Significant Accounting Policies and Basis of Consolidation

6 Months Ended

Jun. 30, 2012

Significant Accounting Policies and Basis of Consolidation

Significant Accounting Policies and Basis of Consolidation

Note C. Significant Accounting Policies and Basis of Consolidation

There have been no material changes from the Significant Accounting Policies and Basis of Presentation previously disclosed in Part II, Item 8, contained within “Notes to Consolidated Financial Statements” of the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2011, except for the effect of the 1 — for - 8 reverse stock split of the Company’s common stock effective as of July 19, 2012.

Basis of Consolidation

The consolidated financial statements include the accounts of Satcon and its wholly owned subsidiaries (Satcon Power Systems Canada, Ltd. and Satcon Trading (Shenzhen) Co., Ltd.). All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

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

Revenue Recognition

The Company recognizes revenue from product sales when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, unless otherwise agreed upon in advance with the customer. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate the Company provides for a warranty reserve at the time the product revenue is recognized. If a contract involves the provision of multiple elements and the elements qualify for separation, total estimated contract revenue is allocated to each element based on the relative selling price of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.

Cost of product revenue includes materials, labor, overhead, warranty and freight.

Deferred revenue primarily consists of cash received for extended product warranties, preventative maintenance plans and up-time guarantee programs. Deferred revenue also consists of payments received from customers in advance of services performed, product shipped or installation completed. When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in the consolidated balance sheets.

Contract Losses

When the current estimates of total contract revenue for a customer order indicates a loss, a provision for the entire loss on the contract is recorded. At June 30, 2012 and December 31, 2011, there were no amounts accrued related to contract losses. The excess costs over projected revenues are recorded as a component of both cost of sales and research and development expense.

Cash and Cash Equivalents

Cash and cash equivalents include demand deposits and highly-liquid investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. At June 30, 2012 and December 31, 2011, the Company had no restricted cash.

Accounts Receivable

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

Inventory

Inventory is valued at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory, and costs are determined based on the first-in, first-out method of accounting and include material, labor and manufacturing overhead costs. A significant decrease in demand for the Company’s products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, the industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of the inventory and reported operating results. The Company records, as a charge to cost of product revenue, any amounts required to reduce the carrying value to net realizable value.

Property and Equipment

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

		Estimated Lives
Machinery and equipment		2-10 years
Furniture and fixtures		7-10 years
Computer hardware/software		3 years
Leasehold improvements		Lesser of the remaining life of the lease or the useful life of the improvement

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

Impairment of Long-Lived Assets

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

Warranty

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

Foreign Currency Translation

As of April 1, 2010, the Company determined that the functional currency of its foreign subsidiaries was the US dollar. As the functional currency changed from the foreign currency to the reporting currency, the translation adjustments as of April 1, 2010 remains as a component of accumulated other comprehensive income (loss). Prior to this determination, the functional currency was the local currency, assets and liabilities were translated at the rates in effect at the balance sheet dates, while stockholders’ equity (deficit) including the long-term portion of intercompany advances was translated at historical rates. Statements of operations and cash flow amounts were translated at the average rate for the period. Translation adjustments were included as a component of accumulated other comprehensive income (loss). The Company records the impact from foreign currency transactions as a component of other income (expense). Foreign currency gains and losses were a loss of $167,444 and $114,314 and a loss of $203,017 and $230,792 for the three and six months ended June 30, 2012 and 2011, respectively.

Foreign Currency Hedges

The Company uses foreign currency contracts to manage its exposure to changes in foreign currency exchange rates associated with our foreign currency denominated receivables. The Company primarily hedges foreign currency exposure to the Euro. The Company does not engage in trading, market making or speculative activities in the derivatives markets. The foreign currency contracts utilized by the Company do not qualify for hedge accounting treatment, and as a result, any fluctuations in the value of these foreign currency contracts are recognized in other income (expense),net in our consolidated statements of operations as incurred. The fluctuations in the value of these foreign currency contracts do, however, largely offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of April 18, 2011, the Company entered into a foreign currency hedge with a bank with a notational amount of approximately $1.6 million, which matured on July 18, 2011. For the three and six months ended June 30, 2012, the Company had no foreign currency contracts.

