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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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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 000-50142
SOLAR
POWER, INC.
(Exact name of registrant as specified in its charter)
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California
(State or Other Jurisdiction of
Incorporation or Organization)
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20-4956638
(I.R.S. Employer
Identification Number) |
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1115 Orlando Avenue
Roseville, California
(Address of Principal Executive Offices)
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95661-5247
(Zip Code) |
(916) 745-0900
(Issuers telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.0001
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Note: Checking the box above will not relieve any registrant required to file reports pursuant
to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
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 issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o(Do not check if a smaller reporting company) |
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of voting stock held by non-affiliates computed by reference to the
price at which the common equity was last sold as of the last business day of the registrants most
recently completed second fiscal quarter, June 30, 2009, was $26,490,378. For purposes of this
computation, it has been assumed that the shares beneficially held by directors and officers of
registrant were held by affiliates; this assumption is not to be deemed to be an admission by
such persons that they are affiliates of registrant.
The number of shares of registrants common stock outstanding as of February 28, 2011 was
98,128,523.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Definitive Proxy Statement for its Annual Meeting of Stockholders,
which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not
later than 120 days after the registrants fiscal year-ended December 31, 2010, are incorporated
by reference into Part III of this Form 10-K; provided, however, that the Compensation Committee
Report, the Audit Committee Report and any other information in such proxy statement that is not
required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated
herein by reference or filed as a part of this Annual Report on Form 10-K
PART I
As used in this Annual Report on Form 10-K, unless otherwise indicated, the terms we, us,
our and the Company refer to Solar Power, Inc., a California corporation and its wholly-owned
subsidiaries.
Our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and information we
provide in our press releases, telephonic reports and other investor communications, including
those on our website, may contain forward-looking statements with respect to anticipated future
events and our projected financial performance, operations and competitive position that are
subject to risks and uncertainties that could cause our actual results to differ materially from
those forward-looking statements and our expectations.
Forward-looking statements can be identified by the use of words such as expects, plans,
will, may, anticipates, believes, should, intends, estimates and other words of
similar meaning. These statements constitute forward-looking statements within the meaning of the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements
are subject to risks and uncertainties that may cause actual results to differ materially from
those expressed or implied by these forward-looking statements. These forward-looking statements
reflect our then current beliefs, projections and estimates with respect to future events and our
projected financial performance, operations and competitive position.
Such risks and uncertainties include, without limitation, our ability to raise capital to
finance our operations, the effectiveness, profitability and the marketability of our services, our
ability to protect our proprietary information, general economic and business conditions, the
impact of new or disruptive technological developments and competition, adverse results of any
legal proceedings, the impact of current, pending or future legislation and regulation of the solar
power industry, our ability to enter into acceptable relationships with one or more of our
suppliers for panel components and the ability of such suppliers to manufacture products or
components of an acceptable quality on a cost-effective basis, our ability to attract or retain
qualified senior management personnel, including sales and marketing and technical personnel and
other risks detailed from time to time in our filings with the SEC, including those described in
Item 1A below. We do not undertake any obligation to update any forward-looking statements.
ITEM 1 BUSINESS
Overview
We previously manufactured photovoltaic panels or modules and balance of system components in
our Shenzhen, China manufacturing facility, which operations were effectively closed in December
2010. We continue to manufacture balance of system components, including our proprietary racking
systems such as SkyMount and Peaq on an OEM basis. We sold these products through three distinct
sales channels: 1) direct product sales to international and domestic markets, 2) our own use in
building commercial and residential solar projects in the U.S., and 3) our authorized dealer
network who sell our Yes! branded products in the U.S. and European residential markets. In 2010 we
discontinued our Yes! Authorized dealer network and Yes! branded products and our residential
installation business, as our strategy and focus shifted solely to solar commercial and utility
projects. In addition to our solar revenue, we generate revenue from our cable, wire and mechanical
assembly business. Our cable, wire and mechanical assemblies products were also manufactured in our
China facility and sold in the transportation and telecommunications markets and we will continue
this business in China. We shut down our manufacturing operations because we could not achieve
scale with other solar manufacturing operations in China and we were able to source modules at a
price lower than our manufacturing costs from Chinese manufacturers with larger scale operations.
As part of this change in our strategy we sought and obtained a strategic partner in China with
large scale manufacturing operations. The strategic partner made a significant investment in our
business that provided significant working capital and broader relationships that will allow us to
more aggressively pursue commercial and utility projects in our pipeline. This strategic partner
strengthens our position in the solar industry. We maintain a strategic office in Shenzhen China
that is principally responsible for our ongoing procurement, logistics and design support for our
products, and data systems for monitoring and managing solar energy facilities which we either own
or maintain under operations and maintenance agreements.
Subsequent to year end, the investment by our strategic partner strengthened our balance
sheet, which will enable the acceleration of the development of our project pipeline, which
primarily consists of utility and commercial distributed generation systems. We now intend to
aggressively grow our pipeline in both the U.S. and European markets and accelerate our
construction of multiple projects simultaneously.
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Business Development
Our Subsidiaries
Our business was conducted through our wholly-owned subsidiaries, SPIC, Inc. (SPIC), Yes!
Solar, Inc. (YES), Yes! Construction Services, Inc. (YCS), International Assembly Solutions,
Limited (IAS HK) and IAS Electronics (Shenzhen) Co., Ltd. (IAS Shenzhen). Beginning in 2010 and
continuing we are eliminating subsidiaries as we consolidate our business operations in the Company
to focus more strategically on commercial and utility construction projects.
Previously, SPIC and YCS were engaged in the business of design, sales and installation of
photovoltaic (PV) solar systems for commercial, industrial and residential markets. SPICs
commercial construction operations were combined with ours on January 1, 2010. We discontinued the
residential installation of YCS in October, 2010. The Company determined that discontinued
operations treatment was not required due to the fact that the revenue generated from residential
installations was included in its photovoltaic installation, integration and sales segment and was
not material to that segment or total revenue.
Previously, YES was engaged in the administration of our domestic dealer network and was
engaged in the sales and administration of franchise operations. In August 2009, due to general
economic conditions, YES discontinued the sale of franchises and converted its franchisees to
authorized Yes! branded product dealers. In August 2010, due to general economic conditions, YES
stopped its solicitation of new authorized dealers, and subsequently terminated all existing dealer
agreements.
IAS HK was engaged in sales of our cable, wire and mechanical assemblies business and the
holding company of IAS Shenzhen. During 2010, the cable, wire and mechanical
assemblies customers were transitioned to Solar Power, Inc.
IAS Shenzhen was engaged in manufacturing our solar modules, our balance of solar system
products and cable, wire and mechanical assemblies through fiscal 2010 and currently facilitates
the manufacture of balance of systems products and cable, wire and mechanical assemblies products.
Industry Overview
We believe 2011 will show continued growth in the Photovoltaic (PV) solar market. We
anticipate demand to be in the range of approximately 18GW. The German market demand is expected
to decline with the growth projected in the U.S., Italian and Japanese markets offsetting the
projected drop in Germany. We expect additional potential upside growth from China, Canada and
United Kingdom markets. Government policies, in the form of both regulation and incentives, have
accelerated the adoption of solar technologies by businesses and consumers and have provided
opportunities for developers to construct PV systems as an alternative to more traditional forms of
power generation. The PV market is a global one. The global market has grown from 6.1GW in 2008 to
an estimated 15.38GW in 2010. Germany has been the major driver of this growth from 1.8GW in 2008
to 8.1GW in 2010.*
In the U.S. market, solar is growing as well. The U.S. market is anticipated to reach 2.3GW in
2011, up from 900MW in 2010. Incentives have been extended that will support this growth and a
pipeline of projects is in place that substantiate the 2.3GW forecast.*
* Source, Roth Capital Partners Cleantech Industry Report dated January 5, 2011
Our Strategy
Our current business strategy is to develop Solar Energy Facilities (SEF), while controlling our
supply chain including engineering, procurement, construction, and manufacturing, to ensure
top-quality products, systems and margin optimization. We presently are focused on the following
steps to implement our business strategy:
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Engineering, procurement, and construction excellence. As an experienced designer and
builder of small and large scale solar systems, we are in a position to identify potential
efficiencies at a system level. Our experience in design and construction has lead to
innovative products and construction techniques that result in lower cost per watt
installations than our competitors. |
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High quality, low cost product design and manufacturing. Our management team has
extensive experience in designing and manufacturing products in China. The recent investment
of our strategic partner has given us access to a strong material supply
source for solar modules and the ability to provide bankable modules to our projects. We will
be working closely with our partner to maintain the high standards of quality we have produced
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Asset Management Services. Through our unique system monitoring products and
capabilities, we are able to offer our customers superior system reporting capabilities,
system uptime, and operation and maintenance services. |
Products and Services
We are a designer, integrator and installer of photovoltaic power systems to a variety of
customers. In addition to building solar systems using our products, we may sell solar modules and
our balance of system components to other integrators in the U.S., Asian, and European markets. For
the fiscal year ended December 31, 2010 we recorded net sales of approximately $30,719,000 from the
sale of solar panels, balance of system products and sales and installation of our photovoltaic
power systems, representing 90.3% of our total sales. Nine (9) customers in this group represented
68.7% of our total net sales. We anticipate that our revenue will shift to a higher percentage of
SEF sales.
