method.  Under SOP 81-1, an acceptable methodology is the efforts-expended method based on a measure of the work performed.  The Company uses labor hours as the basis of the percentage of completion calculation.  It is measured principally by the percentage of labor hours incurred to date for each contract to the estimated total labor hours for each contract at completion.  

 

Each quarter the Company performs an estimate-to-complete analysis, and any changes to its original estimates are recognized in the period in which they are determined.  Revenues recognized and/or costs incurred in excess of amounts billed are classified as current assets and included in “Unbilled costs on government contracts” and amounts billed to clients in excess of revenues recognized to date are classified as current liabilities under “Advance billings on contracts” in the Company’s consolidated balance sheets.  Provisions for contract losses are included in current liabilities as “Accrued contract loss.”  Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to construction contract costs and revenue. 

 

*Inventory Valuation*. The Company values its inventory at the lower of actual cost or the current estimated market value.  It regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical usage for the prior twelve month period and future sales forecasts.  Although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its inventory and its reported operating results.

 

 

16

 

 

 

*Warranty Reserves*. The Company's warranties require it to repair or replace defective products returned to it during the applicable warranty period at no cost to the customer. It records an estimate for warranty-related costs based on actual historical return rates, anticipated return rates, and repair costs at the time of sale. A significant increase in product return rates, or a significant increase in the costs to repair products, could have a material adverse impact on future operating results for the period or periods in which such returns or additional costs materialize and thereafter.

 

*Income Taxes*.  Deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities as well as net operating loss and tax credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when the differences reverse.  Deferred tax assets are reduced by a valuation allowance to reflect the uncertainty associated with their ultimate realization.

 

Significant management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets.  The valuation allowance is based on the Company's estimates of taxable income and the period over which its deferred tax assets will be recoverable.  In the event that actual results differ from these estimates or the Company adjusts these estimates in future periods it may need to establish an additional valuation allowance or reduce its current valuation allowance which could materially impact its tax provision.

 

*Long-Lived Assets*.  In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  The conditions to be considered include whether or not the asset is in service, has become obsolete, or whether external market circumstances indicate that the carrying amount may not be recoverable.  When appropriate the Company recognizes a loss for the difference between the estimated fair value of the asset and the carrying amount.  The fair value of the asset is measured using either available market prices or estimated discounted cash flows. 

 

*Overview*

 

The Company’s initial product strategy was to develop high energy, composite flywheels for back-up powering of telecommunications applications.  With the weakening of the telecommunications market, which began in 2001, the Company recognized that its *Smart Energy* flywheel products as alternative backup solutions to the telecommunications industry were not on a path to produce meaningful revenues.  With that recognition, the Company initiated a series of cost cutting measures throughout 2002 and 2003.  The focus of these efforts was to reduce cash usage while preserving the Company’s intellectual properties and maintaining the integrity of its public company requirements while evaluating all potential product markets for the Company’s technologies and considering acquisitions or mergers that could lead to increased shareholder value.  The Company has:

 

(i)

identified promising applications for its *Smart Energy Matrix* design in the electric utility power grid marketplace.  In the first quarter of 2005 the Company was awarded development contracts by CEC and NYSERDA to demonstrate the viability of the Company’s flywheel technologies for frequency regulation by grid operators. The demonstrations will be a one-tenth-power prototype of the *Smart Energy Matrix*;

(ii)

pursued additional development and design contracts for a variety of applications by government agencies.  The Company has been successful in obtaining two small contracts and is continuing its efforts to obtain additional research and development funding; and

(iii)

entered into an agreement on April 22, 2005 to acquire NxtPhase T&D Corporation (“NxtPhase”), a privately held Canadian supplier of digital and fiber optic products for electric power and grid monitoring and control.  On November 22, 2005, the Company and NxtPhase agreed to terminate the agreement and to pay NxtPhase $150,000 as a release from any and all liabilities related to the agreement.  The Company also expensed approximately $850,000 of deferred professional fees in the 3rd quarter of 2005.

 

On November 8, 2005, the Company distributed 9,868,421 newly issued shares of its common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended.  The number of shares was determined by dividing 

 

17

 

 

the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date.  The Company also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21.  Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction.  This transaction resulted in net proceeds to the Company of approximately $14 million net of expenses and commissions in the amount of approximately $1 million.  The Company has agreed to use these proceeds for working capital purposes only.  For further details, please see the Securities Purchase Agreement which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2005.  

 

On May 24, 2005 and July 26, 2005 the Company received an investment of $2.9 million in the aggregate from Perseus 2000 Expansion, L.L.C., an affiliate of one of the Company’s then largest shareholders, and in return issued 3,452,381 shares of the Company’s Common Stock and a warrant to purchase 800,000 shares of the Company’s Common Stock at $1.008 per share.  Another affiliate, Perseus Capital, L.L.C., also paid $0.1 million for an extension by two years to an existing warrant already held by Perseus Capital.  This warrant entitles Perseus Capital to purchase 1,333,333 shares of the Company’s Common Stock, exercisable at $2.25 per share.  

The Company must raise additional equity to complete the development of its *Smart Energy Matrix* and therefore execute its business plan.  Based on the Company’s rate of expenditure of cash and the additional expenditures expected in support of its business plan, the Company will seek to obtain additional financing during 2006 to fund:

 

**•**

continuing as a going concern;

 
**•**

ongoing research and development of the *Smart Energy Matrix*;

**•**

working capital requirements; and

 
**•**

developing new business.

 
 

The Company does not expect to obtain positive cash flow before 2009. This expectation is based on a business plan that includes full scale development of its *Smart Energy Matrix* beginning in the first quarter of 2006.  If capital to fund full scale development of the *Smart Energy Matrix* is constrained, the time to achieve positive cash flow would be extended.

 

From inception through March 31, 2005, the Company has incurred losses of approximately $131.0 million. The Company expects to continue to incur losses as it expands its product development, commercialization program, and expansion of its manufacturing capabilities. 