The following table shows the fair value of our foreign currency hedge at June 30, 2011:

The following table shows the changes in the fair value of our foreign currency contract recorded in net loss during the three and six month periods ended June 30, 2011:

	(Loss) Gain Three Months Ended		(Loss) Gain Six Months Ended
	June 30, 2011		June 30, 2011
Foreign currency hedges (a)	$	120,102	$	(10,308	)

(a) The Company recorded transaction losses associated with the re-measurement of its foreign denominated assets of $203,017 and $230,792 in the three and six months ended June 30, 2011. Transaction losses were included in Other loss (income) in the consolidated statements of operations. The net impact of transaction (losses) gains associated with the re-measurement of the foreign denominated assets and the gains (losses) incurred on the foreign currency hedge was a net loss of $82,913 and $241,100 for the three and six month period ended June 30, 2011, respectively.

Income Taxes

The Company accounts for income taxes utilizing the asset and liability method for accounting and reporting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In addition, the Company is required to establish a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company is allowed to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. The amount recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalties (if applicable) on that excess. In addition, the Company is required to provide a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to the accrued interest and penalties for unrecognized tax benefits. Discussion is also required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next twelve months.

As of December 31, 2011, the Company had federal and state net operating loss (“NOL”) carry forwards and federal and state R&D credit carry forwards, which may be available to offset future federal and state income tax liabilities which expire at various dates through 2032. Utilization of the NOL and R&D credit carry forwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Sections 382 or 383 of the Internal Revenue Code of 1986, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and R&D credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a rolling three-year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on several occasions (both pre and post initial public offering) which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition.

The Company commissioned a study to determine whether Sections 382 or 383 could limit the use of our carryforwards in this manner. After completing this study, the Company has concluded that the limitation will not have a material impact on its ability to utilize its net operating loss or credit carryforwards.

The tax years 1996 through 2011 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying financial statements. The Company would record any such interest and penalties as a component of interest expense. The Company does not expect any material changes to the unrecognized benefits within 12 months of the reporting date.

Accounting for Stock-based Compensation

The Company has several stock-based employee compensation plans, as well as stock options issued outside of such plans as an inducement to engage new executives. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period.

The Company uses the Black-Scholes valuation model for valuing options. This model incorporates several assumptions, including volatility, expected life and discount rate. The Company uses historical volatility as it believes it is more reflective of market conditions and a better indicator of volatility. The Company uses historical information in the calculation of expected life for its “plain-vanilla” option grants. If the Company determines that another method used to estimate expected volatility is more reasonable than the Company’s current methods, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and longer expected lives would result in an increase to share-based compensation determined at the date of grant.

The Company recognized the full impact of its share-based compensation plans in the consolidated financial statements for the three and six months ended June 30, 2012 and 2011 and did not capitalize any such costs on the consolidated balance sheets, as such costs that qualified for capitalization were not material. The following table presents stock-based compensation expense, included in the Company’s consolidated statement of operations:

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Cost of product revenue	$	89,673	$	123,661	$	179,674	$	269,388
Research and development	182,854		312,868		402,510		584,360
Selling, general and administrative expenses	735,586		1,278,643		1,707,432		2,198,499
Share-based compensation expense from continuing operations before tax	1,008,113		1,715,172		2,289,616		3,052,247
Income tax benefit	—		—		—		—
Net share-based compensation expense	$	1,008,113	$	1,715,172	$	2,289,616	$	3,052,247

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

Included in the 2012 and 2011 stock-based compensation expense above are amounts related to employee participation in the Employee Stock Purchase Plan (“ESPP”) of approximately $70,000 and $172,000 and $290,000 and $424,000, for the three and six month periods ended June 30, 2012 and June 30, 2011, respectively. See Note R, Employee Benefit Plan.

At June 30, 2012 approximately $6.4 million in unrecognized compensation expense remains to be recognized over a weighted average period of 1.3 years. The table below summarizes the recognition of the deferred compensation expense associated with employee stock options over the next five years as follows:

Calendar Years Ending December 31,	Non Cash Stock-Based Compensation Expense
2012	$	1,363,258
2013	2,543,617
2014	1,914,623
2015	496,403
2016	43,375
Total	$	6,361,276

The weighted average grant date fair value of options granted during the three and six months ended June 30, 2012 and 2011 were $3.13 and $3.01 and $23.82 and $25.74, respectively, per option. The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following range of assumptions:

	Three Months Ended		Six Months Ended
Assumptions:	June 30, 2012	June 30, 2011	June 30, 2012	June 30, 2011
Expected life	0 to 5.6 (1)	0 to 5.6 (1)	0 to 5.6 (1)	0 to 5.6 (1)
Expected volatility ranging from	86.5% to 89.3% (2)	73.6% to 73.9% (2)	78.7% to 89.3% (2)	73.6% to 75.1% (2)
Dividends	none	none	none	none
Risk-free interest rate	1% (3)	1% (3)	1% (3)	1% to 2.15% (3)
Forfeiture Rate (4)	0% to 6.25%	0% to 6.25%	0% to 6.25%	0% to 6.25%

(1) The option life was determined using actual option experience. Prior to March 31, 2010, the option life was determined using the simplified method for estimating expected option life, which qualify as “plain vanilla” options.