Additionally, for the fiscal year ended December 31, 2010, net sales in our cable, wire and
mechanical assemblies segment was $3,317,000 or 9.7% of our total net sales.
Intellectual Property
We rely and will continue to rely on trade secrets, know-how and other unpatented proprietary
information in our business. We have the following trademarks: Yes! Solar Solutions, Yes!, and
SkyMount®. We have filed applications to register the following trademarks: ClickRack and Peaq for
use with our solar product brands. In addition, we have four PCT applications, four provisional
patents pending, one patent application and one design application for certain proprietary
technologies.
Competition
The solar power market is intensely competitive and rapidly evolving and we compete with major
international and domestic companies. Our major competitors in the development of SEFs include
totally vertically integrated companies such as Sun Power Corporation and First Solar, and
companies such as Sun Edison (a wholly owned subsidiary of MEMC Electronic Materials, Inc.) plus
numerous regional developers. We compete in the sale of our balance of system products with other
manufacturers of racking systems for solar modules. The entire solar industry also faces
competition from other power generation sources, both conventional sources as well as other
emerging technologies. Solar power has certain advantages and disadvantages when compared to other
power generating technologies. The advantages include the ability to deploy products in many sizes
and configurations, to install products almost anywhere in the world, to provide reliable power for
many applications, to serve as both a power generator and the skin of a building and to eliminate
air, water and noise emissions.
Manufacturing and Assembly Capabilities
Through 2010 we manufactured solar modules and balance of system products in our manufacturing
facility in Shenzhen, China. As described previously we no longer manufacture solar modules but
continue to manufacture balance of system products. Our knowledge and experience in manufacturing
and assembly operations in China gives us a competitive advantage in the production of solar module
and balance of system products. Our senior management has broad experience in the manufacturing of
liquid crystal displays and electronic module assemblies. The manufacturing and assembly process of
these products is not unlike the manufacturing and assembly of solar modules and balance of system
products. It is our goal to continue to strive to reduce costs in the overall solar system cost to
the end customer with the ultimate goal to make the actual installed cost of solar equivalent to
the comparable cost of grid based energy without rebate. These overall reductions in cost will be
delivered by reducing labor installation costs through better system design and kit packaging and
reductions in module and balance of system costs by focusing on driving prices down on these
commodity types of products.
Suppliers
There are numerous suppliers of solar modules in the industry and we have sourced modules from
several of them through 2010. There does not appear to be a shortage of modules or raw materials
used in the manufacture of solar modules required for our
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SEFs. We anticipate that our primary source of modules will be through our strategic partner, LDK
Solar Ltd., although we are not contractually obligated to purchase solely from LDK Solar Ltd.
Sales and Marketing
Our products and services are largely represented through our companys sales force located in
California. To ensure adequate coverage of the markets we are targeting, we rely on a series of
outside sales representatives to cultivate opportunities. These representatives currently cover
Europe, Asia, and sections of the United States.
Employees
As of December 31, 2010, we had approximately 217 full-time employees comprised of 39
employees in the U.S, and the balance working in our Shenzhen, China engineering and manufacturing
operation. None of our employees is represented by a labor union nor are we organized under a
collective bargaining agreement. We have never experienced a work stoppage and believe that our
relations with our employees are good.
Investing in our common stock involves a high degree of risk. You should carefully consider the
following risks and all other information contained in our public filings before making an
investment decision about our common stock. While the risks described below are the ones we believe
are most important for you to consider, these risks are not the only ones that we face. If any of
the following risks actually occurs, our business, operating results or financial condition could
suffer, the trading price of our common stock could decline and you could lose all or part of your
investment.
Factors, Risks and Uncertainties That May Affect our Business
With the exception of historical facts herein, the matters discussed herein are forward looking
statements that involve risks and uncertainties that could cause actual results to differ
materially from projected results. Such forward looking statements include, but are not
necessarily limited to statements regarding anticipated levels of future revenues and earnings from
the operations of Solar Power, Inc. and its subsidiaries, projected costs and expenses related to
our operations, liquidity, capital resources, and availability of future equity capital on
commercially reasonable terms. Factors that could cause actual results to differ materially are
discussed below. We disclaim any intent or obligation to publicly update these forward looking
statements, whether as a result of new information, future events or otherwise. Unless the context
indicates or suggest otherwise reference to we, our, us, and the Company in this section
refers to the consolidated operations of Solar Power, Inc., a California corporation, DRCI and
Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), on a post-Merger and post
Reincorporation basis, and references to SPI Nevada refers to Solar Power, Inc., a Nevada
corporation (formerly Welund Fund, Inc.) prior to the Merger and Reincorporation.
Risks Related to Our Business
We have limited experience constructing solar systems on a commercial basis and have a limited
operating history on which to base our prospects and anticipated results of operations.
We commenced solar power-related operations in June 2006 and began manufacturing solar modules in
April 2007. Our IAS (Shenzhen) Electronics Co., Ltd. subsidiary completed its first mechanical
assembly manufacturing line in May 2005 and began commercial shipment of its cable, wire and
mechanical products in June 2005. Our operating focus has shifted principally to the construction
of Solar Energy Facilities (SEFs). A SEF is a complete solar array that is designed and
constructed to produce electricity from the sun (DC power) and then convert it, as necessary to AC
power through an inverter to produce power for the end user. We have constructed SEFs mounted on
rooftops, parking lot structures and on the ground. Moreover, due to strategic change in our focus
and revenue generating efforts, our prior operating history, and our historical operating results
may not provide a meaningful basis for evaluating our business, financial performance and
prospects. We have incurred net losses since our inception and, as of December 31, 2010, had an
accumulated deficit of $34 million. We may be unable to achieve or maintain profitability in the
future.
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Our business strategy depends on the widespread adoption of solar power technology and economics
for the construction of Solar Energy Facilities (SEFs), and if demand for such facilities fails
to develop sufficiently, our revenues and ability to achieve or maintain profitability could be
harmed.
While the demand for SEFs is emerging and rapidly evolving, its future success is uncertain. If
solar power technology proves unsuitable for widespread commercial deployment or if demand for SEFs
fails to develop sufficiently, we may not be able to generate enough revenues to achieve and
sustain profitability. The factors influencing the widespread adoption of solar power technology
through the construction of SEFs include but are not limited to:
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cost-effectiveness, performance, and reliability of solar power technologies as compared
with conventional and non-solar alternative energy technologies; |
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success of other alternative distributed generation technologies such as fuel cells, wind
power and micro turbines; |
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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; and |
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availability of government subsidies and incentives. |
The execution of our growth strategy is dependent upon the continued availability of third-party
financing arrangements for our customers.
For many of our projects, our customers have entered into agreements to pay for solar energy over
an extended period of time based on energy savings generated by our solar power systems, rather
than paying us to construct a solar power system for them. For these types of projects, most of our
customers choose to purchase solar electricity under a power purchase agreement with a financing
company that contracts with us for the construction of the SEF. These structured finance
arrangements are complex and rely heavily on the creditworthiness of the customer as well as
required returns of the financing companies. Today the Company does not have an ownership interest
in either the financing company or its customers. Depending on the status of financial markets,
companies may be unwilling or unable to finance the cost of construction of the SEF. Lack of credit
for our customers or restrictions on financial institutions extending such credit will severely
limit our ability to grow our revenues.
Our operating results may fluctuate significantly from period to period; if we fail to meet the
expectations of securities analysts or investors, our stock price may decline significantly.
Several factors can contribute to significant quarterly and other periodic fluctuations in our
results of operations. These factors may include but are not limited to the following:
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Timing of orders and the volume of orders relative to our capacity; |
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Availability of financing for our customers; |
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Availability and pricing of raw materials, such as solar cells and wafers and potential
delays in delivery of components or raw materials by our suppliers. Solar cells represent
over 50% of our direct material cost and fluctuations in pricing or availability of cells
will have material impact to our costs and therefore, margins. |
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Delays in our product sales, design and qualification processes, which vary widely in
length based upon customer requirements, and market acceptance of new products or new
generations of products; |
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Pricing and availability of competitive products and services; |
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Changes in government regulations, tax-based incentive programs, and changes in global
economic conditions; |
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Delays in installation of specific projects due to inclement weather; |
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Changes in currency translation rates affecting margins and pricing levels; |
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We base our planned operating expenses in part on our expectations of future revenue, and we
believe a significant portion of our expenses will be fixed in the short-term. If revenue for a
particular quarter is lower than we expect, we likely will be unable to proportionately reduce our
operating expenses for that quarter, which would harm our operating results for that quarter. This
may cause us to miss analysts guidance or any guidance announced by us. If we fail to meet or
exceed analyst or investor expectations or our own future guidance, even by a small amount, our
stock price could fluctuate, perhaps substantially.