 

The Company recognized an asset impairment charge in 2003 and restructuring and asset impairment charges in 2002.  The Company, as required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” periodically evaluates all of its property and equipment in light of facts and circumstances and the outlook for future cash flows. As a result of its ongoing evaluations, in 2003 the Company took a non-cash charge of approximately $0.4 million representing the impairment of capitalized costs of internally developed intellectual property including various patents and patents pending relating to the Company’s flywheel technology.  In 2002 the Company took a non-cash charge of $6.5 million of which $4.3 million represented impaired capital equipment and leasehold improvements, $1.9 million related to a reserve against future leasepayments and related facility costs and $0.3 million relating to severance costs.  These charges related to a substantial portion of the Company’s long-term assets being idled, including machinery and equipment, tooling, office furniture and fixtures and leasehold improvements.  The portion of the reserve that relates to future lease payments is classified as “Restructuring reserve” in the current liabilities section of the balance sheet.

 

 

18

 

 

 

**Results of operations:**

 

**Comparison of three months ended March 31, 2005 and 2004**

 

 

Three months ended March 31,

 

2005

2004

$ Change

% Change

 

(in thousands)

Revenues

$  636 

$    57 

$   579 

1016%

Cost of goods sold

671

76 

(595)

783%

Selling, general and administrative

1,172 

1,076 

(96)

9%

Research and development

486 

1,048 

562 

54%

Loss on sales and contract commitments

548

-

(548)

0%

Depreciation and amortization

18 

47 

29 

62%

Interest and other income, net

14 

41 

(27)

66%

 

 

*Revenues*.  For the three months ending March 31, 2005, the Company recorded revenues from its development contracts of approximately $620,000 and revenues from the sale of its *Smart Power M5* power conditioning systems of approximately $16,000.  Revenues for the three months ending March 31, 2004 were generated from sales of the Company’s *Smart Power M5*.  

 

During the quarter the Company was awarded development contracts with the California State Energy Resources Conservation and Development Commission (CEC) and the New York State Energy Research and Development Authority (NYSERDA) to demonstrate the viability of the Company’s flywheel technologies for frequency regulation. The demonstrations will be conducted using one-tenth-power prototypes of the Company’s planned megawatt-level system known as the *Smart Energy Matrix.*Under these contracts, the Company expects to develop and install a system in both California and New York during 2005 to demonstrate the benefits of using flywheel energy storage to provide frequency regulation of the grid; a service required by all grid operators.  Successful demonstrations of frequency regulation with CEC and NYSERDA may also demonstrate the system’s technicaland market feasibility in other large, important, growing markets related to the North American grid.

 

*Cost of Goods Sold.*Cost of goods sold for the three months ending March 31, 2005 includes costs incurred to date for the Company’s flywheel development contracts in the amount of approximately $617,000, sell through adjustment and warranty accruals for *Smart Power M5* inverter product sold of approximately $6,000.  Cost of goods sold, for the three months ending March 31, 2004, included costs associated with the sell-through of *Smart Power M5* inverters.  These costs include materials and direct labor.

 

*Selling, General and Administrative Expenses*.  The Company’s sales and marketing expenses consist primarily of compensation and benefits for its sales and marketing personnel and related business development expenses.  The Company’s general and administrative expenses consist primarily of compensation and benefits related to its corporate staff, professional fees, insurance and travel costs.  Selling, general and administrative expenses totaled approximately $1,172,000 and $1,076,000 for the three months ended March 31, 2005 and 2004, respectively.  The increase of approximately $96,000 or 9% is primarily the result of increases in the cost of personnel and benefits and higher professional fees.

 

*Research and Development*.  The Company’s cost of research and development consists primarily of the cost of compensation and benefits for research and development and support staff, as well as materials and supplies used in the engineering design process.  These costs decreased for the three months ending March 31, 2005 over the same period during 2004 due primarily to the allocation of resources from research and development departments to the Company’s flywheel development contracts presented in cost of goods sold in the amount of approximately $529,000.  As a result, the Company expects its cost of research and development for the duration of these contracts to continue to be lower compared to 2004.  The Company expects costs of development of its flywheel systems will be more significant during the last quarter of 2005, once its flywheel development contracts aresubstantially complete and it begins development of a full scale prototype of the *Smart Energy Matrix* and it has obtained funding 

 

19

 

 

to complete this work.  Research and development expenses totaled approximately $486,000 and $1,048,000 for the three months ended March 31, 2005 and 2004, respectively.  The decrease of $562,000 or 54% is primarily the result of accounting allocations from research and development to its development contracts.

 

*Loss on Sales and Contract Commitments*.  The Company has established reserves for anticipated losses on its government contracts with CEC and NYSERDA.  Expected losses are approximately $548,000 ($207,000 for CEC and $341,000 for NYSERDA). The reason for the expected losses is the Company’s agreement to provide cost sharing dollars in its original contract proposals.  The Company did not accrue such losses during 2004.  The Company will re-evaluate its loss reserve and make any necessary adjustments as appropriate.

 

*Depreciation and Amortization.*  The Company’s depreciation and amortization is primarily related to depreciation on capital expenditures and the amortization of lease and leasehold costs related to its facilities.  The Company also amortized the *Smart Power M5* intellectual property it acquired from Advanced Energy Systems in 2004.   Depreciation and amortization totaled approximately $18,000 and $47,000 for the three months ended March 31, 2005 and 2004, respectively.  The decrease of $29,000 or 62% is attributable to the decrease in the remaining net book values of the Company’s assets. 

 

*Interest and Other Income/Expense, net.* The Company’s non-operating income and expenses are primarily attributable to interest income resulting from cash on hand and accrued dividends on the Company’s holdings in the Series A Preferred stock of Evergreen Solar, Inc.  Interest and Other Income/Expense, net for the three months ended March 31, 2005 was approximately $14,000, compared to approximately $41,000 for the same period in 2004.  The decrease of approximately $27,000 in 2005 compared to the prior year is the result of lower interest due to lower cash balances and lower dividends received since the Company sold its Evergreen investment in 2004.

