##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004
 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 000-31687 EVERGREEN SOLAR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 DELAWARE
    
    04-3242254(STATE OR OTHER JURISDICTION OF
    
    (I.R.S. EMPLOYERINCORPORATION OR ORGANIZATION)
    
    IDENTIFICATION NUMBER)
 138 Bartlett Street
Marlboro, Massachusetts 01752(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (508) 357-2221(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE) 259 Cedar Hill Street
Marlboro, Massachusetts 01752(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes o No x Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: As of August 1, 2004 there
were 47,523,287 shares of common stock outstanding.




---



##### Table of Contents



EVERGREEN SOLAR, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTSUnaudited Condensed Consolidated Balance Sheets at December 31, 2003
and June 30, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2003 and
2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2003 and
2004
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    6ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
    
    
    10ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
    
    
    27ITEM 4: CONTROLS AND
PROCEDURES
    
    
    28PART II  OTHER INFORMATIONITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND
ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    28ITEM 6: EXHIBITS AND REPORTS ON FORM
8-K
    
    
    29SIGNATURESEXHIBIT INDEXEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
 2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Evergreen Solar, Inc. 
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
 (unaudited)
 December 31,
    
    June 30,2003
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,620
    
    
    $
    17,603Short-term investments
    
    
    15,720
    
    
    
    6,729Accounts receivable, net of allowance for doubtful accounts of $227
and $208 at December 31, 2003 and June 30, 2004, respectively
    
    
    983
    
    
    
    3,617Interest receivable
    
    
    154
    
    
    
    61Inventory
    
    
    2,019
    
    
    
    2,301Other current assets
    
    
    543
    
    
    
    636Total current assets
    
    
    24,039
    
    
    
    30,947Restricted cash
    
    
    414
    
    
    
    414Fixed assets, net
    
    
    21,523
    
    
    
    22,771Total assets
    
    $
    45,976
    
    
    $
    54,132Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    905
    
    
    $
    2,844Accrued compensation
    
    
    425
    
    
    
    659Accrued warranty
    
    
    426
    
    
    
    519Other accrued expenses
    
    
    244
    
    
    
    521Total current liabilities
    
    
    2,000
    
    
    
    4,543Convertible preferred stockSeries A, $.01 par value, 26,227,668 shares authorized; 22,679,125 and
0 issued and outstanding at December 31, 2003 and June 30, 2004, respectively
    
    
    27,032
    
    
    
    Stockholders equity:Common stock, $0.01 par value, 70,000,000 shares authorized;
15,126,268 and 47,523,287 issued and outstanding at December 31, 2003
and June 30, 2004, respectively
    
    
    151
    
    
    
    475Additional paid-in capital
    
    
    73,239
    
    
    
    116,488Deferred compensation
    
    
    (89
    )
    
    
    (34
    )Accumulated deficit
    
    
    (56,330
    )
    
    
    (67,295
    )Accumulated other comprehensive deficit
    
    
    (27
    )
    
    
    (45
    )Total stockholders equity
    
    
    16,944
    
    
    
    49,589Total liabilities, convertible preferred stock and stockholders equity
    
    $
    45,976
    
    
    $
    54,132
 The accompanying notes are an integral part of these financial statements. 3




---



##### Table of Contents



Evergreen Solar, Inc. 
 Condensed Consolidated Statements of Operations
 (in thousands, except per share data)
 (unaudited)
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Revenues:Product revenues
    
    $
    2,659
    
    
    $
    4,541
    
    
    $
    3,727
    
    
    $
    7,371Research revenues
    
    
    508
    
    
    
    229
    
    
    
    889
    
    
    
    491Total revenues
    
    
    3,167
    
    
    
    4,770
    
    
    
    4,616
    
    
    
    7,862Operating expenses:Cost of product revenues
    
    
    4,242
    
    
    
    9,161
    
    
    
    6,907
    
    
    
    13,714Research and development expenses, including costs of research revenues
    
    
    1,072
    
    
    
    995
    
    
    
    1,786
    
    
    
    1,897Selling, general and administrative expenses
    
    
    1,202
    
    
    
    1,662
    
    
    
    2,521
    
    
    
    3,335Total operating expenses
    
    
    6,516
    
    
    
    11,818
    
    
    
    11,214
    
    
    
    18,946Operating loss
    
    
    (3,349
    )
    
    
    (7,048
    )
    
    
    (6,598
    )
    
    
    (11,084
    )Other income
    
    
    50
    
    
    
    46
    
    
    
    74
    
    
    
    119Net loss
    
    
    (3,299
    )
    
    
    (7,002
    )
    
    
    (6,524
    )
    
    
    (10,965
    )Dividends and conversion premiums on Series A convertible preferred stock
    
    
    (12,055
    )
    
    
    (2,239
    )
    
    
    (12,055
    )
    
    
    (2,904
    )Net loss attributable to common stockholders
    
    $
    (15,354
    )
    
    $
    (9,241
    )
    
    $
    (18,579
    )
    
    $
    (13,869
    )Net loss per share attributable to common stockholders (basic and diluted)
    
    $
    (1.35
    )
    
    $
    (0.44
    )
    
    $
    (1.63
    )
    
    $
    (0.76
    )Weighted average shares used in computing basic and diluted
net loss per share attributable to common stockholders
    
    
    11,412
    
    
    
    20,840
    
    
    
    11,411
    
    
    
    18,159
 The accompanying notes are an integral part of these financial statements. 4




---



##### Table of Contents



Evergreen Solar, Inc. 
 Condensed Consolidated Statements of Cash Flows
 (in thousands)
 (unaudited)
 Six months endedJune 30,2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (6,524
    )
    
    $
    (10,965
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation expense
    
    
    1,023
    
    
    
    1,416Loss on disposal of fixed assets
    
    
    
    
    
    
    2,033Bad debt expense
    
    
    83
    
    
    
    (19
    )Amortization of bond premiums
    
    
    50
    
    
    
    219Compensation expense associated with employee stock options
    
    
    175
    
    
    
    55Changes in operating assets and liabilites:Inventory
    
    
    36
    
    
    
    (282
    )Other current assets
    
    
    314
    
    
    
    (93
    )Interest receivable
    
    
    (121
    )
    
    
    93Accounts receivable
    
    
    (230
    )
    
    
    (2,615
    )Accounts payable
    
    
    20
    
    
    
    1,939Accrued expenses
    
    
    57
    
    
    
    604Net cash used in operating activities
    
    
    (5,117
    )
    
    
    (7,615
    )Cash flows from investing activities:Purchases of fixed assets
    
    
    (2,735
    )
    
    
    (4,697
    )Restricted cash
    
    
    50
    
    
    
    Purchases of investments
    
    
    (17,211
    )
    
    
    (1,000
    )Proceeds from sale and maturity of investments
    
    
    7,251
    
    
    
    9,754Net cash (used in) provided by investing activites
    
    
    (12,645
    )
    
    
    4,057Cash flows from financing activities:Proceeds from the issuance of Series A convertible preferred stock, net of offering costs
    
    
    28,526
    
    
    
    Proceeds from the issuance of common stock warrant
    
    
    100
    
    
    
    Proceeds from issuance of common stock and warrants, net of offering costs
    
    
    
    
    
    
    18,771Dividend and conversion premium paid on Series A convertible preferred stock
    
    
    
    
    
    
    (2,230
    )Net cash flow provided by financing activities
    
    
    28,626
    
    
    
    16,541Net increase in cash and cash equivalents
    
    
    10,864
    
    
    
    12,983Cash and cash equivalents at beginning of period
    
    
    1,194
    
    
    
    4,620Cash and cash equivalents at end of period
    
    $
    12,058
    
    
    $
    17,603Supplemental cash flow information:Taxes paid
    
    
    13
    
    
    
    13Non-cash Series A convertible preferred stock dividends earned
    
    
    367
    
    
    
    674Non-cash conversion of Series A convertible preferred stock to common stock
    
    
    
    
    
    
    27,704
 The accompanying notes are an integral part of these financial statements. 5




---



##### Table of Contents



EVERGREEN SOLAR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying condensed consolidated interim financial statements of
Evergreen Solar, Inc. (Evergreen Solar or the Company) are unaudited and
have been prepared on a basis substantially consistent with the Companys
audited financial statements for the year ended December 31, 2003. The
condensed consolidated interim financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information. Consequently, these statements
do not include all disclosures normally required by generally accepted
accounting principles for annual financial statements. These condensed
consolidated interim financial statements should be read in conjunction with
the Companys audited financial statements for the year ended December 31,
2003, which are contained in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, which was filed with the Securities and
Exchange Commission on March 23, 2004 and as subsequently amended. The
unaudited condensed consolidated interim financial statements, in the opinion
of management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position at June
30, 2004, the results of operations for the three and six month periods ended
June 30, 2004 and 2003, and the cash flows for the six month periods ended June
30, 2004 and 2003. The balance sheet at December 31, 2003 has been derived
from audited financial statements as of that date. The results of operations
for the interim periods are not necessarily indicative of the results of
operations to be expected for any other interim period or for the full fiscal
year ending December 31, 2004. The Companys preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Estimates are used when accounting for the collectibility of
receivables, valuing deferred tax assets, provisions for warranty claims and
inventory obsolescence. The Company is subject to risks common to companies in the high technology and
energy industries including, but not limited to, development by the Company or
its competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology and compliance with government
regulations. Any delay in the Companys plan to scale up to full capacity may
result in increased costs and could impair business operations. The Company applies the accounting provisions of Accounting Principles Board
(APB) Opinion 25, and related interpretations, as they relate to stock-based
compensation and has elected the disclosure-only alternative permitted under
Statement of Financial Accounting Standards, (SFAS) No. 123, Accounting for
Stock-Based Compensation. The Company has disclosed herein pro forma net loss
using the fair value based method. All stock-based awards to non-employees are
accounted for at their fair market value, as calculated using the Black-Scholes
model in accordance with SFAS No. 123, as amended by SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure. Had compensation expense for the Companys employee stock option plan been
determined based on the fair value at the grant dates for options granted under
the plan consistent with SFAS No. 123, the Companys net loss would have been
as follows (in thousands, except per share data): Three Month Period Ended
    
    Six Month Period EndedJune 30, 2003
    
    June 30, 2004
    
    June 30, 2003
    
    June 30, 2004Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net Loss
    
    Net LossAttributable
    
    Per
    
    Attributable
    
    Per
    
    Attributable
    
    Per
    
    Attributable
    
    PerTo Common
    
    Common
    
    To Common
    
    Common
    
    To Common
    
    Common
    
    To Common
    
    CommonStockholders
    
    Share
    
    Stockholders
    
    Share
    
    Stockholders
    
    Share
    
    Stockholders
    
    ShareNet loss attributable to common stockholders, as reported
    
    $
    (15,354
    )
    
    $
    (1.35
    )
    
    $
    (9,241
    )
    
    $
    (0.44
    )
    
    $
    (18,579
    )
    
    $
    (1.63
    )
    
    $
    (13,869
    )
    
    $
    (0.76
    )Add: Stock-based employee compensation expense included in reported results
    
    
    69
    
    
    
    0.01
    
    
    
    24
    
    
    
    
    
    
    
    175
    
    
    
    0.02
    
    
    
    55
    
    
    
    Deduct: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards
    
    
    (291
    )
    
    
    (0.03
    )
    
    
    (637
    )
    
    
    (0.03
    )
    
    
    (578
    )
    
    
    (0.05
    )
    