We act as the general contractor for our customers in connection with the installations of our
solar power systems and are subject to risks associated with construction, bonding, cost overruns,
delays and other contingencies, which could have a material adverse effect on our business and
results of operations.
We act as the general contractor for our customers in connection with the installation of our solar
power systems. All essential costs are estimated at the time of entering into the sales contract
for a particular project, and these are reflected in the overall price that we charge our customers
for the project. These cost estimates are preliminary and may or may not be covered by contracts
between us or the other project developers, subcontractors, suppliers and other parties to the
project. In addition, we require qualified, licensed subcontractors to install most of our systems.
Shortages of such skilled labor could significantly delay a project or otherwise increase our
costs. Should miscalculations in planning a project or defective or late execution occur, we may
not achieve our expected margins or cover our costs. Additionally, many systems customers require
performance bonds issued by a bonding agency. Due to the general performance risk inherent in
construction activities, it is sometimes difficult to secure suitable bonding agencies willing to
provide performance bonding. In the event we are unable to obtain bonding, we will be unable to bid
on, or enter into, sales contracts requiring such bonding.
Delays in solar panel or other supply shipments, other construction delays, unexpected performance
problems in electricity generation or other events could cause us to fail to meet these performance
criteria, resulting in unanticipated and severe revenue and earnings losses and financial
penalties. Construction delays are often caused by inclement weather, failure to timely receive
necessary approvals and permits, or delays in obtaining necessary solar panels, inverters or other
materials. The occurrence of any of these events could have a material adverse effect on our
business and results of operations.
If there is an increase in the price of polysilicon, the corresponding increase in the cost of
constructing SEFs may reduce the demand for SEFs, resulting in lower revenues and earnings.
Increases in polysilicon pricing could result in substantial downward pressure on the demand
for SEFs due to the overall increase in the cost of production for such projects. Lessening demand
for new SEFs may have a negative impact on our revenue and earnings, and adversely affect our
business and financial condition.
We may not be able to efficiently integrate the operations of our acquisitions, products or
technologies.
From time to time, we may acquire new and complementary technology, assets and companies. We do not
know if we will be able to complete any acquisitions or if we will be able to successfully
integrate any acquired businesses, operate them profitably or retain key employees. Integrating any
other newly acquired business, product or technology could be expensive and time-consuming, disrupt
our ongoing business and distract our management. We may face competition for acquisition targets
from larger and more established companies with greater financial resources. In addition, in order
to finance any acquisitions, we might be forced to obtain equity or debt financing on terms that
are not favorable to us and, in the case of equity financing our stockholders interests may be
diluted. If we are unable to integrate effectively any newly acquired company, product or
technology, our business, financial condition and operating results could suffer.
The reduction or elimination of government and economic incentives domestically, and changes in
foreign incentives, could cause our revenue to decline.
We believe that the growth of the market for on-grid applications, where solar power is used to
supplement a customers electricity purchased from the utility network, depends in large part on
the availability and size of government-generated economic incentives. At present, the cost of
producing solar energy generally exceeds the price of electricity in the U.S. from traditional
sources. To encourage the adoption of solar technologies, the U.S. government and numerous state
governments have provided subsidies in the form of cost
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reductions, tax write-offs and other incentives to end users, distributors, systems integrators and
manufacturers of solar power products. Reduction, elimination and/or periodic interruption of these
government subsidies and economic incentives because of policy changes, fiscal tightening or other
reasons may result in the diminished competitiveness of solar energy, and materially and adversely
affect the growth of these markets and our revenues. Electric utility companies that have
significant political lobbying powers may push for a change in the relevant legislation in our
markets. The reduction or elimination of government subsidies and economic incentives for on-grid
solar energy applications, especially those in our target markets, could cause our revenues to
decline and adversely affect our business, financial condition and results of operations. The
existing Federal Investment Tax Credit was renewed with passage of the 2008 economic stimulus
package by the U.S. government. The current Federal Investment Tax Credit allows for a 30% tax
credit for both commercial and residential solar installations with no cap and allows the
commercial credits to be monetized if it cannot be absorbed by a tax liability.
A significant portion of our prior direct module and balance of system sales occured outside of the
U.S. Changes in the feed-in tariffs in markets like Germany, Spain and Italy, will have material
impact on the financial viability of solar systems in those markets. Consequentially, our ability
to sell products into those markets will be impacted accordingly. Changes to international programs
are not easily forecasted and may happen rapidly, causing significant changes in demand for solar
products.
We face intense competition, and many of our competitors have substantially greater resources than
we do.
We compete with major international and domestic companies. Some of our current and potential
competitors have greater market recognition and customer bases, longer operating histories and
substantially greater financial, technical, marketing, distribution, purchasing, manufacturing,
personnel and other resources than we do. In addition, many of our competitors are developing and
are currently producing products based on new solar power technologies that may ultimately have
costs similar to, or lower than, our projected costs.
Some of our competitors own, partner with, have longer term or stronger relationships with solar
cell providers which could result in them being able to obtain solar cells on a more favorable
basis than us. It is possible that new competitors or alliances among existing competitors could
emerge and rapidly acquire significant market share, which would harm our business. If we fail to
compete successfully, our business would suffer and we may lose or be unable to gain market share.
Existing regulations and policies of the electric utility industry and changes to these regulations
and policies may present technical, regulatory and economic barriers to the purchase and use of our
products, which may significantly reduce demand for our products.
The market for electricity generating products is strongly influenced by federal, state and local
government regulations and policies concerning the electric utility industry, as well as policies
promulgated by electric utilities. These regulations and policies often relate to electricity
pricing and technical interconnection of customer-owned electricity generation. In the U.S., these
regulations and policies are being modified and may continue to be modified. Customer purchases 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 demand for our solar
power products. For example, without a regulatory-mandated exception for solar power systems,
utility customers are often charged interconnection or standby fees for putting distributed power
generation on the electric utility grid. These fees could increase the cost to our customers and
make our solar power products less desirable.
The failure to increase or restructure the net metering caps could adversely affect our business.
In the U.S., all grid-tied photovoltaic systems are installed with cooperation by the local utility
providers under guidelines created through statewide net metering policies. These policies require
local utilities to purchase from end users excess solar electricity for a credit against their
utility bills. The amount of solar electricity that the utility is required to purchase is referred
to as a net metering cap. If these net metering caps are reached and local utilities are not
required to purchase solar power, or if the net metering caps do not increase in the locations
where we install our solar product, demand for our products could decrease. The solar industry is
currently lobbying to extend these arbitrary net metering caps, and replace them with either
notably higher numbers, or with a revised method of calculation that will allow the industry to
continue our expansion in a manner consistent with both the industry and state and federal desires.
Moreover, we anticipate that our solar power 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.
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It is difficult to track the requirements of individual states and design equipment to comply with
the varying standards. Any new government regulations or utility policies pertaining to our solar
power products may result in significant additional expenses to us, our resellers, and our
customers and, as a result, could cause a significant reduction in demand for our solar power
products.
Compliance with environmental regulations can be expensive, and noncompliance with these
regulations may result in adverse publicity and potentially significant monetary damages and fines.
We are required to comply with all national and local regulations regarding protection of the
environment. If we fail to comply with present or future environmental regulations, we may be
required to pay substantial fines, suspend production or cease operations. In addition, our cost to
comply with future regulations may increase, which could adversely impact the price of our products
and our profitability.
We generally recognize revenue on system installations on a percentage of completion basis and
payments are due upon the achievement of contractual milestones and any delay or cancellation of a
project could adversely affect our business.
We recognize revenue on our system installations on a percentage of completion basis and, as a
result, our revenue from these installations is driven by the performance of our contractual
obligations, which is generally driven by timelines for the installation of our solar power systems
at customer sites. This could result in unpredictability of revenue and, in the near term, a
revenue decrease. As with any project-related business, there is the potential for delays within
any particular customer project. Variation of project timelines and estimates may impact our
ability to recognize revenue in a particular period. In addition, certain customer contracts may
include payment milestones due at specified points during a project. Because we must invest
substantial time and incur significant expense in advance of achieving milestones and the receipt
of payment, failure to achieve milestones could adversely affect our business and results of
operations.
We are subject to particularly lengthy sales cycles in some markets.
Our focus on developing a customer base that requires installation of a solar power system means
that it may take longer to develop strong customer relationships or partnerships. Moreover, factors
specific to certain industries also have an impact on our sales cycles. Some of our customers may
have longer sales cycles that could occur due to the timing of various state and federal subsidies.
These lengthy and challenging sales cycles may mean that it could take longer before our sales and
marketing efforts result in revenue, if at all, and may have adverse effects on our operating
results, financial condition, cash flows and stock price.
Our competitive position depends in part on maintaining intellectual property protection.