 

**Liquidity and Capital Resources**

 

 

 

Quarter ending March 31,

 

 

 

2005

 

2004

 

 

 

(in thousands)

Cash and cash equivalents

 

$          3,335 

 

$          7,096 

Working capital

 

2,207 

 

7,098 

Cash provided by (used in)

 

 

 

 

 

Operating activities

 

(1,705)

 

(1,826)

 

Investing activities

 

(37)

 

(14)

 

Financing activities

 

(21)

 

27 

Net decrease in cash and cash equivalents

 

$        (1,763)

 

$        (1,813)

Current ratio

 

2.0 

 

3.9 

 The Company’s cash requirements depend on many factors, including but not limited to research and development activities, executing its development contracts, continued efforts to commercialize products, facilities costs, general and administrative expenses, and costs related to raising additional funding and costs related to the NxtPhase transaction.  The Company expects to make significant expenditures to fund its operations, complete the development of its *Smart Energy Matrix*, develop technologies and explore opportunities to find and develop additional markets to sell its products.  The Company has taken significant actions to reduce its cash expenditures for product development and production readiness by reducing headcount, development spending and capital expenditures over the past three years.  The Company has focused its activity on market analysis in terms of size of markets, competitive aspects and advantages that its products could provide.  The Company has begun development of its 25kWh flywheel, which is the core component of its *Smart Energy Matrix* and continued to do preliminary design of products for other markets under consideration for its flywheel systems. The Company must raise additional equity to complete the development of its *Smart Energy Matrix* and therefore execute its business plan.  Based on the Company’s rate of expenditure of cash and the additional expenditures expected in support of its business plan, the Company will seek to obtain additional financing during 2006 to fund:

 

20

 

 

 

 

**•**

continuing as a going concern;

 
**•**

ongoing research and development primarily related to the *Smart Energy Matrix*;

**•**

working capital requirements; and

 
**•**

new business development.

 
 

Net cash used in operating activities was approximately ($1,705,000) and ($1,826,000) for the three months ended March 31, 2005 and 2004, respectively.  The primary component to the negative cash flow from operations is from net losses.  For the first three months of 2005, the Company had a net loss of approximately ($2,245,000).  This included employee stock compensation of approximately $278,000, facility related cash payments charged against restructuring reserves of approximately ($86,000) and depreciation and amortization of approximately $18,000.  Changes in operating assets and liabilities generated approximately $330,000 of cash during the first three months of 2005.  For the first three months of 2004, the Company had a net loss of approximately ($2,149,000).  This included employee stock compensation of $349,000, facility related cash payments charged against restructuring reserves ofapproximately ($86,000), and depreciation and amortization of approximately $47,000.  Changes in operating assets and liabilities generated approximately $13,000 of cash during the first three months of 2004.

 

Net cash used in investing activities was approximately ($37,000) and ($14,000) for the three months ended March 31, 2005 and 2004, respectively, for the purchase of capital equipment.

 

Net cash generated/ (used) by financing activities was approximately ($21,000) and $27,000 for the three months ended March 31, 2005 and 2004, respectively.  For the first three months of 2005, the cash generated by financing activities of approximately $6,000 related to the exercise of stock options, offset by cash paid for financing costs of ($27,000).  For the first three months of 2004, the cash generated by financing activities related to the exercise of stock options in the amount of $27,000.

 

The Company is not expecting to become profitable or cash flow positive until at least 2009 and its ability to continue as a going concern will depend on being able to raise additional cash to fund operations.  The Company may not be able to raise these funds, or if it is able to do so, it may be on terms that are adverse to existing stockholders.  

 

On November 8, 2005, the Company distributed 9,868,421 newly issued shares of its common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended.  The number of shares was determined by dividing the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date.  The Company also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21.  Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction.  This transaction resulted in net proceeds to the Company of approximately $14 million net of expenses and commissions in the amount of approximately $1 million.  The Company has agreed to use these proceeds for working capital purposes only.  Forfurther details, please see the Securities Purchase Agreement which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2005.

 

On May 24, 2005 and July 26, 2005 Perseus 2000 Expansion, L.L.C., an affiliate of one of the Company’s then largest shareholders, invested $2.9 million and received 3,452,381 shares of the Company’s Common Stock, and a warrant to purchase 800,000 shares of the Company’s Common Stock at $1.008, and another affiliate, Perseus Capital, L.L.C. paid $0.1 million for an extension to an existing warrant extending its term for two additional years.  

 

**Certain Factors Affecting Future Operating Results**

 

The following factors, as well as others mentioned in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2004, could cause actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q/A:

 

 

21

 

 

 

*The Company has a history of losses and anticipates future losses.*

 

As shown in the unaudited consolidated financial statements, the Company incurred significant losses from operations of approximately $2,245,000 and $2,149,000 for the three months ending March 31, 2005 and 2004, respectively.  The Company has an accumulated deficit of $131 million and has incurred net losses in each year since its inception in 1997.  The Company is unsure if or when it will become profitable.  The size of its net losses will depend, in part, on the growth rate of its revenues and the level of its expenses.

 

The Company expects future revenues, if any, to come from a combination of the sale of services related to its *Smart Energy Matrix*and sales of*Smart Energy Matrix* units.  The Company has no revenues to date from its *Smart Energy Matrix*.  The timing of future revenues, if any, is uncertain.

 

The Company expects that it will be several years, if ever, before it will recognize significant revenues from the products it intends to offer and the services it intends to provide.  A large portion of its expenses are fixed, including expenses related to facilities, equipment and personnel.  In addition, the Company expects to spend significant amounts to fund product development based on its core technologies.  The Company also expects to incur substantial expenses to manufacture its *Smart Energy Matrix* product in the future.  As a result, operating expenses may increase significantly over the next several years and, consequently, the Company may need to generate significant additional revenue to achieve profitability.  Even if the Company does achieve profitability, it may not be able to sustain or increase profitability on a consistent basis.

 

*The Company will have limited revenues in the near term.  Unless it raises additional funds to operate its business, it may not be able to continue as a going concern, as its cash balances are sufficient to fund operations into the first quarter of 2007.*

 

The Company intends to focus on further development of the *Smart Energy Matrix* to provide frequency regulation services and this product will not be available for revenues in the near-term.  For the foreseeable future, the Company will have limited revenues, if any, since the Company has not generated any revenue from the *Smart Energy Matrix*.  The Company has incurred significant losses from operations since its inception.  The Company had approximately $3,335,000 of cash and cash equivalents on hand at March 31, 2005.  