    
    (1,282
    )
    
    
    (0.07
    )Pro forma net loss attributable to common stockholders
    
    $
    (15,576
    )
    
    $
    (1.37
    )
    
    $
    (9,854
    )
    
    $
    (0.47
    )
    
    $
    (18,982
    )
    
    $
    (1.66
    )
    
    $
    (15,096
    )
    
    $
    (0.83
    )
 2. Net Loss per Common Share The Company computes net loss per common share in accordance with SFAS No. 128,
Earnings Per Share (SFAS 128), and SEC Staff Accounting Bulletin No. 98
(SAB 98). Under the provisions of SFAS 128 and SAB 98, basic net loss per
common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding during
the period. The calculation of diluted net loss per common share for the three
and six month periods ended June 30, 2004 and 2003 does not
include 10,343,788
and 30,520,239 potential shares of common stock equivalents outstanding at June
30, 2004 and 2003, respectively, as their inclusion would be antidilutive. 6




---



##### Table of Contents



3. Inventory Inventory consisted of the following at December 31, 2003 and June 30, 2004 (in
thousands): December 31,
    
    June 30,2003
    
    2004Raw materials
    
    $
    1,318
    
    
    $
    1,641Work-in-process
    
    
    4
    
    
    
    Finished goods
    
    
    697
    
    
    
    660$
    2,019
    
    
    $
    2,301
 4. Fixed Assets Fixed assets consisted of the following at December 31, 2003 and June 30, 2004
(in thousands): Useful
    
    December 31,
    
    June 30,Life
    
    2003
    
    2004Laboratory and manufacturing equipment
    
    3-7 years
    
    $
    13,542
    
    
    $
    13,800Computer and office equipment
    
    3-7 years
    
    
    280
    
    
    
    383Leasehold improvements
    
    Lesser of 15 to 20years or lease term
    
    
    6,273
    
    
    
    7,341Assets under construction
    
    
    
    
    
    
    6,812
    
    
    
    6,41826,907
    
    
    
    27,942Less: accumulated depreciation
    
    
    
    
    
    
    (5,384
    )
    
    
    (5,171

    )$
    21,523
    
    
    $
    22,771
 During the second quarter of 2004 and as a result of the Companys successful
closing of the Common Stock Private Placement consummated on June 21, 2004, the
Company disposed of several pieces of manufacturing equipment in order to
replace them with more technologically advanced equipment expected to increase
total manufacturing capacity in its Marlboro facility to a target level of 15
megawatts. Equipment with a gross value of $3.7 million was disposed of during
the second quarter, for no proceeds, and the Company realized a loss on
disposal of $2.0 million. The loss on disposal of fixed assets is included in
cost of product revenues. In addition to the equipment disposals, the Company
has accelerated the rate of depreciation of some of its other equipment that is
expected to be disposed of by the end of the third quarter 2004, resulting in
incremental depreciation expense of approximately $133,000 for the three month
period ended June 30, 2004, which is also included in cost of product revenues. 5. Guarantor Arrangements The following is a summary of the Companys agreements that are within the
scope of FASB Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45). Product Warranty The Company provides for the estimated cost of product warranties at the time
revenue is recognized. Given the Companys limited operating history, the
Company uses historical industry solar panel failure rates as the basis for the
accrued warranty costs during the period. While the Company engages in product
quality programs and processes, including monitoring and evaluating the quality
of component suppliers, its warranty obligation is affected by product failure
rates and material usage and service delivery costs incurred in correcting a
product failure. If the Companys actual product failure rates, material usage
or service delivery costs differ from these estimates, accrued warranty costs
would be adjusted in the period that such events or costs become known. Since
the Company has a limited operating history and its manufacturing process
differs from industry standards, its experience may be different from the
industry data used as a basis for its estimate. While the Companys
methodology takes into account these uncertainties, adjustments in future
periods may be required as its products 7




---



##### Table of Contents



mature. The following table summarizes
the activity regarding the Companys warranty accrual during the first six
months of 2004: Balance at December 31, 2003
    
    $
    426,000Accruals for warranties issued during the period
    
    
    93,000Balance at June 30, 2004
    
    $
    519,000
 Indemnification Agreements The Company enters into standard indemnification agreements in its ordinary
course of business. Pursuant to these agreements, the Company indemnifies,
holds harmless, and agrees to reimburse the indemnified party for losses
suffered or incurred by the indemnified party, generally our business partners.
The term of these indemnification agreements is generally perpetual any time
after execution of the agreement. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements under certain circumstances may be unlimited. However, the Company
has never incurred costs to defend lawsuits or settle claims related to these
indemnification agreements. The Company believes the estimated fair value of
agreements with parties is minimal as well. The Company agreed to indemnify, defend and hold harmless each of the
purchasers participating in the Companys Series A Private Placement,their
affiliates and their respective officers, directors, agents, employees,
subsidiaries, partners, members and controlling persons to the fullest extent
permitted by law from and against any and all losses, claims or written threats
thereof, damages, expenses (including reasonable fees, disbursements and other
charges of counsel) resulting from or arising out of the Companys breach of
any representation or warranty, covenant or agreement in the purchase
agreement. The Company believes the estimated fair value of this
indemnification agreement is minimal. The Company agreed to indemnify, defend and hold harmless each of the
purchasers participating in the Companys Common Stock Private Placement, their
affiliates and their respective officers, directors, agents, employees,
subsidiaries, partners, members and controlling persons to the fullest extent
permitted by law from and against any and all losses, claims or written threats
thereof, damages, expenses (including reasonable fees, disbursements and other
charges of counsel) resulting from or arising out of the Companys breach of
any representation or warranty, covenant or agreement in the purchase
agreement. The Company believes the estimated fair value of this
indemnification agreement is minimal. 6. Deferred Compensation Prior to December 31, 2000, the Company recorded total cumulative deferred
compensation of approximately $1.3 million, representing the difference between
the fair market value of the Companys common stock and the exercise price on
the option grant date. These amounts were presented as a reduction of
stockholders equity and are being amortized ratably over the vesting period of the options, which is generally
four years. The amortization resulted in charges to operations of $175,000 and
$55,000 for the six months ended June 30, 2003 and 2004, respectively. 7. Segment Information The Company operates as one operating segment. The following table summarizes
the Companys concentration of total revenue: 8




---



##### Table of Contents



Six months endedJune 30,2003
    
    2004By geography:U.S. distributors
    
    
    19
    %
    
    
    29
    %U.S. Government (research revenue)
    
    
    19
    %
    
    
    6
    %Germany
    
    
    54
    %
    
    
    60
    %All other
    
    
    8
    %
    
    
    5
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    45
    %
    
    
    42
    %European distributor #2
    
    
    5
    %
    
    
    18
    %National Renewable Energy Laboratory (research revenue)
    
    
    10
    %
    
    
    5
    %All other
    
    
    40
    %
    
    
    35
    %100
    %
    
    
    100
    %
 8. Stockholders Equity At June 30, 2004, 7,650,000 shares of common stock were authorized for issuance
under the Companys 2000 Stock Option Plan and 4,823,851 shares were reserved
for issuance upon conversion of outstanding warrants issued in the Series A
Private Placement and the Common Stock Private Placement. On May 15, 2003, the Company consummated a private placement transaction with
certain investors to raise $29.5 million through the issuance of 26,227,668
shares of Series A convertible preferred stock and the sale of a warrant to
purchase 2,400,000 shares of common stock. The proceeds to the Company, net of
offering costs of approximately $849,000, were approximately $28.6 million. In order to satisfy the Companys existing capital requirements and to fund the
continuing capacity expansion of its Marlboro, Massachusetts manufacturing
facilities, on June 21, 2004, the Company consummated a $18.8 million private
placement financing transaction, net of offering costs of approximately $1.2
million, whereby the Company issued 7,662,835 shares of its common stock, and
warrants to purchase up to 2,298,851 shares of its common stock, to certain
institutional investors pursuant to a stock and warrant purchase agreement
dated June 16, 2004, and a warrant agreement dated June 21, 2004 (Common Stock
Private Placement). Additionally, in connection with the Common Stock Private
Placement, the Company issued a warrant to purchase 125,000 shares of common
stock to CRT Capital Group LLC, as compensation for CRT Capital Groups
services as the placement agent for the Common Stock Private Placement. The
terms of the placement agent warrants are identical to the terms of the warrants
issued to the investors participating in the Common Stock Private Placement.
The shares of common stock were sold at a per share price of $2.61, which
represented a 10% discount to the $2.90 closing price of shares of the
Companys common stock on the Nasdaq National Market as of the close of
business on June 15, 2004. The warrants entitle the holders to
purchase up to 2,423,851 shares of the
Companys common stock at an exercise price of $3.34. The warrants are
exercisable at any time on or after December 22, 2004 and prior to June 22,
2009. The warrants provide that they may only be exercised with respect to
350,000 shares of common stock in the aggregate prior to approval of the
exercisability of the remaining warrants by stockholders of the Company. On April 21, 2004, the Companys Board of Directors approved a resolution
increasing the number of authorized shares of common stock from 70,000,000 to
100,000,000 and correspondingly increasing the total number of authorized
shares of capital stock from 96,227,668 to 127,227,668. The increase in the
total number of authorized shares of capital stock is subject to approval by the Companys shareholders.
The Companys shareholder meeting is scheduled for August 20, 2004. The Company intends to use the proceeds of the Series A Private Placement as
well as the Common Stock Private Placement to execute its business plan and for
further capital expenditures required over the next six months to increase the
capacity at the Companys manufacturing facility to its target level of 15
megawatts for both manufacturing lines, an increase from its previous target of
10 to 14 megawatts. In addition to the capacity expansion, the Company intends
to use a portion of the proceeds to increase research and development spending
on promising next generation technologies and to explore opportunities for
further expansion. Dividend Rights of Series A Convertible Preferred Stock Shares of Series A convertible preferred stock pay a compounding dividend of
10% per annum, paid quarterly, in cash, or at the Companys election, to be
added to the liquidation preference of the Series A convertible preferred 9