Our ability to compete and to achieve and maintain profitability depends in part on our ability to
protect our proprietary discoveries and technologies. We currently rely on a combination of
copyrights, trademarks, trade secret laws and confidentiality agreements, to protect our
intellectual property rights. We also rely upon unpatented know-how and continuing technological
innovation to develop and maintain our competitive position.
From time to time, the United States Supreme Court, other federal courts, the U.S. Congress or the
U.S. Patent and Trademark Office may change the standards of patentability and any such changes
could have a negative impact on our business.
We may face intellectual property infringement claims that could be time-consuming and costly to
defend and could result in our loss of significant rights and the assessment of damages.
If we receive notice of claims of infringement, misappropriation or misuse of other parties
proprietary rights, some of these claims could lead to litigation. We cannot provide assurance that
we will prevail in these actions, or that other actions alleging misappropriation or misuse by us
of third-party trade secrets, infringement by us of third-party patents and trademarks or the
validity of our patents, will not be asserted or prosecuted against us. We may also initiate claims
to defend our intellectual property rights. Intellectual property litigation, regardless of
outcome, is expensive and time-consuming, could divert managements attention from our business and
have a material negative effect on our business, operating results or financial condition. If there
is a successful claim of infringement against us, we may be required to pay substantial damages
(including treble damages if we were to be found to have willfully infringed a third partys
patent) to the party claiming infringement, develop non-infringing technology, stop selling our
10
products or using technology that contains the allegedly infringing intellectual property or enter
into royalty or license agreements that may not be available on acceptable or commercially
practical terms, if at all. Our failure to develop non-infringing technologies or license the
proprietary rights on a timely basis could harm our business. Parties making infringement claims on
future issued patents may be able to obtain an injunction that would prevent us from selling our
products or using technology that contains the allegedly infringing intellectual property, which
could harm our business.
We are exposed to risks associated with product liability claims in the event that installation of
our solar power systems results in injury or damage, and we have limited insurance coverage to
protect against such claims and additionally those losses resulting from business interruptions or
natural disasters.
Since our solar power systems are electricity-producing devices, it is possible that users could be
injured or killed by our systems, whether by improper installation or other causes. As an
installer of products that are used by consumers, we face an inherent risk of exposure to product
liability claims or class action suits in the event that the installation of the solar power
systems results in injury or damage. Moreover, to the extent that a claim is brought against us we
may not have adequate resources in the event of a successful claim against us. 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 which could have a materially adverse effect on our
financial results. Any business disruption or natural disaster could result in substantial costs
and diversion of resources.
Since we cannot test our solar panels for the duration of our standard 20-year warranty period, we
may be subject to unexpected warranty expense; if we are subject to warranty and product liability
claims, such claims could adversely affect our business and results of operations.
The possibility of future product failures could cause us to incur substantial expense to repair or
replace defective products. We have agreed to indemnify our customers and our distributors in some
circumstances against liability from defects in our solar modules. A successful indemnification
claim against us could require us to make significant damage payments, which would negatively
affect our financial results.
Our current standard product warranty for our solar panel systems includes a 10-year warranty
period for defects in materials and workmanship and a 20-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 revenue. Although we conduct accelerated testing of our solar panels, our solar
panels have not and cannot be tested in an environment simulating the 20-year warranty period. As a
result of the foregoing, we may be subject to unexpected warranty expense, which in turn would harm
our financial results.
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 into which our solar panels are incorporated results in injury. We may be
subject to warranty and product liability claims in the event that our solar power systems fail to
perform as expected or if a failure of our solar power systems results, or is alleged to result, in
bodily injury, property damage or other damages.
Warranty and product liability claims may result from defects or quality issues in certain
third-party technology and components that we incorporate into our solar power systems,
particularly solar cells and panels, over which we have no control. While our agreements with our
suppliers generally include warranties, those provisions may not fully compensate us for any loss
associated with third-party claims caused by defects or quality issues in these products. In the
event we seek recourse through warranties, we will also be dependent on the creditworthiness and
continued existence of these suppliers.
Our failure to raise additional capital or generate the significant capital necessary to expand our
operations and construction of SEFs could reduce our ability to compete and could harm our business
growth.
We expect that our existing cash and cash equivalents, together with collections of our accounts
receivable and other cash flows from operations in 2011, will be sufficient to meet our anticipated
cash needs for at least the next twelve months. However, the timing and amount of our working
capital and capital expenditure requirements may vary significantly depending on numerous factors.
The growth of our business depends on our ability to finance multiple services and projects
simultaneously. In many cases we will need to fund development costs for large projects that we are
going to build short term, pending finalization of project financing. These
11
additional costs may result in greater fixed costs and operating expenses well in advance of the
revenues to be gained. Without access to working capital from profitable operations, equity, or
debt, our business cannot continue to grow.
We must effectively manage our growth.
Failure to manage our growth effectively could adversely affect our operations. Our ability to
manage our planned growth will depend substantially on our ability to sell and manage our
construction of SEFs in the market, maintain adequate capital resources for working capital,
successfully hire, train and motivate additional employees, including the technical personnel
necessary to staff our installation teams.
We may be unable to achieve our goal of reducing the cost of installed solar systems, which may
negatively impact our ability to sell our products in a competitive environment, resulting in lower
revenues, gross margins and earnings.
To reduce the cost of installed solar systems, as compared against the current cost, we will have
to achieve cost savings across the entire value chain from designing to manufacturing to
distributing to selling and ultimately to installing solar systems. We have identified specific
areas of potential savings and are pursuing targeted goals. However, such cost savings are
especially dependent upon factors outside of our direct control including the cost of raw
materials, the cost of both manufacturing and installation labor, and the cost of financing
systems. If we are unsuccessful in our efforts to lower the cost of installed solar systems, our
revenues, gross margins and earnings may be negatively impacted.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
We are required to document and test our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments
of the effectiveness of our internal control over financial reporting. Testing and maintaining
internal control can divert our managements attention from other matters that are important to our
business. We expect to incur increased expense and to devote additional management resources to
Section 404 compliance. We may not be able to conclude on an ongoing basis that we have effective
internal control over financial reporting in accordance with Section 404. If we conclude that our
internal control over financial reporting is not effective, we cannot be certain as to the timing
of completion of our evaluation, testing and remediation actions or their effect on our operations
since there is presently no precedent available by which to measure compliance adequacy. If we are
unable to conclude that we have effective internal control over financial reporting, investors
could lose confidence in our reported financial information, which could have a negative effect on
the trading price of our stock.
Risks Related to Our International Operations
We may not be able to retain, recruit and train adequetly management personnel.
Our continued operations are dependent upon our ability to identify, recruit and retain adequate
management personnel in China to perform certain jobs such as engineering of solar systems,
developing and maintaining internet based platforms for monitoring of SEFs and producing and
facilitating the shipment of materials necessary for the installation of SEFs. We require trained
graduates of varying levels and experience and a flexible work force of semi-skilled operators.
Many of our current employees come from the more remote regions of China as they are attracted by
the wage differential and prospects afforded by our operations. With the growth currently being
experienced in China and competing opportunities for our personnel, there can be no guarantee that
a favorable employment climate will continue and that wage rates in China, where our products are
manufactured, will continue to be internationally competitive.
We face risks associated with international trade and currency exchange.
We transact business in a variety of currencies including the U.S. dollar, the Chinese Yuan
Renminbi, and Euros. We make all sales in both U.S. dollars and the Euro and we incurred
approximately 13% of our operating expenses, such as payroll, land rent, electrical power and other
costs associated with running our facilities in China, in RMB. Changes in exchange rates would
affect the value of deposits of currencies we hold. In July 2005 the Chinese government announced
that the RMB would be pegged to a basket of currencies, making it possible for the
RMB to rise and fall relative to the U.S. dollar. We do not
currently hedge against exposure to currencies. We cannot predict with certainty future exchange
rates and thus their impact on our operating results. We do not have any long-term debt valued in
RMB. Movements between the U.S. dollar, the Euro, and the RMB could have a material impact on our
profitability.
12
Changes to Chinese tax incentives and heightened efforts by the Chinese tax authorities to increase
revenues could subject us to greater taxes.
Under applicable Chinese law, we have been afforded profits tax concessions by Chinese tax
authorities on our operations in China for specific periods of time, which has lowered our cost of
operations in China. However, the Chinese tax system is subject to substantial uncertainties with
respect to interpretation and enforcement. Recently, the Chinese government has attempted to
augment its revenues through heightened tax collection efforts. Continued efforts by the Chinese
government to increase tax revenues could result in revisions to or changes to tax incentives or
new interpretations by the Chinese government of the tax benefits we should be receiving currently,
which could increase our future tax liabilities or deny us expected concessions or refunds.
Risks Related to our Common Stock
LDK Solar Co., Ltd. (LDK) controls us and may have conflicts of interest with other shareholders
in the future.
