| BEACON POWER CORP Item 1A Risk Factors Relating to Our Business For our business strategy to be effectively implemented, demonstrations of the performance of our Smart Energy Matrix at NYSERDA and CEC need to be successful |
| Our business plan focuses on completing the development of our energy storage solution, the Smart Energy Matrix |
| As part of this strategy, we have entered into cost share contracts with the New York State Energy Research and Development Authority (NYSERDA) and the California State Energy Resources Conservation and Development Commission (CEC) to demonstrate the performance capabilities of the Smart Energy Matrix in providing frequency regulation services to the grid |
| These demonstration units provide a one-tenth-power prototype of our Smart energy Matrix |
| If we are not successful in demonstrating the anticipated benefits, completing development of the Smart Energy Matrix may be significantly delayed and our business strategy may be considerably harmed |
| We face significant technical challenges in completing the development of the Smart Energy Matrix |
| We may fail to develop our 25kWh generation flywheel system, which is a critical requirement for the development of the Smart Energy Matrix and, even if we are able to develop the 25kWh system, we may fail to develop the Smart Energy Matrix |
| Although we have successfully developed two high energy systems (the 2kWh and 6kWh) that had similar technical challenges there can be no assurance that we will be able to successfully develop the 25kWh system |
| The successful development of our new 25kWh flywheel system, which will be used in the Smart Energy Matrix, involves significant technological and cost challenges, including, among other possible challenges: - 7 - • it may take longer to develop cost effective designs for key components of the Smart Energy Matrix such as the rim, motor, power electronics and bearing system, and the master controller software; • development and production delays and/or cost increases may occur if we are unable to establish multiple source suppliers for key components to meet our engineering requirements, cost objectives and development and production schedules and we do not have contracts with all of these suppliers; • we may not be able to develop cost effective designs on schedule that will meet system performance requirements such as: o a rotor-cooling scheme to avoid overheating during operation; o cost effective bearings to ensure acceptable vibration levels at all speeds; and o a touchdown bearing system to stabilize the rotor during abnormal conditions such as an earthquake; • we may not be able to ramp up and maintain production rates; and • we may not be able to control the quality and cost of goods we buy from key suppliers |
| There can be no assurance that we will be successful in meeting these challenges |
| In addition, even if we are able to develop the new 25kWh flywheel system, we plan to integrate multiple 25kWh flywheels into a common building or container to produce the Smart Energy Matrix |
| This effort will pose significant technological and cost challenges including, among others: • meeting the technical requirements for interconnection to the utility grid; and • developing a communication and control system adequate to meet the performance standards of the grid managers |
| Competitors in the frequency regulation market include established utilities and independent service providers with far greater resources than us |
| The frequency regulation services market is being served by well-known utilities and independent service providers that use conventional generators |
| These utilities and independent service providers are primarily focused on the sale of energy and generally provide frequency regulation as an ancillary service |
| Although these generators typically prefer to sell energy rather than provide frequency regulation services because, among other things, the sale of energy can provide higher revenues, we will be competing with these established generators that have far greater resources than we do |
| Although the market for frequency regulation services is large and growing, we have not demonstrated an ability to sell into that market |
| We intend to provide frequency regulation services using our Smart Energy Matrix in the spot or auction markets of regional grid operators, such as PJM Interconnection |
| In order to bid in these markets, one must be qualified to do so |
| We expect to receive the necessary approvals, but there is no assurance we will be successful |
| Even if we successfully qualify to participate in the auction markets, if the structure of these markets changes due to regulatory modifications, for example, our business plan could be adversely affected |
| The central financial attraction for us in the auction market is that we are able to bid electronically into each auction |
| These auctions yield the same sales price for all successful bidders |
| Increases or decreases in purchase prices or availability of carbon fiber or other materials and commodities may affect our ability to achieve profitability |
| We use carbon fiber in the manufacture of our flywheel systems |
| Other applications that require carbon fiber have substantially increased in the last few years |
| In response to this increased demand, suppliers are adding capacity but shortages and/or price fluctuations may affect our ability to manufacture our flywheel systems in a timely way and at a reasonable cost |
| Fluctuations in energy prices may have a material impact on the pricing of frequency regulation services and therefore the profitability of our flywheel systems The market pricing for frequency regulation services tends to follow the pricing for energy |
| In the event of any substantial future erosion in the price of energy, frequency regulation prices could be adversely affected |
| New sources of energy including the commissioning of nuclear power plants and other technologies could adversely affect the demand for frequency regulation services - 8 - Potential expansion in the use of nuclear power or other new energy supply technologies could change the supply and demand for energy and may impact frequency regulation pricing |
| Failure to protect our intellectual property could impair our competitive position |
| Although we are unaware of any challenges to our intellectual property, we cannot provide assurance that we have or will be able to maintain a significant proprietary position on the basic technologies used in our flywheel systems |