---



##### Table of Contents



stock
on a quarterly basis, which would result in an increase in the number of shares
of common stock issuable upon conversion of the Series A convertible preferred
stock. On June 21, 2004, holders of all outstanding shares of Series A
convertible preferred stock agreed to convert all of their shares of Series A
convertible preferred stock into shares of our common stock in connection with
the Common Stock Private Placement. During the first quarter of 2004, the
Series A preferred stock earned a dividend of approximately $0.7 million, which
the Company elected to add to the liquidation preference of the Series A
convertible preferred stock. As an inducement to convert their shares into common stock in connection with
the Common Stock Private Placement consummated on June 21, 2004, the remaining
Series A preferred shareholders received the dividend earned for the period
between April 1, 2004 and June 21, 2004 in cash, which totaled approximately
$0.5 million. In addition, the Series A preferred shareholders received a cash
conversion premium of 7% of the accreted value of the Series A Preferred Stock as
of March 31, 2004, which totaled $1.7 million. Therefore, the total dividend
charged recorded by the Company for the six month period ended June 30, 2004
was approximately $2.9 million. 9. Other Comprehensive Income Other comprehensive income (loss) consists of unrealized gains and losses on
marketable securities. For the three months ended June 30, 2004 and 2003, the
Company recorded other comprehensive losses of $55,000, which, when added to
net loss, results in comprehensive losses of $7.1 million and $3.3 million,
respectively. For the six months ended June 30, 2004 and 2003, the Company
recorded other comprehensive losses of $18,000 and $61,000, respectively,
which, when added to net loss, results in comprehensive losses of $11.0 million
and $6.6 million, respectively. 10. Foreign Currency Hedging Transactions During the second quarter of 2004, the Company entered into foreign currency
forward contracts to hedge against potential losses relating to fluctuations in
its receivables denominated in Euros. As of June 30, 2004, the Company had
forward currency contracts with a notional amount of approximately $3.4
million. The Company seeks to manage its foreign exchange risk through the use
of derivative financial instruments. These financial instruments serve to
protect net income against the impact of the translation into U.S. dollars of
foreign exchange denominated transactions. The Company recognized a loss of
approximately $1,000 in the three months ended June 30, 2004 in connection with
the marking to market of these forward contracts. 11. Recent Accounting Pronouncements In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on
Issue 03-6, Participating Securities and the Two-Class Method under Financial
Accounting Standards Board (FASB) Statement No. 128, Earnings Per Share.
This issue involves the computation of earnings per share for companies that
have multiple classes of common stock or have issued securities other than
common stock that participate in dividends with common stock (participating
securities). The EITF concluded that companies having participating securities
are required to apply the two-class method to compute earnings per share. The
two-class method is an earnings allocation method under which earnings per
share is calculated for each class of common stock and participating security
considering both dividends declared (or accumulated) and participation rights
in undistributed earnings as if all such earnings had been distributed during
the period. This issue is effective for fiscal periods beginning after March
31, 2004. The Company has incurred losses for the three and six month periods
ended June 30, 2004 and 2003 and as its Series A preferred shares do not have a contractual obligation to share in the losses of the Company,
EITF 03-6 has no effect on its reported earnings per share. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTION CONCERNING FORWARD-LOOKING STATEMENTS We caution readers that statements in this Quarterly Report on Form 10-Q that
are not strictly historical statements, including, but not limited to:
statements reflecting our expectations regarding the timing, cost, and success
of our manufacturing scale-up at our facility in Marlboro, Massachusetts and
future manufacturing expansion and production, as well as related financing
requirements; future financial performance; our technology and product
development, cost and performance; our current and future strategic
relationships and future market opportunities; and our other business and
technology strategies and objectives, constitute forward-looking statements
which are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These 10




---



##### Table of Contents



statements may be identified with such
words as we expect, we believe, we anticipate or similar indications of
future expectations. These statements are neither promises nor guarantees and
involve risks and uncertainties, which could cause our actual results to differ
materially from such forward-looking statements. Such risks and uncertainties
may include, among other things, those risks and uncertainties described in
this Quarterly Report and in our other filings with the Securities and Exchange
Commission, copies of which may be accessed through the SECs Web Site at
http://www.sec.gov. We caution readers not to place undue reliance on any
forward-looking statements contained in this Quarterly Report, which speak only
as of the date of this Quarterly Report. We disclaim any obligation to publicly
update or revise any such statements to reflect any change in our expectations,
or events, conditions, or circumstances on which any such statements may be
based, or that may affect the likelihood that actual results will differ from
those set forth in such forward-looking statements. EXECUTIVE OVERVIEW We develop, manufacture and market solar power products for the global
marketplace. Solar cells are semiconductor devices that convert sunlight into
electricity and form the building block for all solar power products. To date,
our product sales have been primarily solar panels, which have been used to
generate electricity for on-grid and off-grid applications. Off-grid
applications have included the electrification of rural homes, lighting for
small, rural schools and power supplies for water pumping. More recently, the
substantial majority of our products have been used by on-grid customers as a
clean, renewable source of alternative or supplemental electricity. We made significant progress on our capital expansion program aimed at roughly
quadrupling our production capacity by adding a second manufacturing line,
which we expect to be completed by the end of 2004. During the first half of
2004, our product sales were constrained by our manufacturing capacity despite
the fact that by June 2004, we had more than doubled our manufacturing capacity
over 2003. The factory now has an installed capacity of 7 MW (megawatts, or
million watts) per year, up from the 3 MW capacity of Line 1 and has operated
at a run rate of about 6 MW per year. Since product revenue has been capacity
limited, the planned expansion should enable significant revenue growth during
the second half of 2004 and should also improve our product gross margins
during the second half of 2004. We have already begun to realize significant
revenue growth in the first half of 2004 resulting from the expansion that has
been completed thus far. Specifically, our product revenues for the six months
ended June 30, 2004 represent a 98% increase over our revenues from the same
period of the previous fiscal year. In addition, our recent common stock and
warrant financing consummated on June 21, 2004 (the Common Stock Private
Placement) provided us with the capital to further expand the Marlboro
manufacturing facility to a target of 15 megawatts, an increase from the
previous target of 10-14 megawatts. A portion of the proceeds from the Common
Stock Private Placement will also be used to increase research and development
spending on promising next generation technologies and to explore further
expansion opportunities. Implementation of our dual-ribbon growth technology, increased production
volume, adding key positions to staff across the organization, expanding and
establishing key customer relationships, and consummating the Common Stock
Private Placement were the key factors in determining our performance. We
continue to demonstrate our dual-ribbon growth technology (pulling two string
ribbons out of one furnace) on an increasing production basis, which we expect
to substantially lower the manufacturing cost of growing silicon wafers and
roughly double the capacity of one string ribbon furnace. We expect the new
crystal growth furnaces that will be installed throughout 2004 will all be
dual-ribbon growth furnaces. As of June 30, 2004, we had about 120 crystal
growth furnaces in production, 30 of which were new, second generation
dual-ribbon growth furnaces. We added several key staff in sales,
administration, manufacturing and research and development to better position
ourselves for the anticipated continued growth of the company. Most notably,
we hired Richard M. Feldt as our new President and CEO in December 2003. Financing Transaction In order to satisfy the our existing capital requirements and to fund the
continuing capacity expansion of our Marlboro, Massachusetts manufacturing
facilities, on June 21, 2004, we consummated a $18.8 million private placement
financing transaction, net of offering costs of approximately $1.2 million,
whereby we issued 7,662,835 shares of our common stock, and warrants to
purchase up to 2,298,851 shares of our common stock, to certain institutional
investors pursuant to a stock and warrant purchase agreement dated June 16,
2004, and a warrant agreement dated June 21, 2004. Additionally, in connection
with the Common Stock Private Placement, we issued a warrant to purchase
125,000 shares of common stock to CRT Capital Group LLC, as compensation for
CRT Capital Groups services as the placement agent for the Common Stock
Private Placement. The terms of the placement agent warrant is identical to the
terms of the warrants issued to the investors participating in the Common Stock
Private Placement. The shares of common stock were sold at a per share price of
$2.61, which represented a 10% discount to the $2.90 closing price of shares of
our common stock on the Nasdaq National Market as of the close of 11




---



##### Table of Contents



business on June 15, 2004. The warrants entitle the holders to shares of our
common stock at an exercise price of $3.335. The warrants are exercisable at
any time on or after December 22, 2004 and prior to June 22, 2009. The
warrants provide that they may only be exercised with respect to 350,000 shares
of common stock in the aggregate prior to approval of the exercisability of the
remaining warrants by our stockholders. We believe that our current cash, cash equivalents and short-term investments
will be sufficient to fund our planned manufacturing capacity expansion to our
target level of 15 megawatts for both lines and to fund our operating
expenditures over the next twelve months. We will need to raise additional
capital in order to further enhance our operating infrastructure and to further
increase capacity through the construction of a second manufacturing facility.
We may also require additional capital to respond to competitive pressures and
acquire complementary businesses or necessary technologies. We do not know
whether we will be able to raise additional financing or financing on terms
favorable to us. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our operations, develop and expand our
manufacturing operations and distribution network, or otherwise respond to
competitive pressures would be significantly limited. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of consolidated financial statements in accordance with
generally accepted accounting principals requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements: Revenue Recognition and Allowance for Doubtful Accounts We recognize product revenue if persuasive evidence of an arrangement exists,
shipment has occurred, risk of loss has transferred to the customer, sales
price is fixed or determinable, and collectibility is reasonably assured. The
market for solar power products is emerging and rapidly evolving. We currently
sell our solar power products primarily to distributors, system integrators and
other value-added resellers within and outside of North America, which
typically resell our products to end users throughout the world. For new
customers requesting credit, we evaluate creditworthiness based on credit
applications, feedback from provided references, and credit reports from
independent agencies. For existing customers, we evaluate creditworthiness
based on payment history and known changes in their financial condition. We also evaluate the facts and circumstances related to each sales transaction
and consider whether risk of loss has not passed to the customer upon shipment.
We consider whether our customer is purchasing our product for stock, and
whether contractual or implied rights to return the product exist or whether
our customer has an end user contractually committed. To date, we have not
offered rights to return our products other than for normal warranty
conditions. We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, such that their ability to make
payments was impaired, additional allowances could be required. Revenue from research grants is recognized as services are rendered to the
extent of allowable costs incurred. Inventory Inventory is valued at the lower of cost or market. Certain factors may impact
the realizable value of our inventory including, but not limited to,
technological changes, market demand, changes in product mix strategy, new
product introductions and significant changes to our cost structure. Given our
current production levels and the market value of our products, we currently
sell our finished goods inventory at prices that are below the sum of our fixed
and variable costs per unit. Accordingly, we write down our finished goods
inventory to realizable value equal to the difference between the cost of
inventory and the estimated market value. In addition, estimates of reserves
are made for obsolescence based on the current product mix on hand and its
expected net realizability. If actual market conditions are less favorable or
other factors arise that are significantly different than those anticipated by
management, additional inventory write-downs or increases in obsolescence
reserves may be required. We treat lower of cost or market adjustments and
inventory reserves as an adjustment to the cost basis of the underlying 12