On January 5, 2011, the Company entered into a stock purchase agreement which, on an
as-converted, fully-diluted basis, LDK will own approximately 70% of our common stock. As a result,
LDK will have significant control of the election of our directors and may influence our corporate
and management policies. LDK also has sufficient voting power to amend our organizational
documents. The interests of LDK may not coincide with the interests of other holders of our common
stock. LDK may also pursue, for its own account, acquisition opportunities that may be
complementary to our business, and as a result, those acquisition opportunities may not be
available to us. So long as LDK continues to own a significant amount of the outstanding shares of
our common stock, it will continue to be able to strongly influence or effectively control our
decisions, including potential mergers or acquisitions, asset sales and other significant corporate
transactions. Although we will operate separately, there are no assurances that conflicts will not
arise in the future.
We have not paid and are unlikely to pay cash dividends in the foreseeable future.
We have not paid any cash dividends on our common stock and may not pay cash dividends in the
future. Instead, we intend to apply earnings, if any, to the expansion and development of the
business. Thus, the liquidity of your investment is dependent upon active trading of our stock in
the market.
Any future financings and subsequent registration of common stock for resale will result in a
significant number of shares of our common stock available for sale, and such sales could depress
our common stock price. Further, no assurances can be given that we will not issue additional
shares which will have the effect of diluting the equity interest of current investors. Moreover,
sales of a substantial number of shares of common stock in any future public market could adversely
affect the market price of our common stock and make it more difficult to sell shares of common
stock at times and prices that either you or we determine to be appropriate.
We have significant equity overhang which could adversely affect the market price of our common
stock and impair our ability to raise additional capital through the sale of equity securities.
As of February 28, 2011, we had 98,128,523 shares of common stock outstanding. LDK Solar Co.,
Ltd. (LDK) holds 42,835,947 shares of common stock and, after the second closing occurs, will own
20,000,000 shares of Series A Preferred Stock which may be converted into shares of our common
stock. The possibility that substantial amounts of our outstanding common stock may be sold by LDK
or the perception that such sales could occur, often called equity overhang, could adversely
affect the market price of our common stock and could impair our ability to raise additional
capital through the sale of equity securities in the future.
Our shareholders may experience future dilution.
Our charter permits our board of directors, without shareholder approval, to authorize shares of
preferred stock. The board of directors may classify or reclassify any preferred stock to set the
preferences, rights and other terms of the classified or reclassified shares,
13
including the issuance of shares of preferred stock that have preference rights over the common
stock with respect to dividends, liquidation, voting and other matters or shares of common stock
having special voting rights. Further, substantially all shares of common stock for which our
outstanding stock options are exercisable are, once they have been purchased, eligible for
immediate sale in the public market.
The issuance of additional shares of our capital stock or the exercise of stock options or warrants
could be substantially dilutive to your shares and may negatively affect the market price of our
common stock.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 2 PROPERTIES
Our prior manufacturing facilities consisted of 123,784 square feet, including 101,104 square
feet of factories and 23,680 square feet of dorms, situated in an industrial suburb of Shenzhen,
Southern China known as Long Gang. Only the state may own land in China. Therefore, we lease the
land under our facilities, and our lease agreement gave us the right to use the land until December
31, 2010 at an annual rent of $229,134.
On December 1, 2010 we leased approximately 3,900 square feet of office space to accommodate
our support services operations in Shenzhen, China. The tem of the lease is three years and
expires on November 30, 2013 at an annual rent of approximately $38,334.
Our corporate headquarters are located in Roseville, California in a space of approximately
19,000 square feet. The five year lease commenced on August 1, 2007 and expires in July 2012. The
rent was $342,972 per year for the first year, $351,540 for the second year, $360,336 for the third
year, is $369,336 for the fourth year and $378,576 for the remainder of the lease. The Company has
an option to renew for an additional five years.
Our retail outlet was located in Roseville, California in a space of approximately 2,000
square feet. The five year lease commenced in October 2007 and expires in December 2012. The rent
is currently $79,426 per year and increases to $84,252 in the fifth year. The Company has an option
to renew for an additional five years. In October 2010, in conjunction with the discontinuance of
our residential installation business, we closed our retail outlet. The premises are currently
subleased at monthly rent equal to our leasing costs of the premises.
The Company is obligated under operating leases requiring minimum rentals as follows (in
thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
499 |
|
2012 |
|
|
316 |
|
2013 |
|
|
|
|
|
|
|
|
Total minimum payments |
|
$ |
815 |
|
|
|
|
|
ITEM 3 LEGAL PROCEEDINGS
Rogers v. Kircher, et al.
Subsequent to fiscal year end, on January 25, 2011, a putative class action was filed by
William Rogers against the Company, the Companys directors Stephen C. Kircher, Francis Chen,
Timothy B. Nyman, Ronald A. Cohan, D. Paul Regan, and LDK Solar Co., Ltd. (LDK), in the Superior
Court of California, County of Placer. The complaint alleges violations of fiduciary duty by the
individual director defendants concerning a proposed transaction announced on January 5, 2011,
pursuant to which defendant LDK agreed to acquire 70% interest in the Company. Plaintiff contends
that the independence of the individual director defendants was compromised because they are
allegedly beholden to defendant LDK for continuation of their positions as directors and possible
future employment. Plaintiff further contends that the proposed transaction is unfair because it
allegedly contains onerous and preclusive deal protection devices, such as no shop, standstill and
no solicitation provisions and a termination fee that operates to
14
effectively prevent any competing offers. The complaint alleges that the Company aided and
abetted the breaches of fiduciary duty by the individual director defendants by providing aid and
assistance. Plaintiff asks for class certification, the enjoining of the sale, or if the sale is
completed prior to judgment, rescission of the sale and damages.
The case is in its early stages and the Company is gathering facts and information to refute
the applicants claims. The Company intends to vigorously defend this action. Because the
complaint was recently filed, it is difficult at this time to fully evaluate the claims and
determine the likelihood of an unfavorable outcome or provide an estimate of the amount of any
potential loss. The Company does have insurance coverage for this type of action.
ITEM 4 RESERVED
15
PART II
ITEM 5 MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market Information
Our common stock began trading on the Over the Counter Bulletin Board (OTCBB) under the symbol
SOPW.OB on September 25, 2007. The quarterly high and low bid information in U.S. dollars on the
OTCBB of our common shares during the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
High Bid |
|
|
Low Bid |
|
Fiscal Year Ended December 31, 2010 |
|
|
|
|
|
|
|
|
Fourth Quarter to December 31, 2010 |
|
$ |
0.33 |
|
|
$ |
0.29 |
|
Third Quarter to September 30, 2010 |
|
$ |
0.39 |
|
|
$ |
0.33 |
|
Second Quarter to June 30, 2010 |
|
$ |
0.84 |
|
|
$ |
0.77 |
|
First Quarter to March 31, 2010 |
|
$ |
1.08 |
|
|
$ |
1.00 |
|
Fiscal Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
Fourth Quarter to December 31, 2009 |
|
$ |
1.53 |
|
|
$ |
0.94 |
|
Third Quarter to September 30, 2009 |
|
$ |
1.90 |
|
|
$ |
0.75 |
|
Second Quarter to June 30, 2009 |
|
$ |
1.29 |
|
|
$ |
0.55 |
|
First Quarter to March 31, 2009 |
|
$ |
1.02 |
|
|
$ |
0.42 |
|
Fiscal Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
Fourth Quarter to December 31, 2008 |
|
$ |
1.43 |
|
|
$ |
0.41 |
|
Third Quarter to September 30, 2008 |
|
$ |
1.72 |
|
|
$ |
1.04 |
|
Second Quarter to June 30, 2008 |
|
$ |
1.80 |
|
|
$ |
1.05 |
|
First Quarter to March 31, 2008 |
|
$ |
1.44 |
|
|
$ |
0.95 |
|
These Over-the-Counter Bulletin Board bid quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual transactions. On December 31,
2010, 2009 and 2008, the last reported sale price for our common stock was $0.29, $1.23 and $0.47
per share, respectively.
Stockholders
As of March 10, 2011 we had approximately 212 holders of record of our common stock.
Dividends
We have paid no dividends on our common stock since our inception and may not do so in the
future.
Recent Sales of Unregistered Securities
Subsequent to year end, on January 5, 2011, we entered into a Stock Purchase Agreement (SPA)
with LDK Solar Co., Ltd. (LDK) in connection with the sale and issuance by the Company of
convertible Series A Preferred Stock and Common Stock. At the first closing on January 10, 2011,
we issued 42,835,947 shares of our common stock at $0.25 per share, receiving proceeds, net of
expenses of approximately $10,505,000. At the second closing, expected to occur before the end of
the second quarter of fiscal 2011, we will issue 20,000,000 shares of our Series A Preferred Stock
receiving proceeds of approximately $22,227,669.
On September 23, 2009 and October 2, 2009, we completed a private placement of 14,077,000
shares of restricted common stock at a purchase price of $1.00 per share to 31 accredited
investors. The shares were offered and sold by us in reliance on Section 506 of Regulation D of the
Securities Act, and comparable exemptions for sales under state securities laws.