 

On November 8, 2005, the Company distributed 9,868,421 newly issued shares of its common stock to ten "accredited investors", as defined in the Securities Act of 1933, as amended.  The number of shares was determined by dividing the gross proceeds of $15 million by a share price of $1.52, derived by applying a 20% discount to the five-day volume weighted average price just prior to the closing date.  The Company also issued warrants to purchase an additional 2,960,527 shares of common stock at an exercise price of $2.21.  Each warrant is exercisable for a period of five years but may not be exercised until six months and one day after the closing of the transaction.  This transaction resulted in net proceeds to the Company of approximately $14 million net of expenses and commissions in the amount of approximately $1 million.  The Company has agreed to use these proceeds for working capital purposes only.  Forfurther details, please see the Securities Purchase Agreement which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2005.

 

On May 24, 2005 and July 26, 2005 the Company received an investment of $2.9 million in the aggregate from Perseus 2000 Expansion, L.L.C., an affiliate of one of the Company’s then largest shareholders, and in return issued 3,452,381 shares of the Company’s Common Stock and a warrant to purchase 800,000 shares of the Company’s Common Stock at $1.008 per share.  Another affiliate, Perseus Capital, L.L.C., paid $0.1 million for an extension by two years to an existing warrant already held by Perseus Capital.  This warrant entitles Perseus Capital to purchase 1,333,333 shares of the Company’s Common Stock, exercisable at $2.25 per share.

 

Based on the Company’s current cash usage rates and additional expenditures expected in support of its business plan, the Company has adequate cash to fund operations into the first quarter of 2007.

 

The Company will require substantial funds to conduct research and development activities, market its products and services, and increase its sales.  The Company anticipates that such funds will be obtained from external sources and intends to seek additional equity or debt to fund future operations.  However, the Company’s actual capital 

 

22

 

 

requirements will depend on many factors.  If the Company experiences unanticipated cash requirements, it may need to seek additional sources of funding, which may not be available on favorable terms, if at all.  Such additional funding may only be available on terms that may, for example, cause dilution to common stockholders, and/or have liquidation preferences and/or pre-emptive rights.  If the Company does not succeed in raising additional funds on acceptable terms, it may be unable to complete planned development for its products and services.  In addition, the Company could be forced to take unattractive steps, such as discontinuing product development, limiting the services it can offer, reducing or foregoing sales and marketing efforts and attractive business opportunities, or discontinuing operations entirely.  

 

Miller Wachman, LLP, the Company’s independent auditors, have included an explanatory paragraph related to a going concern uncertainty in their audit report on the Company’s consolidated financial statements for the fiscal year ended December 31, 2004, which states that “the Company’s recurring losses from operations and negative cash flows raise substantial doubt about its ability to continue as a going concern.”

 

The Company’s financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not made any adjustments to its financial statements as a result of the going concern uncertainty.  If the Company cannot continue as a going concern, it may have to liquidate its assets and may receive significantly less than the values at which they are carried on its financial statements.  Any shortfall in the proceeds from the liquidation of the Company’s assets would directly reduce the amounts that holders of its common stock could receive in liquidation.

 

*The Company’s possible inability to continue as a going concern may negatively impact the Company’s ability to obtain customers.*

 

The uncertainty of the Company’s ability to continue as a going concern may negatively impact the Company’s ability to successfully attract customers for its products.  Even if customers find the Company’s products attractive from a performance and price analysis, the warranty and support activities that the Company’s long-life products feature may prevent customers from making purchases in sufficient quantities for the Company to be able to function as a going concern.

 

*The Company’s stock may be removed from The NASDAQ SmallCap Market System.*

 

On May 12, 2005, the Company’s stock closed at $0.86 per share and had closed below $1.00 per share for 30 consecutive business days.  On May 13, 2005 the Company received a letter from Nasdaq dated May 13, 2005 indicating that the Company’s common stock has not met the $1.00 minimum bid price requirement for continued listing for the past 30 days and that the Company’s common stock is, therefore, subject to delisting from the Nasdaq SmallCap Market, pursuant to Nasdaq Marketplace Rule 4310(c)(4). Therefore in accordance with Marketplace Rule 4310(c)(8)(D), the Company will be provided 180 calendar days, or until November 9, 2005, to regain compliance or face delisting on November 9, 2005.  To attain compliance the Company’s common stock must close at $1.00 per share or more for a minimum of ten consecutive days before November 9, 2005. In the event that the Company’s stock does notmeet this requirement, but meets the requirements for inclusion on the Nasdaq SmallCap Market as set forth in Marketplace Rule 4310(c), the Company may be granted an additional 180 calendar day period to regain compliance.  There can be no assurance that the Company will continue to meet Nasdaq’s SmallCap listing requirements and therefore may no longer be eligible for quotation on The NASDAQ SmallCap Market.  Should the Company’s stock lose its eligibility to be quoted on the SmallCap Market, it will seek to have its stock quoted on the OTCBB.  While the Company knows of no reason that its stock will not be accepted for quotation on OTCBB, it cannot guarantee that acceptance.  If the Company’s stock is not accepted for listing on the OTCBB, it will be listed on the pink sheets.

 

*The Company has no history of being able to complete development of designs into economically competitive commercially viable products*

 

The Company has no history of being able to complete development of designs into economically competitive commercially viable products.  Examples of the Company’s challenges in developing its technologies into commercial products are the following:

 

23

 

 

 

 

**•**

it may take longer than anticipated to develop these services and products;

**•**

as there are costs associated with the development of these technically challenging products the economic return may not be adequate to pay for these costs;

**•**

the Company must ensure that warranty expenses are kept to a minimum; and

**•**

the Company must obtain additional financing.