---



##### Table of Contents



inventory. Accordingly, the affects of favorable changes in market conditions
are not considered in our evaluation of previously established obsolescence
reserves in subsequent periods. Warranty We provide for the estimated cost of product warranties at the time revenue is
recognized. Given our limited operating history, we use historical industry
solar panel failure rates as the basis for our warranty provision calculation.
While we engage in product quality programs and processes, including monitoring
and evaluating the quality of our component suppliers, our warranty obligation
is affected by product failure rates and material usage and service delivery
costs incurred in correcting a product failure. If our actual product failure
rates, material usage or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be required. Since we
have a limited operating history and our manufacturing process differs from
industry standards, our experience may be different from the industry data used
as a basis for our estimate. While our methodology takes into account these
uncertainties, adjustments in future periods may be required as our products
mature. Long-lived Assets Our policy regarding long-lived assets is to evaluate the recoverability or
usefulness of these assets when the facts and circumstances suggest that these
assets may be impaired. This analysis relies on a number of factors, including
changes in strategic direction, business plans, regulatory developments,
economic and budget projections, technological improvements, and operating
results. The test of recoverability or usefulness is a comparison of the asset
value to the undiscounted cash flow of its expected cumulative net operating
cash flow over the assets remaining useful life. If such a test indicates
that an impairment is required, then the asset is written down to its estimated
fair value. Any write-downs would be treated as permanent reductions in the
carrying amounts of the assets and an operating loss would be recognized. To
date, we have had recurring operating losses and the recoverability of our
long-lived assets is contingent upon executing our business plan that includes
further reducing our manufacturing costs and significantly increasing sales.
If we are unable to execute our business plan, we may be required to write down
the value of our long-lived assets in future periods. Income Taxes We are required to estimate our income taxes in each of the jurisdictions in
which we operate as part of our consolidated financial statements. This
involves estimating the actual current tax in addition to assessing temporary
differences resulting from differing treatments for tax and financial
accounting purposes. These differences together with net operating loss
carryforwards and tax credits may be recorded as deferred tax assets or
liabilities on the balance sheet. A judgment must then be made of the
likelihood that any deferred tax assets will be recovered from future taxable
income. To the extent that we determine that it is more likely than not that
deferred tax assets will not be utilized, a valuation allowance is established.
Taxable income in future periods significantly different from that projected
may cause adjustments to the valuation allowance that could materially increase
or decrease future income tax expense. Derivative Financial Instruments and Hedging Activities During the second quarter of 2004, we entered into foreign currency forward
contracts to hedge against potential losses relating to fluctuations in its
receivables denominated in Euros. As of June 30, 2004, we had forward currency
contracts with a notional amount of approximately $3.4 million. We seek to
manage our foreign exchange risk through the use of derivative financial
instruments. These financial instruments serve to protect net income against
the impact of the translation into U.S. dollars of foreign exchange denominated
transactions. We recognized a loss of approximately $1,000 in the three months
ended June 30, 2004 in connection with the marking to market of these forward
contracts. Results of Operations Revenues.Total revenues for the Company consist of revenues from the sale of
products and research revenues. Product revenues consist of revenues from the
sale of solar cells, panels and systems. Research revenues consist of revenues
from various state and federal government agencies to fund our ongoing
research, development, testing and enhancement of our products and
manufacturing technology. Our current intention is not to pursue contracts that
are not part of our ongoing research activities. We recognize research revenues
as services are rendered. Cost of product revenues.Cost of product revenues consists primarily of
salaries and related personnel costs, materials expenses, depreciation
expenses, maintenance, rent, royalties on licensed technology, warranty costs,
and 13




---



##### Table of Contents



other support expenses associated with the manufacture of our solar power
products. We expect to continue to experience costs in excess of product
revenues unless we are able to achieve greater manufacturing efficiencies,
higher yields, and higher production levels. Research and development expenses, including cost of research revenues.
Research and development expenses, including cost of research revenues, consist
primarily of salaries and related personnel costs, consulting expenses, and
prototype costs related to the design, development, testing and enhancement of
our products and manufacturing technology. We expense our research and
development costs as incurred. We believe that research and development is
critical to our strategic objectives of enhancing our technology, reducing
manufacturing costs and meeting the changing requirements of our customers. As
a result, we expect that our total research and development expenses will
increase in the future. Selling, general and administrative expenses.Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs, professional fees, rent, insurance and other sales expenses. We expect
that selling expenses will increase substantially in absolute dollars as we
increase our sales efforts, hire additional sales personnel and initiate
additional marketing programs. We expect that general and administrative
expenses will increase as we add personnel and incur additional costs related
to the growth of our business. Stock-based compensation expense, related to the issuance of stock options to
employees. Prior to December 31, 2000, we recorded total cumulative deferred
compensation of approximately $1.3 million representing the difference between
the estimated fair market value of the common stock and the exercise price of
the option at the grant date. These amounts were presented as a reduction of
stockholders equity and are being amortized ratably over the vesting period of
the options, which is generally four years. Other income.Other income consists of net interest income primarily from
interest earned on the holding of short-term, high quality commercial paper,
corporate bonds and United States government-backed securities, less any bond
premium amortization, and foreign currency translation gains and losses. Dividends on preferred stock.On May 15, 2003, we issued 26,227,668 shares of
Series A convertible preferred stock at a per share purchase price of $1.12 to
several purchasers. Outstanding shares of Series A convertible preferred stock
paid compounding dividend of 10% per annum, paid quarterly, in cash, or at our
election to be added to the liquidation preference of the Series A convertible
preferred stock on a quarterly basis, which would result in an increase in the
number of shares of common stock issuable upon conversion of the Series A
convertible preferred stock. On June 21, 2004, holders of all outstanding
shares of Series A convertible preferred stock agreed to convert all of their
shares of Series A convertible preferred stock into shares of our common stock
in connection with the Common Stock Private Placement. During the first quarter
of 2004, the Series A preferred stock earned a dividend of approximately $0.7
million, which the Company elected to add to the liquidation preference of the
Series A convertible preferred stock. As an inducement to convert their shares into common stock in connection with
the Common Stock Private Placement consummated on June 21, 2004, the remaining
Series A preferred shareholders received the dividend earned for the period
between April 1, 2004 and June 21, 2004 in cash, which totaled approximately
$0.5 million. In addition, the Series A preferred shareholders received a cash
conversion premium of 7% of the accreted value of the Series A
Preferred Stock as of March 31, 2004, which
totaled $1.7 million. Therefore, the total dividend charged recorded by the
Company for the six month period ended June 30, 2004 was approximately $2.9
million. Net loss attributable to common stockholders.Net loss attributable to common
stockholders consists of net losses and dividends earned by the Series A
convertible preferred stockholders. Other comprehensive income (loss).Our other comprehensive income consists of
net unrealized gains and losses on marketable securities. Comparison of Three Months Ended June 30, 2004 and 2003 Revenues.Our product revenues for the three months ended June 30, 2004 were
$4.5 million, an increase of $1.8 million, or 71%, from $2.7 million for the
same period in 2003. The increase in product revenues was due to the increased
production capacity of our new manufacturing facility in Marlboro,
Massachusetts, and our increased marketing and sales activities. Research
revenues for the three months ended June 30, 2004 were $229,000, a decrease of
$279,000, or 55%, from $508,000 for the same period in 2003. Research revenue
decreased during the second quarter of 2004 as we had only one active research
contract during the period ended June 30, 2004 versus two active contracts
during the same period in 2003. 14




---



##### Table of Contents



Product revenues represented 95% of total revenues for the three-month period
ended June 30, 2004 and 84% of total revenues for the three-month period ended
June 30, 2003. The share of total revenues represented by product revenues in
the first quarter of 2004 increased from previous quarters due to an increase
in product revenues from increased production capacity and a decrease in
research revenues. International product sales accounted for approximately 67%
of total revenues for the three-month period ended June 30,
2004, and 67% for
the three-month period ended June 30, 2003. We anticipate that international
sales will continue to account for a significant portion of our product
revenues for the foreseeable future. Currently, all European sales are
denominated in Euros, which increases our risk of incurring foreign exchange
gains or losses. As we expand our manufacturing operations and distribution
network internationally, our exposure to fluctuations in currency exchange
rates may increase. The following table summarizes our concentration of total revenue: Three months endedJune 30,2003
    
    2004By geography:U.S. distributors
    
    
    17
    %
    
    
    28
    %U.S. Government (research revenue)
    
    
    16
    %
    
    
    5
    %Germany
    
    
    60
    %
    
    
    63
    %All other
    
    
    7
    %
    
    
    4
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    50
    %
    
    
    46
    %European distributor #2
    
    
    7
    %
    
    
    17
    %All other
    
    
    43
    %
    
    
    37
    %100
    %
    
    
    100
    %
 Cost of product revenues.Our cost of product revenues for the three months
ended June 30, 2004 was $9.2 million, an increase of $5.0 million, or 116%,
from $4.2 million for the same period in 2003. Most of the increase was due to
a loss on disposal of fixed assets and an increase in materials consumption and
labor costs due to increased product sales. Product gross margin for the three
months ended June 30, 2004 was -102% versus -60% for the same period in 2003.
Product gross margin decreased due primarily to losses realized upon disposal
of fixed assets, offset by improvements in yield and efficiency associated with
the scale-up of our second manufacturing line and increased sales volume.
During the second quarter of 2004 and as a result of the Companys successful
closing of the Common Stock Private Placement consummated on June 21, 2004, the
Company disposed of several pieces of manufacturing equipment in order to
replace them with more technologically advanced equipment expected to increase
total manufacturing capacity in its Marlboro facility to a target level of 15
megawatts. Equipment with a gross value of $3.7 million was disposed of during
the second quarter, for no proceeds, and the Company realized a loss on
disposal of $2.0 million. The loss on disposal of fixed assets is included in
cost of product revenues. In addition to the equipment disposals, the Company
has accelerated the rate of depreciation of some of its other equipment that is
expected to be disposed of by the end of the third quarter 2004, resulting in
incremental depreciation expense of approximately $133,000 for the three month
period ended June 30, 2004, which is also included in cost of product revenue.
Due to the relatively large component of fixed costs, product gross margins
will still be highly dependent on sales volumes. We do not expect substantial
improvements in product gross margin until we realize production capacity
increases associated with the ramp up of our second manufacturing line,
expected by the end of 2004. Research and development expenses, including cost of research revenues.Our
research and development expenses, including cost of research revenues, for the
three months ended June 30, 2004 were $995,000, a decrease of $77,000, or 7%,
from $1.1 million for the same period in 2003. The decrease was due mainly to
reduced costs incurred as a result of engaging in only one active government
research contract during the three months ended June 30, 2004 compared to two
active contracts engaged in during the same period in 2003. Selling, general and administrative expenses.Our selling, general and
administrative expenses for the three months ended June 30, 2004 were $1.7
million, an increase of $460,000, or 38%, from $1.2 million for the same period
in 2003. The increase was primarily due to increased legal and accounting
costs, increased compensation costs associated with added
personnel and increased costs associated with sales and marketing initiatives.
As a result of the shorter timelines imposed upon us for complying with various
aspects of the Sarbanes-Oxley Act, most notably Section 404 regarding reporting
on internal controls, we expect that activities undertaken in 15




---



##### Table of Contents



response to the Act in this shorter timeline will substantially increase our
administrative costs for the foreseeable future. Stock-based compensation expense, related to the issuance of stock options to
employees. The amortization of total cumulative deferred compensation of
approximately $1.3 million recorded prior to December 31, 2000, representing
the difference between the estimated fair market value of the common stock and
the exercise price of the option at the grant date resulted in charges to
operations of $24,000 and $69,000 for the three month periods ended June 30,
2004 and 2003, respectively. Other income.Our other income for the three months ended June 30, 2004 was
$46,000, a decrease of $4,000, or 8%, from $50,000 for the same period in 2003.
The decrease in other income was primarily due to a decrease in net interest
income resulting from lower cash and investment balances compared to the prior
year. Net loss attributable to common stockholders.Net loss attributable to common
stockholders was $9.2 million and $15.4 million for the period ended June 30,
2004 and June 30, 2003, respectively. The decrease in net loss attributable to
common stockholders was due to the dividend and other charges associated with
the Series A convertible preferred stock partially offset by an increase in our
overall operating losses. Comparison of Six Months Ended June 30, 2004 and 2003 Revenues.Our product revenues for the six months ended June 30, 2004 were
$7.4 million, an increase of $3.7 million, or 98%, from $3.7 million for the
same period in 2003. The increase in product revenues was due to the increased
production capacity of our new manufacturing facility in Marlboro,
Massachusetts, and our increased marketing and sales activities. Research
revenues for the six months ended June 30, 2004 were $491,000, a decrease of
$398,000, or 45%, from $889,000 for the same period in 2003. Research revenue
decreased during the six months ended June 30, 2004, as a result of our
engaging in only one active research contract during the period as compared to
the two active research contracts we engaged in during the same period in 2003. Product revenues represented 94% of total revenues for the six-month period
ended June 30, 2004 and 81% of total revenues for the six-month period ended
June 30, 2003. The share of total revenues represented by product revenues in
the second quarter of 2004 increased from previous quarters due to an increase
in product revenues from increased production capacity and a decrease in
research revenues. International product sales accounted for approximately 65%
of total revenues for the six-month period ended June 30, 2004,
and 62% for the
six-month period ended June 30, 2003. The increased share of total revenues
represented by international product sales for the six-month period ended June
30, 2004 resulted from an expanded focus on international sales channels. We
anticipate that international sales will continue to account for a significant
portion of our product revenues for the foreseeable future. Currently, all
European sales are denominated in Euros, which increases our risk of incurring
foreign exchange gains or losses. As we expand our manufacturing operations
and distribution network internationally, our exposure to fluctuations in
currency exchange rates may increase. The following table summarizes our concentration of total revenue: Six months endedJune 30,2003
    