On May 15, 2009, the Company issued 10,000 shares of its common stock pursuant to a resolution
of the Companys Board of Directors, on February 27, 2009, as compensation for services. The shares
were fair-valued at $0.75, the closing price of the Companys common stock on May 15, 2009 and the
Company recorded approximately $7,400 in expense related to this transaction.
16
The above offerings were offered and sold by us in reliance on Section 506 of Regulation D of
the Securities Act, and comparable exemptions for sales under state securities laws.
Securities Authorized for Issuance under Equity Compensation Plans
On November 15, 2006, subject to approval of the Stockholders, the Company adopted the 2006
Equity Incentive Plan reserving nine percent of the outstanding shares of common stock of the
Company (2006 Plan). On February 7, 2007, our stockholders approved the 2006 Plan reserving nine
percent of the outstanding shares of common stock of the Company pursuant to the Definitive Proxy
on Schedule 14A filed with the Commission on January 22, 2007.
As of December 31, 2010, we have outstanding 2,305,175 service-based and 200,000
performance-based stock options to purchase shares of our common stock issued under the 2006 Plan.
The service-based and performance-based options have an exercise price from $0.23 to $3.45 and are
subject to vesting schedules and terms. As of December 31, 2009, we had 2,494,400 service-based and
200,000 performance-based options. The following table provides aggregate information as of
December 31, 2010 with respect to all compensation plans (including individual compensation
arrangements) under which equity securities are authorized for issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Number of |
|
|
|
|
|
|
Number of securities |
|
|
|
securities to be |
|
|
|
|
|
|
remaining available for |
|
|
|
issued upon |
|
|
|
|
|
|
future issuance under |
|
|
|
exercise of |
|
|
Weighted-average |
|
|
equity compensation |
|
|
|
of outstanding |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
options, warrants |
|
|
outstanding options, |
|
|
securities reflected |
|
Plan Category |
|
and rights |
|
|
warrants and rights |
|
|
in column (a)) |
|
Equity Compensation Plans approved by security holders |
|
|
2,505,175 |
|
|
$ |
0.92 |
|
|
|
1,744,061 |
(1) |
Equity Compensation Plans not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,505,175 |
|
|
$ |
0.92 |
|
|
|
1,744,061 |
(1) |
|
|
|
(1) |
|
Includes number of shares of common stock reserved under the 2006 Equity Incentive Plan (the
Equity Plan) as of December 31, 2010, which reserves 9% of the outstanding shares of common
stock of the Company, plus outstanding warrants. |
Issuer Purchase of Equity Securities
None
ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights what we believe are the principal factors that have
affected our financial condition and results of operations as well as our liquidity and capital
resources for the periods described. This discussion should be read in conjunction with our
financial statements and related notes appearing elsewhere in this Annual Report. This discussion
contains forward-looking statements, which can be identified by the use of words such as
expects, plans, will, may, anticipates, believes, should, intends, estimates and
other words of similar meaning. These forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially from those expressed or implied by
these forward-looking statements. Such risks and uncertainties include, without limitation, the
risks described in Part I on page 3 of this Annual Report, and the risks described in Item 1A, Page
6 above.
The following discussion is presented on a consolidated basis, and analyzes our financial
condition and results of operations for the years ended December 31, 2010 and 2009.
Unless the context indicates or suggests otherwise reference to we, our, us and the
Company in this section refers to the consolidated operations of Solar Power, Inc.
Overview
We previously manufactured photovoltaic panels or modules and balance of system components in
our Shenzhen, China manufacturing facility, which operations were effectively closed in December
2010. We continue to manufacture balance of system
17
components, including our proprietary racking systems such as SkyMount and Peaq on an OEM basis. We sold these products through
three distinct sales channels: 1) direct product sales to international and domestic markets,
2) our own use in building commercial and residential solar projects in the U.S., and 3) our
authorized dealer network who sell our Yes! branded products in the U.S. and European residential
markets. In 2010 we discontinued our Yes! Authorized dealer network and Yes! branded products and
our residential installation business, as our strategy and focus shifted solely to commercial solar
and utility projects. In addition to our solar revenue, we generate revenue from our cable wire and
mechanical assembly business. Our cable, wire and mechanical assemblies products were also
manufactured in our China facility and sold in the transportation and telecommunications markets
and we will continue this business in China. We shut down our manufacturing operations because we
could not achieve scale with other solar manufacturing operations in China and we were able to
source modules at a price lower than our manufacturing costs from Chinese manufacturers with larger
scale operations. As part of this change in our strategy we sought and obtained a strategic
partner in China with large scale manufacturing operations. The strategic partner made a
significant investment in our business that provided significant working capital and broader
relationships that will allow us to more aggressively pursue commercial and utility projects in our
pipeline. This strategic partner strengthens our position in the solar industry. We maintain a
strategic office in Shenzhen China that is principally responsible for our ongoing procurement,
logistics and design support for our products, and data systems for monitoring and managing solar
energy facilities which we either own or maintain under operations and maintenance agreements.
Subsequent to year end, the investment by our strategic partner strengthened our balance sheet,
which will enable the acceleration of the development of our project pipeline, which primarily
consists of utility and commercial distributed generation systems. We now intend to aggressively
grow our pipeline in both the U.S. and European markets and accelerate our construction of multiple
projects simultaneously.
Business Development
Our Subsidiaries
Our business was conducted through our wholly-owned subsidiaries, SPIC, Inc. (SPIC), Yes!
Solar, Inc. (YES), Yes! Construction Services, Inc. (YCS), International Assembly Solutions,
Limited (IAS HK) and IAS Electronics (Shenzhen) Co., Ltd. (IAS Shenzhen). Beginning in 2010 and
continuing we are eliminating subsidiaries as we consolidate our business operations in the Company
as we focus more strategically commercial and utility construction projects.
Previously, SPIC and YCS were engaged in the business of design, sales and installation of
photovoltaic (PV) solar systems for commercial, industrial and residential markets. SPICs
commercial construction operations were combined with ours on January 1, 2010. We discontinued the
residential installation of YCS in October, 2010.
Previously, YES was engaged in the administration of our domestic dealer network and was
engaged in the sales and administration of franchise operations. In August 2009, due to general
economic conditions, YES discontinued the sale of franchises and converted its franchisees to
authorized Yes! branded product dealers. In August 2010, due to general economic conditions, YES
stopped its solicitation of new authorized dealers, and subsequently terminated all existing dealer
agreements.
The Company determined that discontinued operations treatment was not required due to
the fact that revenue generated from residential installations was included in its
photovoltaic installation, integration and sales segment and was not material to that segment or total revenue.
IAS HK was engaged in sales of our cable, wire and mechanical assemblies business and the
holding company of IAS Shenzhen. During 2010, the cable, wire and mechanical assemblies
customers were transitioned to Solar Power, Inc.
IAS Shenzhen was engaged in manufacturing our solar modules, our balance of solar system
products and cable, wire and mechanical assemblies through fiscal 2010 and currently facilitates
the manufacture of balance of systems products and cable, wire and mechanical assemblies products.
Critical Accounting Policies and Estimates
Inventories Certain factors could impact the realizable value of our inventory, so we
continually evaluate the recoverability based on assumptions about customer demand and market
conditions. The evaluation may take into consideration historic usage, expected demand, anticipated
sales price, product obsolescence, customer concentrations, product merchantability and other
factors. The reserve or write-down is equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those projected by
management, inventory reserves or write-downs may be required that could negatively impact our
gross margin and operating results.
18
Beginning on January 1, 2009, inventories are stated at the lower of cost or market,
determined by the first in first out cost method. Prior to January 1, 2009, inventories were
determined using the weighted average cost method. The conversion to first in first out cost method
had no material effect on the financial statements for the fiscal year ended December 31, 2009 as
or on prior fiscal years. Work-in-progress and finished goods inventories consist of raw materials,
direct labor and overhead associated with the manufacturing process. Provisions are made for
obsolete or slow-moving inventory based on management estimates. Inventories are written down based
on the difference between the cost of inventories and the net realizable value based upon estimates
about future demand from customers and specific customer requirements on certain projects.
Goodwill Goodwill resulted from our acquisition of Dale Renewables Consulting, Inc. We
perform a goodwill impairment test on an annual basis and will perform an assessment between annual
tests in certain circumstances. The process of evaluating the potential impairment of goodwill is
highly subjective and requires significant judgment at many points during the analysis. In
estimating the fair value of our business, we make estimates and judgments about our future cash
flows. Our cash flow forecasts are based on assumptions that are consistent with the plans and
estimates we use to manage our business.
Revenue recognition The Companys two primary business segments include photovoltaic
installation, integration and sales, and cable, wire and mechanical assemblies.
Photovoltaic Installation, integration and sales In our photovoltaic systems installation,
integration and sales segment, revenue on product sales is recognized when there is evidence of an
arrangement, title and risk of ownership have passed (generally upon delivery), the price to the
buyer is fixed or determinable and collectability is reasonably assured. Customers do not have a
general right of return on products shipped therefore we make no provisions for returns. During the
year ended December 31, 2009, the Company did recognize one product sale on a bill and hold
arrangement. In the 2009 instance, the customer requested that we store product to combine with a
subsequent order in order to reduce their transportation costs. Since all criteria for revenue
recognition had been met the Company recognized revenue on this sale. There were no bill and hold
sales outstanding at December 31, 2010 or 2009.