 
 

 

*The Company may fail to develop its 25kWh generation flywheel system which is a critical requirement for the development of the Smart Energy Matrix.*

 

Although the Company has successfully developed two high energy systems (the 2kWh and 6kWh) that had similar technical challenges, there can be no assurance that the Company will be able to successfully develop the 25kWh system.  The successful development of the Company’s new 25kWh flywheel system, which is the flywheel system that will be used in the *Smart Energy Matrix,* involves significant technological and cost challenges, including:

 

**•**

it may take longer to develop the software and key hardware components such as the rim, motor, and bearing system;  

**•**

the Company is relying on single-source suppliers to supply key components to meet the Company’s engineering requirements, cost objectives and development and production schedules.  Specifically:

 
**•**

the composite rim, which has four times more volume than the rim in the 6kWh flywheel product;

 
**•**

a high speed, vacuum friendly, permanent magnet, high power motor with overall dimensions that will not adversely affect rotor dynamics; and 

 
**•**

an active magnetic bearing system that supports the rotor over the entire speed range;

**•**

the Company’s ability to develop cost effective designs on schedule for:

 
 
**•**

rotor-cooling scheme to avoid overheating during operation;

 
 
**•**

cost effective bearings to ensure acceptable vibration levels at all speeds;

 
**•**

touchdown bearing system to stabilize the rotor during abnormal conditions such as an earthquake.

**•**

the ability to ramp up and maintain production rates;

 
**•**

the cost of developing key components that have significant technical risk;

**•**

quality and cost control from key suppliers;

 
 

 

*The Company may fail to develop the Smart Energy Matrix.*

 

The Company’s *Smart Energy Matrix* will integrate up to ten 25kWh flywheels into a common 40 foot shipping container.  This effort will pose significant technological and cost challenges including:

 

**•**

locating a contract manufacturer  to install the flywheels, control electronics, and ancillary equipment, then perform final test and deliver the *Smart Energy Matrix* to the end user;

**•**

resolving flywheel vibration transference from one flywheel to another;

 
**•**

transporting the *Smart Energy Matrix* safely to customer locations;

 
**•**

meeting the technical requirements for interconnection to the utility grid;

**•**

developing a communication and control system adequate to meet the performance standards of the grid managers; and

**•**

designing flywheel accessibility in the *Smart Energy Matrix* for repair and reduce the cost of field service.

 

 

*Although the market for frequency regulation services is large and growing the Company has not demonstrated its ability to sell into that market.*

 

The Company believes that the use of its *Smart Energy Matrix* will be successful in the frequency regulation market.  However, this market is being served by well-known utilities and independent service providers that use conventional generators and that have far greater resources than the Company.  These utilities and independent 

 

24

 

 

service providers are primarily focused on the sale of energy and provide frequency regulation services as a secondary source of revenue.  Companies that are providing frequency regulation include Allegheny Energy Supply Company, Commonwealth Chesapeake Company, Dominion Virginia Power, Ingenco Wholesale Power, NRG Power Marketing and Reliant Energy Services.

 

Although the Company believes that the products and services it plans to provide by using its products offer greater effectiveness than generators and could produce positive investment returns for the Company and perhaps other independent service providers, there can be no assurance that the Company will be able to establish its products or services in that market.  To date, the Company has not completed any services or product sales of the *Smart Energy Matrix*.

 

*The Company’s stockholders may be adversely affected if the Company issues debt securities or additional equity securities to obtain financing.*

 

If the Company raises additional funds by issuing debt securities or additional equity securities, existing stockholders may be adversely affected because new investors may have superior rights than current stockholders and current stockholders may be diluted.

 

*If the Company is unable to increase its sales of inverter products, it may not recover the capital that it has invested in developing these products.*

 

The Company has invested considerable capital in the development of its inverter products, including the *Smart Power M5*.  To date, the Company has generated limited revenue based on low volume sales of these products.  If the Company is unable to increase sales of its inverter products in the near future, it may be forced to abandon these products, and may consequently not be able to recover the full amount of capital it has invested in developing inverter products.

 

*The Company has limited experience manufacturing**flywheel energy storage systems on a commercial basis.  In the event of significant sales, the Company will need to develop or obtain manufacturing capacity for its products.*

 

Should the Company experience significant customer demand for its products or services, it will need to develop or obtain manufacturing capacity to meet quality, profitability and delivery schedules.  The Company may need to establish additional manufacturing facilities, expand its current facilities or expand third-party manufacturing.  The Company has limited experience in the manufacture of flywheel or inverter systems and there can be no assurance that it will be able to accomplish these tasks, if necessary, on a timely basis to meet customer demand.  The Company has taken actions to conserve cash including idling its manufacturing capabilities through headcount reduction, delaying the development of its manufacturing process documentation and halting capital build-out.  

 

*It is difficult to evaluate the Company and to predict its future performance because of its short operating history and the fact that it is a development stage company.*

 

The Company is a development stage entity and has a limited operating history.  Unless the Company can achieve significant market acceptance of its current or future products at volumes and with margins that allow it to cover its costs of operations, the Company may never advance beyond the start-up phase.  

 

*Because the Company depends on third-party suppliers for the development and supply of key components for its products, it could experience disruptions in supply that could delay or decrease its revenues.*

 

The Company’s business, prospects, results of operations, or financial condition could be harmed if it is unable to maintain satisfactory relationships with suppliers.  To accelerate development time and reduce capital investment, the Company relies on third-party suppliers for several key components of its systems.  The Company does not have contracts with all of these suppliers.  If these suppliers should fail to timely deliver components that meet the Company’s quality, quantity, or cost standards, then the Company could experience production delays or cost increases.  Because certain key components are complex and difficult to manufacture and require long lead times, 

 

25

 

 

the Company may have difficulty finding alternative suppliers on a timely or cost effective basis.  As a result, the Company could experience shortages in supply or be unable to be cost competitive in the markets it is pursuing.  

 

*The Company’s financial performance could be adversely affected by its need to hire and retain key sales personnel.*

 

The Company’s ability to meet its business plan may be adversely affected if the Company cannot attract and retain sales personnel.  Competition for skilled sales people is intense and the Company may not be successful in attracting and retaining the sales talent necessary to develop markets and achieve sufficient sales volume to operate profitably. 

 

*The Company’s financial performance could be adversely affected if it is unable to retain key executive officers.*

 

Because the Company’s future success depends to a large degree on the management provided by the executive officers, the Company’s competitiveness will depend significantly on whether it can retain members of its executive team.  The Company has employment agreements with Messrs. Spiezio, Vice President of Finance, Chief Financial Officer, Treasurer and Secretary; and Lazarewicz, Vice President and Chief Technical Officer.  The employment agreement between the Company and Mr. Capp, CEO and President, expired on December 31, 2004.  Negotiations between Mr. Capp and the Company are ongoing.  There can be no assurance that an agreement will be reached with Mr. Capp.  