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

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

(4) The estimated forfeiture rate for each option grant is between 0% - 6.25%. The Company periodically reviews the estimated forfeiture rate, in light of actual experience.

Net Loss per Basic and Diluted Common Share

The Company reports net loss per basic and diluted common share in accordance with standards established for computing and presenting earnings per share. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, except when the effect would be anti-dilutive. See Note E, Loss Per Share, for more information related to options, warrants and Convertible Subordinated Note which would be considered anti-dilutive.

Concentration of Credit Risk

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

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

Significant customers are defined as those customers that account for 10% or more of total net revenue in a fiscal year or 10% or more of accounts receivable at the end of a fiscal period. The table below details out customers that were considered significant, greater than 10%, as it pertains to both revenues for the three and six months ended June 30, 2012 and 2011 and accounts receivable as of June 30, 2012 and December 31, 2011.

	Revenue		Accounts Receivable
Period	Three Months ended June 30,	Six Months ended June 30,	At June 30, 2012 and December 31, 2011

2012	SunPower Corporation (approximately 14.8%) Skwentex International Corporation (approximately 12.6%)*	SunPower Corporation (approximately 14.3%)	GCL Solar Limited (approximately 13.3%)

2011	Q-Cell International Canada Corporation (approximately 11.3%)	SunPower Corporation (approximately 12.3%)	The Ciro Group (approximately 18.1%) GCL Solar Limited (approximately 11.8%)

* The accounts receivable associated with this customer were backed by irrevocable letters of credit at June 30, 2012.

Significant suppliers are defined as those suppliers that account for 10% or more of total purchases in a fiscal year or 10% or more of accounts payable at the end of a fiscal period. At June 30, 2012, there was one supplier, Perfect Galaxy, which made up approximately 74.1% of the Company’s gross accounts payable. Purchases from this supplier for six months ended June 30, 2012 were approximately $22.0 million. At December 31, 2011, there was one supplier, Perfect Galaxy, which made up approximately 66% of the Company’s gross accounts payable at December 31, 2011. The Company’s non-exclusive contract manufacturing agreement with Perfect Galaxy was extended for 5 years in February 2012.

Research and Development Costs

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

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash equivalents, accounts receivable, warrants to purchase shares of common stock, accounts payable, foreign currency hedge, subordinated convertible note, note payable and the line of credit. The estimated fair values have been determined through information obtained from market sources and management estimates. The estimated fair value of certain financial instruments including cash equivalents, accounts receivable and account payable, approximate the carrying value due to their short-term maturity. The Company’s warrant liability and subordinated convertible note are recorded at fair value. See “Fair Value Measurements” below. The carrying value of the note payable, as of June 30, 2012, is not materially different from the fair value of the notes. The estimated fair values of the remaining financial instruments approximate their carrying values at June 30, 2012 and December 31, 2011.

Fair Value Measurements

The fair value of the Company’s financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which are as follows:

Level 1	—	Quoted prices in active markets for identical assets or liabilities.
Level 2	—	Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	—	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The amounts outstanding under the line of credit and note payable are not measured at fair value in the accompanying consolidated balance sheets. The Company determines the fair value of the amount outstanding under the line of credit and note payable using a discounted cash flow approach based on current market interest rates for debt issues with similar remaining years to maturity. The line of credit and note payable are valued using level 2 inputs.

There were no assets measured at fair value on a recurring basis at June 30, 2012. The following table sets forth the fair value of certain of the Company’s liabilities as of June 30, 2012 by level within the fair value hierarchy are as follows:

	Fair Value Measurements at Reporting Date Using
Description	Balance as of June 30, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities
Subordinated convertible note (2)	$	7,270,000	$	—	$	—	$	7,270,000
Long-term warrant liabilities (1)	22,000		—		22,000		—
Total Liabilities	$	7,292,000	$	—	$	22,000	$	7,270,000

Transfers in and out of Level 3 of the fair value hierarchy consist of settlements of the subordinated convertible note, the adjustments to the fair value of the subordinated convertible note and the modification in April 2012 (for details of the change in fair value related activity, see Note I Commitments and Contingencies):