Revenue on photovoltaic system construction contracts is generally recognized using the percentage
of completion method of accounting. At the end of each period, the Company measures the cost
incurred on each project and compares the result against its estimated total costs at completion.
The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are
generally defined by the contract and as a result may not match the timing of the costs incurred by
the Company and the related recognition of revenue. Such differences are recorded as costs and
estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs
and estimated earnings on uncompleted contracts. The Company determines its customers credit
worthiness at the time the order is accepted. Sudden and unexpected changes in customers financial
condition could put recoverability at risk.
For the year ended December 31, 2009, the Company recognized revenue for one photovoltaic system
construction contract using the zero margin method of revenue recognition. In the third quarter of
2009, the Company recognized revenue of approximately $13,061,000 and gross profit of approximately
$3,209,000 related to this contract using the percentage-of-completion method of revenue
recognition. However, in the fourth quarter of 2009 the Company modified its revenue recognition
method on this contract to the zero margin method since the financing structure the customer had in
place to pay the outstanding balance on the contract did not fund as expected. The contract was for
approximately $19,557,000. As of December 31, 2009 the Company had recognized revenue on the
contract up to the incurred contract cost of approximately $14,852,000, deferring revenue of
approximately $4,563,000. In December 2009 the Company made certain guarantees to assist its
customer in obtaining financing for the contract. The Company recorded a liability at the estimated
fair value of approximately $142,000 related to these guarantees. At December 31, 2010 the fair
value of the guarantee, net of amortization was approximately $127,000. As of December 31, 2009,
the deferred revenue of $4,563,000 had been netted on our balance sheet against the note and
accounts receivable related to this contract. On December 22, 2010, the Company entered into a
Note Purchase and Sale Agreement discounting the note receivable and receiving a cash payment of
$1,000,000. The purchase price of the note was determined based on the present value of the
obligation over the likely repayment period, the risk involved with the payment of such term, and
the unsecured nature of the obligation, and the release of any claims against the Company by the
issuer of the note related to the finance structure and assumptions. As a result of the
transaction, the Company recognized approximately $464,000 of the revenue that had been previously
deferred and that as a result of the transaction there is no additional revenue to be recognized
and the note has been settled.
Additionally in 2009, for a separate construction contract the Company determined the use of the
completed contract method of revenue recognition was appropriate. At December 31, 2009 we have
recorded on our balance sheet approximately $5,557,000 of cost related to this contract in the
caption cost and estimated earnings in excess of billings on uncompleted contracts. In our second
fiscal quarter ended
19
June 30, 2010 it was determined that the customer was unable to perform on its
payment obligations under the contract. The Company took possession of the facility and its
related Power Purchase Agreement (PPA) in lieu of payment. The Company reclassified the amount
recorded in costs and estimated earnings in excess of billings on uncompleted contracts
(approximately $5,557,000) and the remaining costs to complete the contract (approximately
$4,459,000) to assets held for sale on its balance sheet. At December 31, 2010, value of the asset
held for sale on our balance sheet is approximately $6,669,000, the cost of the project
(approximately $10,016,000) less the Section 1603 grant-in-lieu of tax credits of approximately
$3,347,000.
In our solar photovoltaic business, contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Selling and general and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty provisions, and final
contract settlements may result in revisions to costs and income and are recognized in the period
in which the revisions are determined. Profit incentives are included in revenues when their
realization is reasonably assured.
The asset, Costs and estimated earnings in excess of billings on uncompleted contracts represents
revenues recognized in excess of amounts billed. The liability, Billings in excess of costs and
estimated earnings on uncompleted contracts, represents billings in excess of revenues recognized.
Cable, wire and mechanical assemblies In our cable, wire and mechanical assemblies business
the Company recognizes the sales of goods when there is evidence of an arrangement, title and risk
of ownership have passed, the price to the buyer is fixed or determinable and collectability is
reasonably assured. There are no formal customer acceptance requirements or further obligations
related to our assembly services once we ship our products. Customers do not have a general right
of return on products shipped therefore we make no provisions for returns. We make determination of
our customers credit worthiness at the time we accept their order.
Product Warranties We offer the industry standard of 20 years for our solar modules and
industry standard five (5) years on inverter and balance of system components. Due to the warranty
period, we bear the risk of extensive warranty claims long after we have shipped product and
recognized revenue. In our cable, wire and mechanical assemblies business, historically our
warranty claims have not been material. In our solar photovoltaic business our greatest warranty
exposure is in the form of product replacement. Until the third quarter of fiscal 2007, the Company
purchased its solar panels from third-party suppliers and since the third-party warranties are
consistent with industry standards we considered our financial exposure to warranty claims
immaterial. Since the Company does not have sufficient historical data to estimate its exposure, we
have looked to historical data reported by other solar system installers and manufacturers. In our
cable, wire and mechanical assemblies business our current standard product warranty for our
mechanical assembly product ranges from one to five years. The Company has provided a warranty
provision of approximately $296,000 and $503,000 for the years ended December 31, 2010 and 2009,
respectively.
Performance Guarantee
On December 18, 2009, the Company entered into a 10-year energy output guaranty related to the
photovoltaic system installed for Solar Tax Partners 1, LLC (STP) at the Aerojet facility in
Rancho Cordova, CA. The guaranty provided for compensation to STPs system lessee for shortfalls in
production related to the design and operation of the system, but excluding shortfalls outside the
Companys control such as government regulation. The Company believes that the probability of
shortfalls are unlikely and if they should occur be covered under the provisions of its current
panel and equipment warranty provisions.
The accrual for warranty claims consisted of the following at December 31, 2010 and 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
|
|
|
|
Beginning balance |
|
$ |
1,246 |
|
|
$ |
743 |
|
Provision charged to warranty expense |
|
|
296 |
|
|
|
503 |
|
Less: warranty claims |
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,542 |
|
|
$ |
1,246 |
|
|
|
|
Stock based compensation The Company accounts for stock-based compensation under the
provisions of FASB ASC 718 (Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment.) which requires the Company to measure the stock-based compensation costs of
share-based compensation arrangements based on the grant-date fair value and
20
recognizes the costs in the financial statements over the employee requisite service period.
Stock-based compensation expense for all stock-based compensation awards granted was based on the
grant-date fair value estimated in accordance with the provisions of FASB ASC 718. Prior to 2006
the Company had not issued stock options or other forms of stock-based compensation.
Determining the appropriate fair value model and calculating the fair value of share-based payment
awards require the input of highly subjective assumptions, including the expected life of the
share-based payment awards and stock price volatility. The assumptions used in calculating the fair
value of share-based payment awards represent managements best estimates, but these estimates
involve inherent uncertainties and the application of management judgment. As a result, if factors
change and we use different assumptions, our stock-based compensation expense could be materially
different in the future. In addition, we are required to estimate the expected forfeiture rate and
only recognize expense for those shares expected to vest. If our actual forfeiture rate is
materially different from our estimate, the stock-based compensation expense could be significantly
different from what we have recorded in the current period.
Allowance for doubtful accounts The Company regularly monitors and assesses the risk of not
collecting amounts owed to the Company by customers. This evaluation is based upon a variety of
factors including an analysis of amounts current and past due along with relevant history and facts
particular to the customer. It requires the Company to make significant estimates and changes in
facts and circumstances could result in material changes in the allowance for doubtful accounts. At
December 31, 2010 and 2009 the Company has an allowance of approximately $28,000 and $395,000,
respectively.
Income taxes We account for income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are determined based on differences between financial
reporting and tax reporting bases of assets and liabilities and are measured using enacted tax
rates and laws that are expected to be in effect when the differences are expected to reverse.
Realization of deferred tax assets is dependent upon the weight of available evidence, including
expected future earnings. A valuation allowance is recognized if it is more likely than not that
some portion, or all, of a deferred tax asset will not be realized. Should we determine that we
would be able to realize deferred tax assets in the future in excess of the net recorded amount, we
would record an adjustment to the deferred tax asset valuation allowance. This adjustment would
increase income in the period such determination is made.
Our operations include manufacturing activities outside of the United States. Profit from non-U.S.
activities is subject to local country taxes but not subject to United States tax until repatriated
to the United States. It is our intention to permanently reinvest these earnings outside the United
States. The calculation of tax liabilities involves dealing with uncertainties in the application
of complex global tax regulations. We recognize potential liabilities for anticipated tax audit
issues in the United States and other tax jurisdictions based on our estimate of whether, and the
extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be
unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the
period when we determine the liabilities are no longer necessary. If the estimate of tax
liabilities proves to be less than the ultimate tax assessment, a further charge to expense would
result.
Foreign currency translation The consolidated financial statements of the Company are
presented in U.S. dollars and the Company conducts substantially all of their business in U.S.
dollars.