    2004By geography:U.S. distributors
    
    
    19
    %
    
    
    29
    %U.S. Government (research revenue)
    
    
    19
    %
    
    
    6
    %Germany
    
    
    54
    %
    
    
    60
    %All other
    
    
    8
    %
    
    
    5
    %100
    %
    
    
    100
    %By customer:European distributor #1
    
    
    45
    %
    
    
    42
    %European distributor #2
    
    
    5
    %
    
    
    18
    %National Renewable Energy Laboratory (research revenue)
    
    
    10
    %
    
    
    5
    %All other
    
    
    40
    %
    
    
    35
    %100
    %
    
    
    100
    %
 Cost of product revenues.Our cost of product revenues for the six months
ended June 30, 2004 was $13.7 million, an increase of $6.8 million, or 99%,
from $6.9 million for the same period in 2003. Most of the increase was due to 16




---



##### Table of Contents



a loss on disposal of fixed assets and an increase in materials consumption and
labor costs due to increased product sales. Product gross margin for the six
months ended June 30, 2004 was -86% versus -85% for the same period in 2003.
Product gross margin decreased due primarily to losses realized upon disposal
of fixed assets, offset by improvements in yield and efficiency associated with
the scale-up of our second manufacturing line and increased sales volume.
During the second quarter of 2004 and as a result of the Companys successful
closing of the Common Stock Private Placement consummated on June 21, 2004, the
Company disposed of several pieces of manufacturing equipment in order to
replace them with more technologically advanced equipment expected to increase
total manufacturing capacity in its Marlboro facility to a target level of 15
megawatts. Equipment with a gross value of $3.7 million was disposed of during
the second quarter, for no proceeds, and the Company realized a loss on
disposal of $2.0 million. The loss on disposal of fixed assets is included in
cost of product revenues. In addition to the equipment disposals, the Company
has accelerated the rate of depreciation of some of its other equipment that is
expected to be disposed of by the end of the third quarter 2004, resulting in
incremental depreciation expense of approximately $133,000 for the six month
period ended June 30, 2004, which is also included in cost of product revenues.
We do not expect substantial improvements in product gross margin until we
realize production capacity increases associated with the ramp up of our second
manufacturing line, expected by the end of 2004. Research and development expenses, including cost of research revenues.Our
research and development expenses, including cost of research revenues, for the
six months ended June 30, 2004 were $1.9 million, an increase of $111,000, or
6%, from $1.8 million for the same period in 2003. The increase was due mainly
to increased activity on internal research and development programs. Selling, general and administrative expenses.Our selling, general and
administrative expenses for the six months ended June 30, 2004 were $3.3
million, an increase of $814,000, or 32%, from $2.5 million for the same period
in 2003. The increase was primarily due to increased legal and accounting
costs associated with increased compensation costs associated with added
personnel and increased costs associated with sales and marketing initiatives.
As a result of the shorter timelines imposed upon us for complying with various
aspects of the Sarbanes-Oxley Act, most notably Section 404 regarding reporting
on internal controls, we expect that activities undertaken in response to the
Act in this shorter timeline will substantially increase our administrative
costs for the foreseeable future. Stock-based compensation expense, related to the issuance of stock options to
employees. The amortization of total cumulative deferred compensation of
approximately $1.3 million recorded prior to December 31, 2000, representing
the difference between the estimated fair market value of the common stock and
the exercise price of the option at the grant date resulted in charges to
operations of $55,000 and $175,000 for the six month periods ended June 30,
2004 and 2003, respectively. Other income.Our other income for the six months ended June 30, 2004 was
$119,000, an increase of $45,000, or 61%, from $74,000 for the same period in
2003. The increase in other income was primarily due to an increase in net
interest income resulting from higher cash and investment balances compared to
the prior year. Net loss attributable to common stockholders.Net loss attributable to common
stockholders was $13.9 million and $18.6 million for the six month period ended
June 30, 2004 and June 30, 2003, respectively. The decrease in net loss
attributable to common stockholders was due to the dividend and other charges
associated with the Series A convertible preferred stock partially offset by an
increase in our overall operating losses. Liquidity and Capital Resources We have historically financed our operations and met our capital expenditures
requirements primarily through sales of our capital stock and, to a lesser
extent, product revenues. Research and development expenditures have
historically been partially funded by government research contracts. At June
30, 2004, we had working capital of $26.4 million, including cash, cash
equivalents and short-term investments of $24.3 million. Net cash used in operating activities was $7.6 million for the six months ended
June 30, 2004, as compared to $5.1 million for the six months ended June 30,
2003. The increase in net cash used in operating activities was primarily due
to an increase in our operating loss and accounts associated with an increase
in sales volume towards the end of the quarter. For the second quarter in
2004, Days Sales Outstanding (DSO) was approximately 68 days, versus
approximately 59 days as of March 31, 2004. The increase in DSO was due mainly
to increased sales volume towards the later part of the second quarter of 2004.
Product sales to customers can fluctuate month-to-month, and depending on when
sales occur during the quarter, DSO can fluctuate significantly
quarter-to-quarter. In general, we anticipate DSO in excess of 60 days during
2004. 17




---



##### Table of Contents



Net cash provided by investing activities was $4.1 million for the six months
ended June 30, 2004, as compared to net cash used of $12.6 million for the six
months ended June 30, 2003. For the six months ended June 30, 2004, net cash
was provided by maturing and selling short-term investments as required to fund
operations and purchases of equipment associated with the build-out of the
second manufacturing line at our Marlboro manufacturing plant, offset by
purchases of corporate paper, corporate bonds and United States
government-backed obligations with contractual maturities typically less than
one year and purchases of equipment. Net cash provided by financing activities was $16.5 million for the six months
ended June 30, 2004, as compared to $28.6 million for the six months ended June
30, 2003. The cash provided by financing activities during the six months ended
June 30, 2004 represents net proceeds from common stock issued in conjunction
with the Common Stock Private Placement, offset by dividends and conversion
premiums paid to the Series A convertible preferred shareholders. The cash
provided by financing activities during the six months ended June 30, 2003
represents net proceeds from the shares of Series A convertible preferred stock
and the warrant issued in conjunction with the Series A convertible preferred
stock and warrant financing consummated on May 15, 2003. Capital expenditures were $4.7 million for the six months ended June 30, 2004,
as compared to $2.7 million for the six months ended June 30, 2003. Capital
expenditures for the six months ended June 30, 2004 were primarily for
equipment needed for our manufacturing facility. As of June 30, 2004, our
outstanding commitments for capital expenditures were approximately $2.4
million. Nearly all of our commitments for capital expenditures are associated
with infrastructure improvements and equipment purchases for our manufacturing
facility. The first of the Marlboro facilitys two manufacturing lines became
operational in 2001. We have purchased certain equipment that is planned for
the second manufacturing line. We expect to complete the addition of the second
manufacturing line by the end of 2004. We will continue to fund our current
capital commitments primarily with the proceeds from our Series A convertible
preferred stock and warrant financing which closed on May 15, 2003 as well as
from our common stock and warrant private placement financing which closed on
June 21, 2004. In addition to the current capital commitments, substantial
further capital expenditures will be required over the next eight to ten months
to increase the capacity at our manufacturing facility to our target level of
15 megawatts for both lines. We expect improvements to our manufacturing lines
will be completed in 2005. We believe that our current cash, cash equivalents and short-term investments
will be sufficient to fund our planned manufacturing capacity expansion to our
target level of 15 megawatts for both lines and to fund our operating
expenditures over the next twelve months. We will need to raise additional
capital in order to further enhance our operating infrastructure and to further
increase capacity through the build out a second manufacturing facility. We may
also require additional capital to respond to competitive pressures and acquire
complementary businesses or necessary technologies. We do not know whether we
will be able to raise additional financing or financing on terms favorable to
us. If adequate funds are not available or are not available on acceptable
terms, our ability to fund our operations, develop and expand our manufacturing
operations and distribution network, or otherwise respond to competitive
pressures would be significantly limited. We do not have any special purpose entities or off-balance sheet financing
arrangements. As of June 30, 2004, our cash commitments, as disclosed in Note
11 to our consolidated financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2003, have not significantly changed. There have been no material changes since December 31, 2003 to our contractual
obligations reported in Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2003 as filed with the Securities and Exchange
Commission. Certain Factors Which May Affect Future Results Risks Relating to Our Financial Results Evaluating our business and future prospects may be difficult due to our
limited operating history. We are at an early stage of development and there is limited historical
information available upon which you can base your evaluation of our business
and prospects. We were formed in 1994 to research and develop crystalline
silicon technology for use in manufacturing solar power products. Although we
began shipping product from our pilot manufacturing facility in 1997, the
primary objective of our pilot production line was the technical development
and further refinement of our String Ribbon technology and related
manufacturing processes. We shipped our first commercial products from our
Marlboro manufacturing facility in September 2001. We have shipped only a
limited number of solar power panels and have recognized limited revenues since
our inception. 18