	Subordinated Convertible Note
Balance at December 31, 2011	$	18,240,000
Transfers into Level 3	6,740,000
Transfers out of Level 3	(5,670,000		)
Total losses for the period	—
Fair value adjustment	(2,073,832		)
Settlement (conversion to common shares)	(9,966,168		)
Fair value at June 30, 2012	$	7,270,000

There were no assets measured at fair value on a recurring basis as of December 31, 2011. Liabilities measured at fair value on a recurring basis as of December 31, 2011 are as follows:

	Fair Value Measurements at Reporting Date Using
Description	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Liabilities
Subordinated convertible note (2)	$	18,240,000	$	—	$	—	$	18,240,000
Long-term warrant liabilities (1)	$	131,530	$	—	$	131,530	$	—
Total Liabilities	$	18,371,530	$	—	$	131,530	$	18,240,000

Transfers in and out of Level 3 of the fair value hierarchy consist of the issuance of the subordinated convertible note in June 2011, and the subsequent modification in December 2011 (for details of the change in fair value related activity see Note I, Commitments and Contingencies - Subordinated Convertible Note).

The following table rolls forward the Level 3 balance as it relates to the subordinated convertible note:

	Subordinated Convertible Note
Balance at December 31, 2010	$	—
Transfers into Level 3	36,090,000
Transfers out of Level 3	(17,320,000		)
Total losses for the period	—
Fair value adjustment	679,152
Settlement (conversion to common shares)	(1,209,152		)
Fair value at December 31, 2011	$	18,240,000

(1) The Company’s Level 2 financial liabilities consist of long term investor warrant liabilities comprised of the Warrant As, Warrant Cs, the warrants issued to the investors in connection with the 2007 preferred stock financing (the “2007 Financing Warrants”) and the placement agent warrants. The fair value of the Warrant As and Warrant Cs is being estimated using a binomial lattice model and the fair value of the placement agent warrants and the 2007 Financing Warrants is being estimated using the Black-Scholes option pricing model. (See Note K. Warrant Liabilities-Valuation — Methodology and Significant Assumptions; Note L - Series C Convertible Preferred Stock and Warrants; and “Warrant Liabilities”).

(2) The Company’s Level 3 financial liabilities consist of a subordinated convertible notes. (See Note I. Commitments and Contingencies.) The valuation of this instrument utilizes a continuous-variable stochastic process in the form of a Monte-Carlo Simulation and includes unobservable inputs supported by little or no market activity such as discount rate applicable to the instrument’s debt-like feature, probabilities of debt-like and equity-like positions, and various probabilities of occurrences of certain future events. The analysis also includes the contractual terms of instrument in the form of interest rate, timing and extent of principal and interest payments, and time to maturity.

Subordinated Convertible Note

The Company has elected to account for the Subordinated Convertible Note (“Convertible Note”) as an instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. The Company has identified all of the derivatives associated with the June 30, 2011 financing; however, several of the derivatives cannot be reliably measured nor reliably associated with another derivative that can be reliably measured. As such, the Company has appropriately valued these derivatives as a single contract together with the Convertible Note. As permitted under ASC 825-10-10, the Company has elected as of the issuance date to measure the Convertible Note in its entirety at fair value with changes in fair value recognized as either gain or loss until the notes are settled. This election was made by the Company after determining that the fair value of the Convertible Note to be more meaningful in the context of the Company’s financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained in such Convertible Note.

Warrant Liabilities

Upon issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together, the “Warrants”) did not meet the requirements for equity classification, because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale registration of the shares and (c) provide a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted for as freestanding derivative instruments. Changes in fair value are recognized as either a gain or loss in the consolidated statement of operations under the caption “Change in fair value of warrant liabilities.”

The Company determined the fair value of the investor warrants (the Warrant As and Warrant Cs) and placement agent warrants using valuation models it considers to be appropriate. The Company’s stock price has the most significant influence on the fair value of its warrants. An increase in the Company’s common stock price would cause the fair values of the warrants to increase, because the exercise price of the warrants is fixed at $14.52 per share, and result in a charge to the Company’s statement of operations. A decrease in the Company’s stock price would likewise cause the fair value of the warrants to decrease and result in a credit to the Company’s statement of operations. See Note K. Warrant Liabilities for valuation discussion.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

+ References+ Details

Fair Value Measurements as of

Balance Sheet Location

June 30, 2011

Liability Derivatives:

Foreign currency hedge

Other current liabilities

SATCON TECHNOLOGY CORP 10-Q/A