 

The Company’s ability to effectively implement its business plan depends, to a significant extent, on its ability to retain its executive officers.  There can be no assurance that the Company will be successful in retaining its other executive officers.

 

If the Company cannot reach agreement with Mr. Capp and he elects to leave the Company, pursuant to the terms of the expired employment agreement, if he ceases to be an employee the Company is obligated to pay him a monthly amount until December 31, 2005, equal to the sum of one-twelfth of his base salary at the time of expiration plus one-twelfth of his bonus for the most recent fiscal year.  No monthly payment is required after December 31, 2005.  If the at-will employment continues after December 31, 2005 but then terminates, no such monthly amount will be paid.  As of December 31, 2004, Mr. Capp’s base salary was $240,000 annually.  Based on the closing bid price of the Company’s common stock as of December 31, 2004 as reported on The NASDAQ SmallCap Market, Mr. Capp received a bonus in the amount of $236,800, paid in the form of a grant of 251,391 restricted stock units, pursuant to theCompany’s Second Amended and Restated 1998 Stock Incentive Plan.

 

*The Company’s financial performance could be adversely affected by its need to retain and attract technical personnel.*

 

The Company’s future success depends to a large degree on the technical skills of its engineering staff and its ability to attract technical personnel.  Competition for skilled technical professionals is intense and the Company may not be successful in attracting and retaining the talent necessary to design, develop and manufacture its flywheel products. 

 

*Failure to protect the Company’s intellectual property could impair its competitive position.*

 

The Company cannot provide assurance that it has or will be able to maintain a significant proprietary position on the basic technologies used in its flywheel systems.  The Company’s ability to compete effectively against alternative technologies will be affected by its ability to protect proprietary technology, systems designs and manufacturing processes.  The Company does not know whether any of its pending or future patent applications under which it has rights will issue, or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect the Company’s technology or processes from competitors.  Even if all the Company’s patent applications are issued and are sufficiently broad, they may be challenged or invalidated.  The Company could incur substantial costs in prosecuting or defending patent infringement suits, and such suits woulddivert funds and resources that could be used in the Company’s business.  The Company does not know whether it has been or will be completely successful in safeguarding and maintaining its proprietary rights.

 

 

26

 

 

 

Further, the Company’s competitors or others may independently develop or patent technologies or processes that are substantially equivalent or superior to those of the Company.  If the Company is found to be infringing on third-party patents, the Company does not know whether it will be able to obtain licenses to use such patents on acceptable terms, if at all.  Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of the Company’s systems.

 

The Company relies, in part, on contractual provisions to protect trade secrets and proprietary knowledge.  These agreements may be breached, and the Company may not have adequate remedies for any breach.  The Company’s trade secrets may also be known without breach of such agreements or may be independently developed by competitors or others.  The Company’s inability to maintain the proprietary nature of its technology and processes could allow competitors or others to limit or eliminate any competitive advantages the Company may have. 

 

*The share prices of companies in the Company’s sector have been highly volatile and the Company’s share price could be subject to extreme price fluctuations.*

 

The markets for equity securities of high technology companies, including companies in the power reliability and power quality markets, have been highly volatile recently and the market price of the Company’s common stock has been, and may continue to be, subject to significant fluctuations.  This could be in response to operating results, announcements of technological innovations or new products by the Company, or its competitors, patent or proprietary rights developments, energy blackouts and market conditions for high technology stocks in general.  In addition, stock markets in recent years have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the market price of the Company’s common stock, which couldaffect its ability to attract additional capital to fund operations.

 

*There may be other technologies under development that could prevent the Company from achieving or sustaining its ability to sell products or services or to do so at prices that will yield profits.*

 

There are a number of technology companies in various stages of development, there may be emerging technologies that the Company is unaware of and there may be combinations of technologies in the future.  The Company cannot give assurance that some or all of its target markets for the sale of product or services will not be displaced by these emerging technologies.

 

*The Company may invest cash in other companies in its sector to increase shareholder value through strategic alliances or return on investment which do not create gains and therefore reduce shareholder value.*

 

Given the Company’s financial position, its ability to make cash investments in other companies is very limited at this time.  However, in the future, the Company may make cash investments in other companies in its sector to gain strategic alliances, channels to market or appreciation in stock value.  These investments may not increase shareholder value.  Given the volatility of share prices for companies in this sector, general economic conditions and market fluctuations in general, the market price of investments may decrease and reduce shareholder value. 

 

*Product liability claims against the Company could result in substantial expenses and negative publicity that could impair successful marketing of products.*

 

The Company’s business exposes it to potential product liability claims that are inherent in the manufacture, marketing and sale of electro-mechanical products, and as such, the Company may face substantial liability for damages resulting from the faulty design or manufacture of products or improper use of products by end users.  The Company cannot provide assurance that its product liability insurance will provide sufficient coverage in the event of a claim.  Also, the Company cannot predict whether it will be able to maintain such coverage on acceptable terms, if at all, or that a product liability claim would not materially adversely affect its business, financial condition or the price of its common stock.  In addition, negative publicity in connection with the faulty design or manufacture of the Company’s products would adversely affect its ability to market and sell its products.

 

 

27

 

 

 

*Safety failures by the Company’s flywheel products or those of its competitors could reduce market demand or acceptance for flywheel services or products in general.*

 

A serious accident involving either the Company’s flywheels or competitors' similar products could be a significant deterrent to market acceptance and adversely affect the Company’s financial performance.  There is the possibility of accident with any form of energy storage.  In particular, if a metal flywheel fails and the stored energy is released, the flywheel could break apart into fragments that could be ejected at a high rate of speed.  However, the Company’s flywheels are based on a composite design so that in the event of a failure, its flywheel will fail in a more benign manner.