---



##### Table of Contents



In addition, our early stage of development means that we have less insight
into how market and technology trends may affect our business. The revenue and
income potential of our business is unproven and the market we are addressing
is rapidly evolving. You should consider our business and prospects in light of
the risks, expenses and challenges that we will face as an early-stage company
seeking to develop and manufacture new products in a growing and rapidly
evolving market. We have a history of losses, expect to incur substantial further losses and may
not achieve or maintain profitability in the future, which may decrease the
market value of our stock. Since our inception, we have incurred significant net losses, including net
losses of $11.0 million for the six months ended June 30, 2004. As a result of
ongoing operating losses, we had a cumulative net loss of $67.3 million as of
June 30, 2004. We expect to incur substantial losses for the foreseeable
future, and may never become profitable. Even if we do achieve profitability,
we may be unable to sustain or increase our profitability in the future, which
could materially decrease the market value of our common stock. We expect to
continue to incur significant capital expenditures and anticipate that our
expenses will increase substantially in the foreseeable future as we seek to:
expand our manufacturing operations, develop our distribution network, continue
to research and develop our products and manufacturing technologies, implement
internal systems and infrastructure in conjunction with our growth and hire
additional personnel. We do not know whether our revenues will grow at all or grow rapidly enough to
absorb these expenses, and our limited operating history makes it difficult to
assess the extent of these expenses or their impact on our operating results. Our stock price could fall substantially if our quarterly revenue or operating
results fluctuate or are disappointing. Our quarterly revenue and operating results have fluctuated significantly in
the past and may fluctuate significantly from quarter to quarter in the future
due to a variety of factors, many of which are discussed elsewhere in this
section. We anticipate that our operating expenses will continue to increase
significantly. If sales in any quarter do not increase correspondingly, our net
losses for that period will increase. For these reasons, quarter-to-quarter
comparisons of our results of operations are not necessarily meaningful and you
should not rely on results of operations in any particular quarter as an
indication of future performance. If our quarterly revenue or results of
operations fall below the expectations of investors or public market analysts
in any quarter, the market value of our common stock would likely decrease, and
could decrease rapidly and substantially. Risks Relating to Our Industry, Products and Operations We have significant capital requirements in order to maintain and grow our
business. In order to satisfy our existing capital requirements and to fund the
continuing capacity expansion of our Marlboro, Massachusetts manufacturing
facilities, on June 21, 2004, we consummated a $20 million private placement
financing transaction whereby we issued 7,662,835 shares of our common stock
and warrants to purchase up to 2,298,851 shares of our common stock to certain
institutional investors pursuant to a stock and warrant purchase agreement
dated June 16, 2004, and a warrant agreement dated June 21, 2004 (the Common
Stock Private Placement). Additionally, in connection with the Common Stock
Private Placement we issued a warrant to purchase 125,000 shares of common
stock to CRT Capital Group LLC, as compensation for CRT Capital Group LLCs
services as the placement agent for the Common Stock Private Placement
transaction. We believe that our current cash, cash equivalents and short-term investments
will be sufficient to fund our planned manufacturing capacity expansion to our
target level of 15 megawatts for both lines prior to the end of 2004 and to
fund our operating expenditures over the next twelve months. We will need to
raise additional capital in order to further enhance our operating
infrastructure and to further increase capacity through the build out a second
manufacturing facility. We may also require additional capital to respond to
competitive pressures and acquire complementary businesses or necessary
technologies. We do not know whether we will be able to raise additional
financing or financing on terms favorable to us. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
operations, develop and expand our manufacturing operations and distribution
network, or otherwise respond to competitive pressures would be significantly
limited. 19




---



##### Table of Contents



In addition, if we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our existing
stockholders will be reduced. These newly issued securities may have rights,
preferences and privileges senior to those of existing stockholders. If solar power technology is not suitable for widespread adoption or sufficient
demand for solar power products does not develop or takes longer to develop
than we anticipate, our sales would not significantly increase and we would be
unable to achieve or sustain profitability. The market for solar power products is emerging and rapidly evolving, and its
future success is uncertain. If solar power technology proves unsuitable for
widespread commercial deployment or if demand for solar power products fails to
develop sufficiently, we would be unable to generate enough revenues to achieve
and sustain profitability. In addition, demand for solar power products in the
markets and geographic regions we target may not develop or may develop more
slowly than we anticipate. Many factors will influence the widespread adoption
of solar power technology and demand for solar power products, including:  
    
    cost-effectiveness of solar power technologies as compared with
conventional and non-solar alternative energy technologies;
    
    performance and reliability of solar power products as compared with
conventional and non-solar alternative energy products;
    
    success of alternative distributed generation technologies such as
fuel cells, wind power and micro turbines;
    
    fluctuations in economic and market conditions which impact the
viability of conventional and non-solar alternative energy sources, such
as increases or decreases in the prices of oil and other fossil fuels;
    
    continued deregulation of the electric power industry and broader energy industry; and
    
    availability of government subsidies and incentives. Because we depend on single and sole source suppliers for a number of
specialized materials, including silicon, necessary to manufacture our solar
power products, we are susceptible to supplier and industry-wide supply
shortages that could adversely affect our ability to meet existing and future
customer demand for our products and cause us to make fewer shipments, generate
lower than anticipated revenues, and manufacture our products at higher than
expected costs. We have single and sole source suppliers for a number of specialized materials
necessary to manufacture our solar power products which makes us susceptible to
quality issues, shortages, and price changes for these materials.
Specifically, our supplier of the silicon we use in the manufacture of our
solar power products is also a supplier to the semi-conductor industry which
has significantly greater buying power and market influence than we have or
that anyone else in the solar power industry has. As a result, an increase in
the demand for silicon from the semi-conductor industry may lead us to
encounter shortages or delays in obtaining the specialized silicon to be used
in the manufacture of our solar power products which could result in customer
dissatisfaction and decreased revenues. In addition, our silicon supplier may
enter into exclusive arrangements with our competitors, stop selling silicon to
us at commercially reasonable prices or refuse to sell silicon to us at any
price, which could harm our results of operations. We acquire silicon from our
supplier through purchase orders and we have no long-term commitments regarding
supply or price from this supplier. Problems with product quality or product performance may cause us to incur
warranty expenses and may damage our market reputation and prevent us from
achieving increased sales and market share. As is consistent with standard practice in our industry, the duration of our
product warranties is lengthy relative to expected product life and has
recently been increasing. Our current standard product warranty includes a one
or two-year warranty period for defects in material and workmanship and a
25-year warranty period for declines in power performance. We believe our
warranty periods are consistent with industry practice. Due to the long
warranty period, we bear the risk of extensive warranty claims long after we
have shipped product and recognized revenues. Although we have sold over
75,000 solar panels since 1997, none of these panels has been operating more
than seven years, and over 50% of them have been operating less than two years.
The possibility of future product failures could cause us to incur substantial
expense to repair or replace defective products. Furthermore, widespread
product failures may damage our market reputation and reduce our market share
and cause sales to decline. 20




---



##### Table of Contents



We may fail to successfully bring to market our new solar power products under
development, which may prevent us from achieving increased sales and market
share. Although we have been selling our solar power products since 1997, we expect to
derive a substantial portion of our revenues from sales of our new solar power
products which are under development and not yet commercially available. Many
of these new products are derived from our innovative cell fabrication and
advanced panel design technologies, which are under development. If we fail to
successfully develop our new solar power products or technologies, we will
likely be unable to recover the losses we will have incurred to develop these
products and technologies and may be unable to increase our sales and market
share and to become profitable. Many of our new product and manufacturing
technologies are novel and represent a departure from conventional solar power
technologies, and it is difficult to predict whether we will be successful in
completing their development. Our manufacturing technologies have been tested
only in our pilot manufacturing facility and, in most cases, only limited
pre-production prototypes of our new products have been field-tested. Our solar power products may not gain market acceptance, which would prevent us
from achieving increased sales and market share. The development of a successful market for our solar power products may be
adversely affected by a number of factors, many of which are beyond our
control, including:  
    
    our failure to produce solar power products which compete favorably
against other solar power products on the basis of cost, quality and
performance;
    
    our failure to produce solar power products which compete favorably
against conventional energy sources and alternative distributed
generation technologies, such as fuel cells, on the basis of cost,
quality and performance;
    
    whether customers accept our new panel designs under development and
the techniques we are developing to mount them; and
    
    our failure to develop and maintain successful relationships with
distributors, systems integrators and other resellers, as well as
strategic partners. If our solar power products fail to gain market acceptance, we would be unable
to increase our sales and market share and to achieve and sustain
profitability. Technological changes in the solar power industry could render our solar power
products obsolete, which could reduce our market share and cause our sales to
decline. Our failure to further refine our technology and develop and introduce new
solar power products could cause our products to become obsolete, which could
reduce our market share and cause our sales to decline. The solar power
industry is rapidly evolving and competitive. We will need to invest
significant financial resources in research and development to keep pace with
technological advances in the solar power industry and to effectively compete
in the future. We believe that there are a variety of competing solar power
technologies under development by other companies that could result in lower
manufacturing costs than those expected for our solar power products. Our
development efforts may be rendered obsolete by the technological advances of
others, and other technologies may prove more advantageous for the
commercialization of solar power products. The build-out of our manufacturing facility may take longer and cost more than
we expect, which would likely result in lower revenues and earnings than
anticipated. If we fail to successfully complete the build-out of our Marlboro manufacturing
facility, our business and results of operations would likely be materially
impaired. The first of the Marlboro facilitys two manufacturing lines entered
service in 2001. The Company expects the second manufacturing line to be
completed by the end of 2004, and improvements to the manufacturing equipment
in order to increase the total capacity of the manufacturing facility to a
target level of 15 megawatts will be completed by mid-2005. Completing the
build-out of this facility to capacity will require a significant investment of
capital and substantial engineering expenditures, and is subject to significant
risks, including risks of cost overruns, delays, equipment problems and other
start-up and operating difficulties. Our manufacturing processes also use
custom-built equipment that may not be delivered and installed in our new
facility in a timely manner. In addition, this equipment may take longer and
cost more to debug than planned and may 21




---



##### Table of Contents



never operate as designed. We plan to incorporate first-time equipment designs
and technology improvements, which we expect to lower unit capital and
operating costs, but this new technology may not be successful, which would
increase cost, limit capacity, and prevent us from achieving increases in
sales. If we experience any of these or similar difficulties, we may be unable
to complete the build-out of the facility, our manufacturing capacity could be
substantially constrained and our revenues and earnings would likely be
materially impaired. We may not be able to manufacture our solar power products in sufficient
quantities or at acceptable costs to meet customer demand. We may not be able to achieve our manufacturing cost targets, which could
prevent us from ever becoming profitable. If we cannot achieve our targeted
production volumes or capacity or if we experience capacity constraints,
quality control problems or other disruptions, we may not be able to
manufacture our products in large volumes or at acceptable costs and may be
unable to satisfy the demand of our customers, which would reduce our market
share and revenues and may harm our reputation. The expansion of our
manufacturing operations to achieve targeted production volumes will require
the successful deployment of advanced equipment and technology utilizing
manufacturing processes and components, which we are currently developing. Our ability to increase market share and sales depends on our ability to
successfully maintain our existing distribution relationships and expand our
distribution channels. We currently sell our solar power products primarily to distributors, system
integrators and other value-added resellers within and outside of North
America, which typically resell our products to end users on a global basis.
For the six months ended June 30, 2004, we sold our solar power products to
approximately 30 distributors, system integrators and other value-added
resellers. If we are unable to successfully maintain our existing distribution
relationships and expand our distribution channels, our revenues and future
prospects will be materially harmed. As we seek to grow our sales by entering
new markets in which we have little experience selling our solar power
products, our ability to increase market share and sales will depend
substantially on our ability to expand our distribution channels by
identifying, developing and maintaining relationships with resellers both
within and outside of North America. We may be unable to enter into
relationships with resellers in the markets we target or on terms and
conditions favorable to us, which could prevent us from entering these markets
or entering these markets in accordance with our plans. Our ability to enter
into and maintain relationships with resellers will be influenced by the
relationships between these resellers and our competitors, market acceptance of
our solar power products and our low brand recognition as a new entrant. We face risks associated with the marketing, distribution and sale of our solar
power products internationally, and if we are unable to effectively manage
these risks, it could impair our ability to expand our business abroad. From our inception through June 30, 2004, approximately 66% of our product
sales have been made to resellers outside North America. Sales in Germany
constituted approximately 64% of our total product sales for the six months
ended June 30, 2004. We expect that our sales both to resellers and
distributors outside of North America and through our resellers and
distributors to end users outside of North America will continue to be
significant. It will require significant management attention and financial
resources to successfully develop our international sales channels. In
addition, the marketing, distribution and sale of our solar power products
internationally exposes us to a number of markets with which we have limited
experience. If we are unable to effectively manage these risks, it could impair
our ability to grow our business abroad. These risks include:  
    
    difficult and expensive compliance with the commercial and legal
requirements of international markets, with which we have only limited
experience;
    
    inability to obtain intellectual property protection;
    
    encountering trade barriers such as export requirements, tariffs,
taxes and other restrictions and expenses, which could affect the
competitive pricing of our solar power products and reduce our market
share in some countries;
    
    difficulty of enforcing revenue collection internationally; and
    
    our continued ability to sell our products in the German market. We expect that a portion of our international sales will be denominated in
United States dollars. As a result, increases in the value of the United States
dollar relative to foreign currencies would cause our products to become 22