| Our ability to compete effectively against alternative technologies will be affected by our ability to protect proprietary technology, systems designs and manufacturing processes |
| We do not know whether any of our pending or future patent applications under which we have rights will issue, or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes from competitors |
| Even if all of our patent applications are issued and are sufficiently broad, they may be challenged or invalidated |
| We could incur substantial costs in prosecuting or defending patent infringement suits, and such suits would divert funds and resources that could be used in our business |
| We do not know whether we have been or will be completely successful in safeguarding and maintaining our proprietary rights |
| Further, our competitors or others may independently develop or patent technologies or processes that are substantially equivalent or superior to ours |
| If we are found to be infringing on third-party patents, we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all |
| Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our systems |
| We rely, in part, on contractual provisions to protect trade secrets and proprietary knowledge |
| These agreements may be breached, and we may not have adequate remedies for any breach |
| Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors or others |
| Our inability to maintain the proprietary nature of our technology and processes could allow competitors or others to limit or eliminate any competitive advantages we may have |
| Government regulation may impair our ability to market our products |
| Government regulation of our products, whether at the federal, state or local level, including any change in regulations or tariffs, product buy downs or tax rebates relating to purchase and installation of our products, may increase the cost and price of our systems, and may have a negative impact on our revenue and profitability |
| We cannot provide assurance that our products will not be subject to existing or future federal and state regulations governing traditional electric utilities and other regulated entities |
| We expect that our products and their installation will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, safety and related matters |
| We do not know the extent to which any existing or new regulations may impact our ability to distribute, install and service our products |
| Once our products reach the commercialization stage, federal, state or local government entities may seek to impose regulations |
| Our ability to complete development of our Smart Energy Matrix will require substantial funds |
| Our stockholders may be adversely affected if we issue debt securities or additional equity securities to obtain financing |
| We will require substantial funds to conduct research and development activities, market our products and services, and increase our revenues |
| We anticipate that such funds will be obtained from external sources and intend to seek additional equity or debt to fund future operations |
| We estimate that we will need to raise an additional dlra20 to dlra30 million to complete development of the Smart Energy Matrix |
| We expect the development to be complete in 2007 |
| Our actual capital requirements will depend on many factors |
| The additional funding we require may not be available on favorable terms, if at all |
| Such additional funding may only be available on terms that may, for example, cause substantial dilution to common stockholders, and/or have liquidation preferences and/or pre-emptive rights |
| If we raise additional funds by issuing debt securities or additional equity securities, existing stockholders may be adversely affected because new investors may have rights superior to current stockholders and current stockholders may be diluted |
| If we do not succeed in raising additional funds we will be unable to complete planned development for our products and services |
| In addition, we could be forced to take unattractive steps, such as discontinuing product development, limiting the services offered, reducing or foregoing sales and marketing efforts and attractive business opportunities, or discontinuing operations entirely |
| - 9 - We expect that it will be several years before we will recognize significant revenues from the products we intend to offer and the services we intend to provide |
| A large portion of our expenses are fixed, including expenses related to facilities, equipment and key personnel |
| In addition, we expect to spend significant amounts to fund product development based on our core technologies |
| We also expect to incur substantial expenses to manufacture our Smart Energy Matrix product in the future |
| As a result, operating expenses may increase significantly over the next several years and, consequently, we will need to generate substantial commercial revenue to achieve profitability |
| Even we do achieve profitability, we may not be able to sustain or increase profitability on a consistent basis |
| The exercise of options and warrants and other issuances of shares will likely have a dilutive effect on our stock price |
| As of December 31, 2005, there were outstanding options to purchase an aggregate of 5cmam581cmam803 shares of our common stock at prices ranging from dlra0dtta255 per share to dlra9dtta31 per share, of which options to purchase 5cmam306cmam799 shares were exercisable as of such date |
| As of December 31, 2005, there were outstanding warrants to purchase 5cmam093cmam860 shares of our common stock |
| Of this total, warrants to purchase 800cmam000 shares of our common stock are currently exercisable at dlra1dtta001 per share, subject to adjustment under the anti-dilution provisions of the warrants |
| On November 8, 2005, in connection with a private placement of our common stock, we issued to institutional investors warrants to purchase 2cmam960cmam527 shares of our common stock at an exercise price of dlra2dtta21 per share, which are exercisable as of March 8, 2006 |
| In connection with an April 2005 private placement of our common stock, we granted to the investor warrants to purchase 800cmam000 shares of our common stock at an exercise price of dlra1dtta008 per share, and extended a warrant for two years for 1cmam333cmam333 shares at dlra2dtta25 per share |
| As of December 31, 2005, these warrants have not yet been issued |
| The exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of our common stock |
| Additional dilution may result from the issuance of shares of our capital stock in connection with collaborations or manufacturing arrangements or in connection with other financing efforts |