 

*The Company may make acquisitions or mergers which may cost more or take longer  to complete  than expected, or not produce the revenues and cash flow expected which may increase the Company’s cash usage and therefore increase the Company’s need for additional cash to sustain its operations*

 

The Company has may make acquisitions or mergers**and the costs associated with completing these transaction may be greater than expected and the time to complete the transactions may be extended or the transactions may not be approved by stockholders or regulators.  Further if acquisition or mergers are completed revenues and cash flow projections that the Company expects may not be achieved.  These factors could shorten the period of time that the Company’s cash balances will be sufficient to fund operations. There can be no assurance that acquisition or mergers will be perceived as positive by investors and therefore investments necessary to sustain operations may not be realized.

 

*The Company has limited experience in acquisitions and mergers and may not be successful in identifying appropriate acquisitions or mergers or be unsuccessful in integrating these entities*.

 

The Company and its management have limited experience in evaluating, integrating and coordinating the acquisition or merger of companies and therefore may not be successful in this effort.

 

*Any weaknesses identified in the Company’s internal controls as part of the evaluation being undertaken by the Company and its independent public accountant pursuant to Section* *404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on the Company’s business.*

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal control over financial reporting.  In addition, the independent accountants must report on management's evaluation.  The Company is in the process of documenting and testing its system of internal control over financial reporting to provide the basis for its report.  At this time, the Company is aware that its financial reporting information systems and point-of-sale information systems require a significant level of manual controls to ensure the accurate reporting of its results of operations and financial position.  Upon the completion of its review, certain deficiencies may be discovered that will require remediation.  This remediation may require the implementation of certain information systems operating protocols and/or additional manual controls, the costs of which could have amaterial adverse effect on the Company’s business, financial condition and results of operations.  Due to the ongoing evaluation and testing of The Company's internal controls, there can be no assurance that there may not be significant deficiencies or material weaknesses that would be required to be reported.  In addition, the Company expects the evaluation process and any required remediation, if applicable, to increase its accounting, legal and other costs and divert management resources from core business operations. 

 

*Ongoing compliance with the Sarbanes-Oxley Act of 2002 may require additional personnel or systems changes.*

The Company’s business plan may not have sufficient resources identified to insure ongoing compliance with the Sarbanes-Oxley Act of 2002.  Given the limited size of the Company and its cash position the Company may not have sufficient resources to satisfy the segregation of duties required for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 or to be compliant the Company may need to obtain additional funding and cash flow positive timing may need to be extended.

 

28

 

 

 

*Government regulation may impair the Company’s ability to market its products.*

 

Government regulation of the Company’s products, whether at the federal, state or local level, including any change in regulations, on tariffs, product buy downs or tax rebates relating to purchase and installation of its products, may increase the cost and price of its systems, and may have a negative impact on the Company’s revenue and profitability.  The Company cannot provide assurance that its products will not be subject to existing or future federal and state regulations governing traditional electric utilities and other regulated entities. The Company expects that its products and their installation will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, safety and related matters.  The Company does not know the extent to which any existing or new regulations may impact its ability to distribute, install andservice its products.  Once the Company’s products reach the commercialization stage, federal, state or local government entities may seek to impose regulations.

 

*Terrorist attacks have contributed to economic instability in the United States; continued terrorist attacks, war or other civil disturbances could lead to further economic instability and depress the Company’s stock price.*

On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope. These attacks have caused instability in the global financial markets, and have contributed to volatility in the stock prices of United States publicly traded companies, such as The Company.  These attacks may lead to armed hostilities or to further acts of terrorism and civil disturbances in the United States or elsewhere, which may further contribute to economic instability in the United States and could have a material adverse effect on the Company’s business, financial condition and operating results. 

 

 

29

 

 

 

**Item 3.  Quantitative and Qualitative Disclosure about Market Risk**

 

The Company’s cash equivalents and investments, all of which have maturities of less than one year, may expose the Company to interest rate risk but not to market risk of principal. At March 31, 2005, the Company had approximately $60,000 of cash equivalents that were held in non-interest bearing accounts.  Also at March 31, 2005, the Company had approximately $540,000 of cash equivalents that were held in interest bearing checking accounts and $2,734,000 invested in interest-bearing money market accounts.  A 10% change in interest rates would change the investment income realized on an annual basis by approximately $3,000.

 

**Item 4.  Controls and Procedures**

 

The Company’s management, with the participation of its chief executive officer and chief financial officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q/A.  Based on that evaluation, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective in enabling the Company to record, process, summarize, and report information required to be included in its periodic SEC filings within the required time period. 

 

In addition, the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the period covered by this Quarterly Report on Form 10-Q/A.  Based on that evaluation, the chief executive officer and chief financial officer have concluded that there has been no change in the Company’s internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q/A that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. 

 

30

 

 

 

**PART II**

 

**Item 1.  Legal Proceedings**

 

On August 16, 2004, Ricardo and Gladys Farnes and TLER Associates, Ltd., a Bahamas corporation ("TLER"), delivered a complaint to the Company naming as defendants the Company, John Doherty, Richard Lane, and unidentified individuals and corporations.  The case was filed in District Court in Clark County, Nevada on or about June 1, 2004, and later was removed to the United States District Court for the District of Nevada.  The complaint alleged that in 2001 defendants (a) forged the signature of plaintiff Ricardo Farnes (a principal of TLER) to a document purporting to extend the performance period on a purchase order issued by TLER to the Company and (b) thereafter posted on the internet defamatory and personal information concerning the plaintiffs.  The plaintiffs did not allege any specific amount of damages and instead merely asserted that damages exceed $10,000.  The Company answeredthe complaint and denied its material allegations.  On July 31st of 2005, the Company agreed to make a payment in final settlement of this suit in the amount of $5,000.

 

**Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**

 

None

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4.  Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5.  Other Information**

 

On May 13, 2005 the Company received a letter from The Nasdaq Stock Market Listing Qualifications panel stating that the Company has not met the minimum $1.00 per share bid price requirement for 30 consecutive business days and that, in accordance with Marketplace Rule 4310(c)(8)(D), the Company will be provided 180 calendar days, or until November 9, 2005, to regain compliance.  On June 27, 2005, the Company announced that it had received a letter from The NASDAQ Stock Market stating that because the closing bid price of its common stock had been at $1.00 per share or greater for at least 10 consecutive business days, it had regained compliance with Marketplace Rule 4310(c)(4). 