---



##### Table of Contents



less competitive in international markets and could result in limited, if any,
sales and profitability. We expect that during 2004, market conditions will
require us to denominate a majority of our sales in local currencies, which
will further expose us to foreign exchange gains or losses. Our strategy includes establishing local manufacturing facilities in
international markets, although we have not yet done so. As we implement our
strategy, we may encounter legal and commercial restrictions and incur taxes
and other expenses to establish our manufacturing facilities in certain
countries. In addition, we may potentially forfeit, voluntarily or
involuntarily, foreign assets due to economic or political instability in the
countries where our local manufacturing facilities are located. Our dependence on a small number of resellers may cause significant
fluctuations or declines in our product revenues. From our inception through June 30, 2004, our three largest resellers accounted
for approximately 60% of our product sales and our 10 largest resellers
accounted for approximately 83% of our product sales. We anticipate that sales
of our solar power products to a limited number of key resellers will continue
to account for a significant portion of our total product revenues for the
foreseeable future. Consequently, any one of the following events may cause
significant fluctuations or declines in our product revenues:  
    
    reduction, delay or cancellation of orders from one or more of our significant resellers;
    
    selection by one or more of our significant resellers of products competitive with ours;
    
    loss of one or more of our significant resellers and our failure to
recruit additional or replacement resellers; and
    
    failure of any of our significant resellers to make timely payment of
our invoices. Our dependence on a limited number of third party suppliers for raw materials,
key components for our solar power products and custom-built equipment for our
operations could prevent us from delivering our products to our customers
within required timeframes and we may experience order cancellation and loss of
market share. We manufacture all of our solar power products using materials and components
procured from a limited number of third-party suppliers. If we fail to develop
or maintain our relationships with these or our other suppliers, we may be
unable to manufacture our products or our products may be available only at a
higher cost or after a long delay, which could prevent us from delivering our
products to our customers within required time frames and we may experience
order cancellation and loss of market share. We currently do not have contracts
with many of our suppliers and may not be able to procure sufficient quantities
of the materials and components necessary to manufacture our products on
acceptable commercial terms or at all. To the extent the processes that our
suppliers use to manufacture materials and components are proprietary, we may
be unable to obtain comparable materials and components from alternative
suppliers. The failure of a supplier to supply materials and components in a
timely manner, or to supply materials and components that meet our quality,
quantity and cost requirements could impair our ability to manufacture our
products and/or increase their costs, particularly if we are unable to obtain
substitute sources of these materials and components on a timely basis or on
terms acceptable to us. In addition, our manufacturing processes utilize
custom-built equipment that is currently produced by a limited number of
suppliers. A suppliers failure to supply this equipment in a timely manner,
with adequate quality and on terms acceptable to us could delay our capacity
expansion of our manufacturing facility and otherwise disrupt our production
schedule or increase our costs of production. Our use of forecasts to manage our inventory could result in insufficient
quantities to meet reseller demand or excess inventory. We generally do not obtain long-term contracts or purchase orders prior to the
production of our solar power products. Instead, we rely on forecasts to
determine the timing of our production schedules and the volume and mix of
product to be manufactured. The level and timing of orders placed by our
resellers may vary for many reasons. As a result, at any particular time, we
may not have enough inventory to meet demand or we may have excess inventory,
each of which could negatively impact our operating results. In addition, as we
manufacture more solar power products without related purchase orders, we
increase our risk of loss of revenues due to the obsolescence of products held
in inventory for which we have already incurred production costs. 23




---



##### Table of Contents



The success of our business depends on the continuing contributions of our key
personnel and our ability to attract and retain new qualified employees in a
competitive labor market. We have attracted a highly skilled management team and specialized workforce,
including scientists, engineers, researchers, and manufacturing and marketing
professionals. If we were to lose the services of Richard M. Feldt, our Chief
Executive Officer, President and a director, or any of our other executive
officers and key employees, our business could be materially and adversely
impacted. We had 224 employees as of June 30, 2004, and anticipate that we will
need to hire a significant number of new highly-skilled technical,
manufacturing, sales and marketing, and administrative personnel if we are to
successfully develop and market our products, develop our distribution network,
and operate our expanded manufacturing facility. Competition for personnel is
intense, and qualified technical personnel are likely to remain a limited
resource for the foreseeable future. Locating candidates with the appropriate
qualifications, particularly in the desired geographic location, can be costly
and difficult. We may not be able to hire the necessary personnel to implement
our business strategy, or we may need to provide higher compensation or more
training to our personnel than we currently anticipate. Moreover, any officer
or employee can terminate his or her relationship with us at any time. Our management team may not be able to successfully implement our business
strategies because it has limited experience managing a rapidly growing
company. If our management team is unable to manage the rapid growth of our business
operations, then our product development, the expansion of our manufacturing
operations and distribution network, and our sales and marketing activities
would be materially and adversely affected. In connection with the planned
expansion of our manufacturing capacity, we have undergone and anticipate
undergoing further rapid growth in the scope of our operations and the number
of our employees, which is likely to place a significant strain on our senior
management team and other resources. In addition, we may encounter difficulties
in effectively managing the budgeting, forecasting and other process control
issues presented by this rapid growth. We may seek to augment or replace
members of our management team or we may lose key members of our management
team, and we may not be able to attract new management talent with sufficient
skill and experience. We face intense competition from other companies producing solar power and
other energy generation products. If we fail to compete effectively, we may be
unable to increase our market share and sales. The solar power market is intensely competitive and rapidly evolving. Our
competitors have established a market position more prominent than ours, and if
we fail to attract and retain customers and establish a successful distribution
network for our solar power products, we may be unable to increase our sales
and market share. There are over 20 companies in the world that produce solar
power products, including BP Solar, Kyocera Corporation, Royal Dutch Shell,
Sharp Corporation, RWE, and Sanyo Corporation. Other existing and potential
competitors in the solar power market include universities and research
institutions. We also expect that future competition will include new entrants
to the solar power market offering new technological solutions. Further, many
of our competitors are developing and are currently producing products based on
new solar power technologies, including other crystalline silicon ribbon and
sheet technologies, that they believe will ultimately have costs similar to, or
lower than, our projected costs. Most of our competitors are substantially larger than we are, have longer
operating histories and have substantially greater financial, technical,
manufacturing and other resources than we do. Many also have greater name
recognition, a more established distribution network and a larger installed
base of customers. In addition, many of our competitors have well-established
relationships with our current and potential customers and have extensive
knowledge of our target markets. As a result, our competitors may be able to
devote greater resources to the research, development, promotion and sale of
their products and respond more quickly to evolving industry standards and
changing customer requirements than we can. If we are unable to protect our intellectual property adequately, we could lose
our competitive advantage in the solar power market. Our ability to compete effectively against competing solar power technologies
will depend, in part, on our ability to protect our current and future
proprietary technology, product designs and manufacturing processes through a
combination of patent, copyright, trademark, trade secret and unfair
competition laws. We may not be able to adequately protect our intellectual
property and may need to defend our intellectual property against infringement
claims, either of which could result in the loss of our competitive advantage
in the solar power market and materially harm our business and profitability.
We face the following risks in protecting our intellectual property: 24




---



##### Table of Contents




    
    we cannot be certain that our pending United States and foreign
patent applications will result in issued patents or that the claims
allowed are or will be sufficiently broad to protect our technology or
processes;
    
    our license, but not our right, to practice the String Ribbon
technology terminates upon expiration of the underlying patents, the
first of which expired in June 2003, and our historical operating
experience with String Ribbon and our related patented and proprietary
manufacturing processes may not adequately protect our competitive
advantage after these patents have expired;
    
    third parties may design around our patented technologies or seek to
challenge or invalidate our patented technologies;
    
    we may incur significant costs and diversion of management resources
in prosecuting or defending patent infringement suits;
    
    we may not be successful in prosecuting or defending patent
infringement suits and, as a result, may need to seek to obtain a
license of the third partys intellectual property rights; however, a
license may not be available to us or may not be available to us on
commercially reasonable terms; and
    
    the contractual provisions we rely on to protect our trade secrets
and proprietary information, such as our confidentiality and
non-disclosure agreements with our employees, consultants and other
third parties, may be breached and our trade secrets and proprietary
information disclosed to the public. Existing regulations and changes resulting from electric utility deregulation
may present technical, regulatory and economic barriers to the purchase and use
of solar power products, which may significantly reduce demand for our
products. The market for electricity generation products is heavily influenced by
federal, state and local government regulations and policies concerning the
electric utility industry, as well as internal policies and regulations
promulgated by electric utilities. These regulations and policies often relate
to electricity pricing and technical interconnection of customer-owned
electricity generation. In the United States and in a number of other
countries, these regulations and policies are being modified and may continue
to be modified. Customer purchases of, or further investment in the research
and development of, alternative energy sources, including solar power
technology, could be deterred by these regulations and policies, which could
result in a significant reduction in the potential demand for our solar power
products. We anticipate that our solar power products and their installation will be
subject to oversight and regulation in accordance with national and local
ordinances relating to building codes, safety, environmental protection,
utility interconnection and metering and related matters. Any new government
regulations or utility policies pertaining to our solar power products may
result in significant additional expenses to us, our resellers and their
customers and, as a result, could cause a significant reduction in demand for
our solar power products. The reduction or elimination of government subsidies and economic incentives
for on-grid applications could cause our sales to decline. We believe that the growth of some of our target markets, including the market
for on-grid applications, depends in part on the availability and size of
government subsidies and economic incentives. Accordingly, the reduction or
elimination of government subsidies and economic incentives may adversely
affect the growth of these markets, which could cause our sales to decline.
Today, the cost of solar power substantially exceeds the cost of power
furnished by the electric utility grid. As a result, federal, state and local
governmental bodies in many countries, most notably the United States, Japan
and Germany, have provided subsidies in the form of cost reductions, tax
write-offs and other incentives to end users, distributors, systems integrators
and manufacturers of solar power products to promote the use of solar energy in
on-grid applications and to reduce dependency on other forms of energy. These
government subsidies and economic incentives could be reduced or eliminated
altogether. The lack or inaccessibility of financing for off-grid solar power applications
could cause our sales to decline. One of our key markets is off-grid solar power applications to developed and
developing countries. In some developing countries, government agencies and the
private sector have, from time to time, provided subsidies or financing on
preferred terms for rural electrification programs. We believe that the
availability of financing could have a significant effect on the level of sales
of off-grid solar power applications, particularly in developing countries
where users may not have sufficient resources or credit to otherwise acquire
solar power systems. If 25