| We have a history of losses and anticipate future losses and we will have limited revenues in the near term |
| Unless we raise additional capital to operate our business, we may not be able to continue as a going concern as our cash balances are sufficient to fund operations only through approximately the first quarter of 2007 |
| We have incurred significant losses from operations since our inception |
| As shown in our consolidated financial statements, we incurred significant losses from operations of approximately dlra9cmam448cmam000, dlra9cmam049cmam000 and dlra9cmam138cmam000 and operating cash decreases of dlra8cmam832cmam346, dlra8cmam164cmam675 and dlra7cmam700cmam612, during the years ended December 31, 2005, 2004 and 2003, respectively |
| We are unsure if or when we will become profitable |
| We had dlra13cmam890cmam162 of cash and cash equivalents on hand at December 31, 2005 |
| Based on our current cash usage rates and additional expenditures expected in support of our business plan, we estimate that we have adequate cash to fund operations only into the first quarter of 2007 |
| We are focused on further development of the Smart Energy Matrix to provide frequency regulation services, but this product will not generate revenues in the near-term |
| We expect future revenues to come from a combination of the sale of services related to the Smart Energy Matrix and sales of Smart Energy Matrix units |
| Other than revenue related to our research and development contracts in the amount of dlra1dtta4 million, we have had no revenues to date from our Smart Energy Matrix |
| The timing of future revenues is uncertain |
| Miller Wachman, LLP, our independent auditors, have included an explanatory paragraph related to a going concern uncertainty in their audit report on our consolidated financial statements for the fiscal year ended December 31, 2005, which identifies our recurring losses and negative cash flows and raises substantial doubt about out ability to continue as a going concern |
| Our financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business |
| We have not made any adjustments to our financial statements as a result of the going concern uncertainty |
| If we cannot continue as a going concern, we may have to liquidate our assets and may receive significantly less than the values at which they are carried on our financial statements |
| Any shortfall in the proceeds from the liquidation of our assets would directly reduce the amounts that holders of our common stock could receive in liquidation |
| Our financial performance could be adversely affected if we are unable to retain key executive officers and retain or attract key technical personnel |
| Because our future success depends to a large degree on the management provided by the executive officers, our competitiveness will depend significantly on whether we can retain members of our executive team |
| We have an employment agreement with Mr |
| Our employment agreement with Mr |
| Capp, CEO and President, expired on December 31, 2004 and our employment agreement with Mr |
| Lazarewicz, Vice President and Chief - 10 - Technical Officer, expired on December 31, 2005 |
| Negotiations with Mr |
| Lazarewicz are ongoing but both are now employees at will and there can be no assurance that either or both executives will not elect to leave the Company or that an agreement will be reached |
| Our future success also depends to a large degree on the technical skills of our engineering staff and our ability to attract key technical personnel |
| Competition for skilled technical professionals is intense and we may not be successful in attracting and retaining the talent necessary to design, develop and manufacture our flywheel products |
| We have anti-takeover defenses and a staggered board of directors that could delay or prevent an acquisition and changes in control in our board of directors and management, and could adversely affect the price of our common stock |
| Provisions of our certificate of incorporation, by-laws, Rights Agreement and Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing changes in control of management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices |
| In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interest |
| Our certificate of incorporation permits our board of directors to issue preferred stock without stockholder approval upon such terms as the board of directors may determine |
| The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future |
| The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding common stock |
| Although we have no present intention of issuing any additional preferred stock, an issuance of a substantial number of preferred shares could adversely affect the price of our common stock |
| Our certificate of incorporation also provides for a staggered board of directors divided into three classes |
| Such a staggered board of directors will make it more difficult for our stockholders to change the composition of the board of directors in any one year, which could have the effect of preventing or delaying a change of control transaction that is not approved by our board of directors |
| In addition, our certificate of incorporation and our amended and restated by-laws provide that: • our directors may only be removed for cause by a majority of the outstanding capital stock entitled to vote in the election of directors; • our stockholders do not have the power to call special meetings of stockholders; and • the provisions relating to the classified board, removal of directors and calling of special stockholders meetings may only be amended by a 66 2/3prca vote of the outstanding shares of common stock, voting together as a single class |
| These provisions make it more difficult for our stockholders to change the composition of the board of directors and approve transactions they may deem to be in their best interests that are not approved by the board of directors |
| Pursuant to a Rights Agreement, we issued rights as a dividend on common stock on October 7, 2002, each of which entitles the holder to purchase 1/100^th of a share of newly issued preferred stock for dlra22dtta50 in the event that any person not approved by the board of directors acquires more than 15prca (35prca in the case of one large shareholder, Perseus Capital, LLC and its affiliates, that at that time owned more than 15prca) of Beacon’s outstanding common stock, or in the event of an acquisition by another company, dlra22dtta50 worth of the common stock of the other company at half its market value (in each case the rights held by the acquiring person are not exercisable and become void) |