 

 

31

 

 

 

**Item 6.  Exhibits**

 

Exhibit

Number

Description of Document

 

 

3.1(1)

Sixth Amended and Restated Certificate of Incorporation of the Company.

 

 

3.2(1)

Amended and Restated Bylaws of the Company.

 

 

4.1(2)

Rights Agreement dated September 25, 2002 between the Company and EquiServe Trust Company, N.A.

 

 

4.2(3)

Amendment No. 1 to Rights Agreement dated December 27, 2002 between the Company and EquiServe Trust Company, N.A.

 

 

10.1.1(1)

Securities Purchase Agreement dated May 28, 1997 among the Company, SatCon Technology Corporation and Duquesne Enterprises (n/k/a DQE Enterprises, Inc.).

 

 

10.1.2(1)

Securities Purchase Agreement dated April 7, 2000 among the Company, Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a DQE Enterprises, Inc.), Micro-Generation Technology Fund, L.L.C. and SatCon Technology Corporation.

 

 

10.1.3(1)

Securities Purchase Agreement dated April 21, 2000 among the Company, Perseus Capital, L.L.C., Micro-Generation Technology Fund, L.L.C., Mechanical Technology Incorporated, The Beacon Group Energy Investment Fund II, L.P. and Penske Corporation.

 

 

10.1.4(1)

Securities Purchase Agreement dated May 23, 2000 among the Company, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro-Generation Technology Fund, L.L.C., Mechanical Technology Incorporated, GE Capital Equity Investments, Inc., The Beacon Group Energy Investment Fund II, L.P. and Penske Corporation.

 

 

10.1.5(1)

Investor Rights Agreement dated May 23, 2000 among the Company, Perseus Capital, L.L.C., DQE Enterprises, Inc., Micro-Generation Technology Fund, L.L.C., Mechanical Technology Incorporated, GE Capital Equity Investments, Inc., The Beacon Group Energy Investment Fund II, L.P., Penske Corporation, SatCon Technology Corporation, James S. Bezreh, Russel S. Jackson, Russell A. Kelley, Stephen J.  O'Connor, Jane E. O'Sullivan and Robert G. Wilkinson.

 

 

10.1.6(1)

Form of Warrant of the Company issued pursuant to Class E financing and list of holders thereof.

 

 

10.1.7(1)

Form of Warrant of the Company issued pursuant to Class F bridge financing and list of holders thereof.

 

 

10.1.8(1)

Form of Warrant of the Company issued pursuant to Class F financing and list of holders thereof.

 

 

10.1.9(1)

Warrant of the Company dated August 2, 2000 issued to Kaufman-Peters Company.

 

 

10.1.10(1)

Warrant of the Company dated October 24, 2000 issued to GE Capital Equity Investments, Inc. 

 

 

10.1.11(1)

Second Amended and Restated 1998 Stock Incentive Plan of the Company.

 

 

10.1.12(1)

Form of Incentive Stock Option Agreement of the Company.

 

 

10.1.13(1)

Form of Non-Qualified Stock Option Agreement of the Company.

 

 

32

 

 

 

 

 

 

10.1.14(1)

Form of Non-Qualified Stock Option Agreement of the Company issued to certain consultants on July 24, 2000 and list of holders thereof.

 

 

10.1.15(1)

Amended and Restated License Agreement dated October 23, 1998 between the Company and SatCon Technology Corporation.

 

 

10.1.16(1)

Lease dated July 14, 2000 between the Company and BCIA New England Holdings LLC.

 

 

10.1.17(1)

Letter Agreement dated October 24, 2000 among the Company, GE Capital Equity Investments, Inc. and GE Corporate Research and Development.

 

 

10.1.18(1)

Form of Director and Officer Indemnification Agreement of the Company.

 

 

10.1.19(4)

Employment Agreement dated December 1, 2003 between the Company and F. William Capp.   

 

 

10.1.20(9)

Employment Agreement dated April 25, 2004 between the Company and Matthew L. Lazarewicz.

 

 

10.1.21(3)

Employment Agreement dated October 25, 2002 between the Company and James M. Spiezio.

 

 

10.1.22(4)

Form of Restricted Stock Unit Agreement of the Company.

 

 

10.1.23(5)

Assignment dated December 27, 2004 between the Company and CRT Capital Group LLC. 

 

 

10.1.24(6)

Agreement dated January 31, 2005 between the Company and the New York State Energy Research and Development Authority. 

 

 

10.1.25(7)

Agreement dated January 31, 2005 between the Company and California State Energy Resources Conservation and Development Commission. 

 

 

10.1.26(9)

Amendment to employment agreement between the Company and Matthew L. Lazarewicz.

 

 

31.1+

Principal Executive Officer—Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2+

Principal Financial Officer—Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1+

Principal Executive Officer—Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2+

Principal Financial Officer—Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(1)

Incorporated by reference from the Form S-1 filed on November 16, 2000 (File No. 333-43386).

 
(2)

Incorporated by reference from the Form 8-K filed on October 4, 2002 (File No. 001-16171).

 
(3)

Incorporated by reference from the Form 10-K filed on March 31, 2003 (File No. 001-16171).

 
(4)

Incorporated by reference from the Form 10-K/A filed on May 17, 2004 (File No. 001-16171).

 
(5)

Incorporated by reference from the Form 8-K filed on December 30, 2004 (File No. 001-16171).

 
(6)

Incorporated by reference from the Form 8-K filed on February 14, 2005 (File No. 001-16171).

 
(7)

Incorporated by reference from the Form 8-K filed on February 16, 2005 (File No. 001-16171).

 
(8)

Incorporated by reference from the Form 8-K/A filed on November 2, 2004 (File No. 001-16171).

(9)

Incorporated by reference from the Form 10-K filed on March 31, 2005 (File No. 001-16171).

 
 

 

33

 

 

 

+

Filed herewith.

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BEACON POWER CORPORATION

 

Date:  February 17, 2006

By:  /s/ F. William Capp

F. William Capp

President and Chief Executive Officer

 

 

February 17, 2006

By: s/ James M. Spiezio

 
 
James M. Spiezio

 
 
Vice President of Finance, Chief Financial Officer,

 
Treasurer and Secretary

 
 
Principal Financial Officer

 
 

 

 

34

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