---



##### Table of Contents



existing financing programs for off-grid solar power applications are
eliminated or if financing is inaccessible, the growth of the market for
off-grid applications may be adversely affected, which could cause our sales to
decline. Our reliance on government contracts to partially fund our research and
development programs could impair our ability to commercialize our solar power
technologies and would increase our research and development expenses. We intend to continue our policy of selectively pursuing contract research,
product development, and market development programs funded by various agencies
of the United States, state and international governments to complement and
enhance our own resources. The percentage of our total revenues derived from
government-related contracts was approximately 5% for the three months ended
June 30, 2004. As of June 30, 2004, we had one active research contract with
the National Renewable Energy Laboratory. These government agencies may not continue their commitment to programs to
which our development projects are applicable. Moreover, we may not be able to
compete successfully to obtain funding through these or other programs. A
reduction or discontinuance of these programs or of our participation in these
programs would increase our research and development expenses, which could
impair our ability to develop our solar power technologies. In addition, contracts involving government agencies may be terminated at the
convenience of the agency. Other risks include potential disclosure of our
confidential information to third parties and the exercise of march-in rights
by the government. Our government-sponsored research contracts require that we
provide regular written technical updates on a monthly, quarterly or annual
basis, and, at the conclusion of the research contract, a final report on the
results of our technical research. Because these reports are generally
available to the public, third parties may obtain some aspects of our sensitive
confidential information. March-in rights refer to the right of the United
States government or government agency to require us to grant a license to the
technology to a responsible applicant or, if we refuse, the government may
grant the license itself. The government can exercise its march-in rights if it
determines that action is necessary because we fail to achieve practical
application of the technology, because action is necessary to alleviate health
or safety needs, or to meet requirements of federal regulations, or to give the
United States industry preference. Funding from government contracts also may
limit when and how we can deploy our technology developed under those
contracts. Compliance with environmental regulations can be expensive and inadvertent
noncompliance may result in adverse publicity and potentially significant
monetary damages and fines. We are required to comply with all federal, state and local regulations
regarding protection of the environment. If more stringent regulations are
adopted in the future, the costs of compliance with these new regulations could
be substantial. We believe that we have all necessary permits to conduct our
business as it is presently conducted. If we fail to comply with present or
future environmental regulations, however, we may be required to pay
substantial fines, suspend production or cease operations. We use, generate and
discharge toxic, volatile and otherwise hazardous chemicals and wastes in our
research and development and manufacturing activities. Any failure by us to
control the use of, or to restrict adequately the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines. In addition, under some federal and state statutes and regulations, a
governmental agency may seek recovery and response costs from operators of
property where releases of hazardous substances have occurred or are ongoing,
even if the operator was not responsible for such release or otherwise at
fault. Product liability claims against us could result in adverse publicity and
potentially significant monetary damages. Like other retailers, distributors and manufacturers of products that are used
by consumers, we face an inherent risk of exposure to product liability claims
in the event that the use of the solar power products we sell results in
injury. Since our products are electricity producing devices, it is possible
that consumers could be injured or killed by our products, whether by product
malfunctions, defects, improper installation or other causes. In addition,
since sales of our existing products have been modest and the products we are
developing incorporate new technologies and use new installation methods, we
cannot predict whether product liability claims will be brought against us in
the future or the effect of any resulting adverse publicity on our business.
Moreover, we may not have adequate resources in the event of a successful claim
against us. We have evaluated the potential risks we face and believe that we
have appropriate levels of insurance for product liability claims. We rely on
our general liability insurance to cover product liability claims and have not
obtained separate product liability insurance. The successful assertion of
product liability claims against us could result in potentially significant
monetary damages and if our insurance protection is inadequate, could require
us to make significant payments. 26




---



##### Table of Contents



Risks Associated With the Market for Our Common Stock Our officers and directors control approximately 38% of our voting stock and
may be able to significantly influence corporate actions. As of June 30, 2004, our executive officers, directors and entities affiliated
with them controlled approximately 38% of our voting stock. As a result, these
stockholders, acting together, may be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors, the approval of charter and by-law amendments, and the approval of
mergers or other business combinations. The price of our common stock may be volatile. The stock market has, from time to time, experienced extreme price and trading
volume fluctuations, and the market prices of technology companies such as ours
have been extremely volatile. Our operating performance will significantly
affect the market price of our common stock. To the extent we are unable to
compete effectively and gain market share or the other factors described in
this section affect us, our stock price will likely decline. The market price
of our common stock also may be adversely impacted by broad market and industry
fluctuations regardless of our operating performance, including general
economic and technology trends. In addition, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. We may be involved in securities class
action litigation in the future. This litigation often results in substantial
costs and a diversion of managements attention and resources. The large number of shares eligible for public sale could cause our stock price
to decline. The market price of our common stock could decline as a result of the resale of
the shares of common stock issued in the Common Stock Private Placement and the
shares of common stock issued upon conversion of all of the outstanding shares
of Series A convertible preferred stock which were converted in connection with
the consummation of the Common Stock Private Placement or the perception that
these sales could occur. Additionally, we may need to sell additional shares of
Common Stock in the future in either private or public transactions in order to
satisfy our financing requirements and we do not know whether we will be able
to sell additional shares of our Common Stock on terms favorable to us. We are subject to anti-takeover provisions in our charter and by-laws and under
Delaware law that could delay or prevent an acquisition of our company, even if
the acquisition would be beneficial to our stockholders. Provisions of our certificate of incorporation, our by-laws and Delaware law
could make it more difficult and expensive for a third party to pursue a tender
offer, change in control transaction or takeover attempt that is opposed by our
board of directors. Stockholders who wish to participate in these transactions
may not have the opportunity to do so. We also have a staggered board of
directors, which makes it difficult for stockholders to change the composition
of our board of directors in any one year. If a tender offer, change in control
transaction, takeover attempt or change in our board of directors is prevented
or delayed, the market price of our common stock could decline. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Interest Rate Risk We do not use derivative financial instruments as a hedge against interest rate
fluctuations. Interest income earned on our cash, cash equivalents and
short-term investments is subject to interest rate fluctuations, but we believe
that the impact of these fluctuations does not have a material effect on our
financial position due to the immediate available liquidity or short-term
nature of these financial instruments. For these reasons, a hypothetical
100-basis point adverse change in interest rates would not have a material
effect on our consolidated financial position, results of operations or cash
flows. Foreign Currency Exchange Rate Risk For the six months ended June 30, 2004, all of our product sales into Europe
were denominated in Euros, which exposes us to foreign exchange gains or
losses. Product sales into Europe accounted for approximately 64% of total
revenues for the six months ended June 30, 2004. Since our Euro-denominated
sales represent a significant portion of our total revenue, a hypothetical 10
percent adverse change in exchange rate would have had a material effect on our
consolidated financial position, reducing revenue by approximately 7%. As we
expand our manufacturing 27




---



##### Table of Contents



operations and distribution network internationally, our exposure to
fluctuations in currency exchange rates may increase. Additionally, from time
to time we may purchase equipment and materials internationally, and to the
extent that such purchases are billed in foreign currency, we will be exposed
to currency gains or losses. We seek to manage our foreign exchange risk through the use of derivative
financial instruments. These financial instruments serve to protect net income
against the impact of the translation into U.S. dollars of foreign exchange
denominated transactions. As of June 30, 2004, the Company had forward
currency contracts with a notional amount of approximately $3.4 million. The
Company seeks to manage its foreign exchange risk through the use of derivative
financial instruments. These financial instruments serve to protect net income
against the impact of the translation into U.S. dollars of foreign exchange
denominated transactions. The Company recognized a loss of approximately
$1,000 in the three months ended June 30, 2004 in connection with the marking
to market of these forward contracts. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this report (the Evaluation Date), have concluded that as of the
Evaluation Date, our disclosure controls and procedures are effective, in all
material respects, to ensure that information required to be disclosed in the
reports that we file and submit under the Exchange Act of 1934 (i) is recorded,
processed, summarized and reported as and when required and (ii) is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Internal Control Over Financial Reporting During the period covered by this report, there have been no changes in our
internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal control over financial
reporting. Limitations Inherent in all Controls. The Companys management, including the Chief Executive Officer and Chief
Financial Officer, recognize that our disclosure controls and our internal
controls (discussed above) cannot prevent all errors or all attempts at fraud.
Any controls system, no matter how well crafted and operated, can only provide
reasonable, and not absolute, assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitations in any control system, no evaluation or
implementation of a control system can provide complete assurance that all
control issues and all possible instances of fraud have been or will be
detected. 
 PART II. OTHER INFORMATION 
 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES On June 21, 2004, we consummated a $20 million private placement financing
transaction whereby we issued 7,662,835 shares of our common stock and warrants
to purchase up to 2,298,851 shares of our common stock to certain institutional
investors pursuant to a stock and warrant purchase agreement dated June 16,
2004 and a warrant agreement dated June 21, 2004. Additionally, in connection
with such transaction, we issued a warrant to purchase 125,000 shares of our
common stock to CRT Capital Group, as compensation for CRT Capital Group LLCs
services as the placement agent for the transaction, the terms and conditions
of which are set forth in a warrant agreement dated June 21, 2004 between the
Company and CRT Capital Group LLC. The terms of the warrant issued to CRT
Capital Group LLC and the warrant agreement between the Company and CRT Capital
Group LLC are identical to the terms of the warrants issued to, and the warrant
agreement with, the investors participating in the transaction and references
herein to the warrants and warrant agreements shall be read to include the
warrant issued to CRT Capital Group LLC and the warrant agreement between the
Company and CRT Capital Group LLC, respectively. 28




---



##### Table of Contents



The shares of common stock were sold at a per share price of $2.61, which
represented a 10% discount to the $2.90 closing price of shares of our common
stock on the Nasdaq National Market as of the close of business on June 15,
2004 (the Closing Price). The warrants entitle the holders thereof to
purchase up to 2,423,851 shares of our common stock at an exercise price of
$3.335, which represented a 15% premium to the Closing Price. The warrants are
exercisable at any time on or after December 22, 2004 and prior to June 22,
2009. The exercise price may be payable in cash, or by means of an exchange of
shares of common stock issuable upon exercise of the warrants, a so-called
cashless exercise, in the event that the Company fails to maintain an
effective registration statement with respect to the shares of common stock
issuable upon exercise of the warrant pursuant to the terms and conditions of
the registration rights agreement dated as of June 21, 2004 that the Company
entered into with the purchasers in connection with the transaction. The
warrant agreements provide that the warrants may only be exercised with respect
to 350,000 shares of common stock in the aggregate prior to approval of the
exercisability of the remaining warrants by stockholders of the Company. As an
inducement to the purchasers to participate in the transaction, the Company
agreed in the stock and warrant purchase agreement to use its best efforts to
obtain stockholder approval of the exercisability in full of the warrants and
the issuance of the shares of common stock upon exercise of the warrants.
Additionally, the Company agreed that if it were not successful in obtaining
stockholder approval at its annual meeting of stockholders, the Company would
cause additional stockholder meetings to be duly called and held every six
months thereafter until such approval is obtained. The shares of common stock
and the warrants to purchase common stock were issued to accredited investors
in a private placement transaction exempt from registration pursuant to Section
4(2) of the Securities Act of 1933 and rule 506 of Regulation D as an issuer
transaction not involving a public offering. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Number
    
    Description31.1
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K: During the quarter ended June 30, 2004, the Company filed a Current Report on
Form 8-K dated May 4, 2004 furnishing information under Item 12 regarding a
press release regarding its financial results for the quarter ended March 31,
2004, dated June 16, 2004 furnishing information under Item 5 regarding the
announcement of its common stock and warrant private placement financing, and
June 22, 2004 furnishing information under Item 5 regarding documents for the
common stock and warrant private placement financing. 
 SIGNATURES Pursuant to the requirements 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. EVERGREEN SOLAR, INC.Date: August 13, 2004/s/ Richard G. ChleboskiRichard G. ChleboskiChief Financial Officer, Treasurer and Secretary(Principal Financial Officer)
 29