All transactions in currencies other than functional currencies during the year are translated at
the exchange rates prevailing on the transaction dates. Related accounts payable or receivable
existing at the balance sheet date denominated in currencies other than the functional currencies
are translated at period end rates. Gains and losses resulting from the translation of foreign
currency transactions are included in income. Translations adjustments as a result of the process
of translating foreign financial statements from functional currency to U.S. dollars are disclosed
and accumulated as a separate component of equity.
Aggregate net foreign currency transaction expense included in the income statement was
approximately $1,025,000 and $91,000 for the years ended December 31, 2010 and 2009, respectively.
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 revenues and
expenses during the reporting period. Actual results could differ from those estimates.
21
Segment Information
The Companys two primary business segments include: (1) photovoltaic installation,
integration, and sales and (2) cable, wire and mechanical assemblies. Prior to the
quarter ended March 31, 2010, the Company operated in a third segment, franchise/product
distribution operations. During that quarter, the Company reorganized its internal reporting and
management structure, combining the operations of the franchise/product distribution segment with
its photovoltaic installation, integration and sales segment. Segment information for the twelve
months ended December 31, 2009 has been restated to give effect to this change. The Companys
reportable segments are strategic business units that offer different products and services. They
are managed separately because each business requires different technology and marketing
strategies.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies.
Recent Accounting Pronouncements
In January 2010, FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).
ASU 2010-06 amends Subtopic 820-10 requiring new disclosures for transfers in and out of Levels 1
and 2, activity in Level 3 fair value measurements, level of disaggregation and disclosures about
inputs and valuation techniques. The new disclosures and clarifications of existing disclosures
are effective for interim and annual reporting periods beginning after December 15, 2009, except
for disclosures about purchases, sales, issuances and settlements in the roll forward activity of
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The adoption of ASU 2010-06
had no impact on results of operations, cash flows or financial position.
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition Milestone Method (Topic
605). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the
milestones method of revenue recognition is appropriate. ASU 2010-17 is effective on a prospective
basis for fiscal years, and interim periods within those years, beginning on or after June 15,
2010. Early adoption is permitted. The Company expects that the adoption of ASU 2010-17 will have
no impact on results of operations, cash flows or financial position.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805). ASU 2010-29
specify that a public entity as defined by Topic 805, who presents comparative financial
statements, must disclose revenue and earnings of the combined entity as though the business
combination that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. ASU 2010-29 is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. Early adoption is permitted. The
Company expects that the adoption of ASU 2010-29 will have no impact on the results of operations,
cash flows or financial position.
In June 2009, FASB issued ASU 2009-16. ASU 2009-16 applies to all entities and is effective
for annual financial periods beginning after November 15, 2009 and for interim periods within those
years. Earlier application is prohibited. A calendar year-end company must adopt this statement as
of January 1, 2010. This statement retains many of the criteria of FASB ASC 860 (FASB 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities) to
determine whether a transfer of financial assets qualifies for sale accounting, but there are some
significant changes as discussed in the statement. Its disclosure and measurement requirements
apply to all transfers of financial assets occurring on or after the effective date. Its disclosure
requirements, however, apply to transfers that occurred both before and after the effective date.
In addition, because ASU 2009-16 eliminates the consolidation exemption for Qualifying Special
Purpose Entities, a company will have to analyze all existing QSPEs to determine whether they must
be consolidated under FASB ASC 810. The adoption of ASU 2009-16 had no impact on results of
operations, cash flows or financial position.
In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value. ASU
2009-05 applies to all entities that measure liabilities at fair value within the scope of FASB ASC
820, Fair Value Measurements and Disclosures. ASU 2009-05 is effective for the first reporting
period (including interim periods) beginning after issuance, October 1, 2009 for the Company. The
adoption of ASU 2009-05 had no impact on results of operations, cash flows or financial position.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU 2010-20 applies to all entities with
financing receivables, excluding short-term trade accounts receivable or receivables measured at
fair value or lower of cost or fair value. ASU 2010-20 is effective for interim and annual
reporting periods ending after December 15, 2010. The adoption of ASU 2010-20 did not have a
material impact on results of operations, cash flows or financial position.
22
In October 2009, the FASB ratified FASB ASU 2009-13 (the EITFs final consensus on Issue 08-1,
Revenue Arrangements with Multiple Deliverables). ASU 2009-13 is effective for fiscal years
beginning on or after June 15, 2010. Earlier adoption is permitted on a prospective or
retrospective basis. The Company does not anticipate the adoption of FASB ASC 605-25 to have an
impact on results of operations, cash flows or financial position.
In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (Topic 350).
ASU 2010-28 modify Step 1 of the goodwill impairment test for reporting units with zero or negative
carrying amounts. For those units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. ASU 2010-28 is
effective for fiscal years, and interim periods within those years, beginning after December 15,
2011. The Company expects that the adoption of ASU 2010-28 will have no material impact on results
of operations, cash flows or financial position.
Results of Operations
Comparison of the year ended December 31, 2010 to the year ended December 31, 2009
Net sales Net sales for the year ended December 31, 2010 decreased 35.2% to approximately
$34,036,000 from approximately $52,551,000 for the year ended December 31, 2009.
Net sales in the photovoltaic installation, integration and sales segment decreased 35.5% to
approximately $30,719,000 from approximately $47,623,000 for the year earlier comparative period.
The decrease in revenue was attributable to a decrease in product sales into the European market as
a result of the unfavorable effect of the decline in the Euro to the U.S. dollar and the inability
of the Company to sell its Aerojet 2 project resulting in the facility being held as an asset held
for sale on its balance sheet. The Company expects that its continued focus on distributed
generation and utility scale projects will result in increased revenues in fiscal 2011.
Net sales in the cable, wire and mechanical assemblies segment decreased 32.7% to
approximately $3,317,000 from approximately $4,928,000 for the year earlier comparative period.
This is the legacy segment of the Companys business. The Company expects to continue to service
the customers it has in this segment as it continues to concentrate on its solar segment, but is
not actively seeking new customers. The decrease in revenue is attributed to a decrease in demand
from existing customers and is expected to continue to fluctuate in fiscal 2011.
Cost of goods sold Cost of goods sold were approximately $29,282,000 (86.0% of net sales)
and approximately $45,788,000 (87.1% of net sales) for the years ended December 31, 2010 and 2009,
respectively.
Cost of goods sold in the photovoltaic installation, integration and sales segment was
approximately $27,020,000 (88.0% of sales) for the year ended December 31, 2010 compared to
approximately $42,660,000 (89.6% of net sales) for the year ended December 31, 2009. The decrease
in costs of goods sold was a direct result in decreased net sales in this segment. The Company
expects that costs will remain stable at current levels in fiscal 2011, with gross margins
remaining stable.
Cost of goods sold in the cable, wire and mechanical assembly segment were approximately
$2,262,000 (68.2% of net sales) for the year ended December 31, 2010 compared to approximately
$3,129,000 (63.5% of net sales) for the year ended December 31, 2009. The increase as a percentage
of net sales is attributable to product mix and increase in the copper wire component of our material
costs, a key component in the cable wire segment. The Company expects margins to remain stable in
this segment.
General and administrative expenses General and administrative expenses were approximately
$7,578,000 for the year ended December 31, 2010 and approximately $8,849,000 for the year ended
December 31, 2009 a decrease of 14.4%. As a percentage of net sales, general and administrative
expenses were 22.3% and 16.8%, for the years ended December 31, 2010 and 2009, respectively. The
Company initiated significant cost reduction efforts in the third and fourth quarters of fiscal
2010 and expects to maintain those levels in fiscal 2011. Significant elements of general and
administrative expenses for the year ended December 31, 2010 include employee related expense of
approximately $3,342,000, information technology costs of approximately $194,000, insurance costs
of approximately $261,000, professional and consulting fees of approximately $1,473,000, rent of
approximately $310,000, travel and lodging costs of $131,000, stock compensation expense of
$162,000 and bad debt expense of $523,000. The bad debt expense pertains primarily to one
uncollectable product sale.
23
Significant elements of general and administrative expenses for the year ended December 31,
2009 include employee related expense of approximately $4,600,000, information technology costs of
approximately $177,000, insurance costs of approximately $195,000, professional and consulting fees
of approximately $1,106,000, rent of approximately $528,000, travel and lodging costs of $171,000,
stock compensation expense of $536,000 and bad debt expense of $418,000. The bad debt expense
pertains primarily to one commercial installation project on which the owner was unable to complete
financing on the project and uncollectable product sales.
Sales, marketing and customer service expense Sales, marketing and customer service
expenses were approximately $3,652,000 for the year ended December 31, 2010 and $3,841,000 for the
year ended December 31, 2009. As a percentage of net sales, sales, marketing and customer service
expenses were 10.7% and 7.3% for the years ended December 31, 2010 and 2009, respectively. The
decrease in cost is primarily due to decreases in advertising and trade show costs. Significant
elements of sales, marketing and customer service expense for the year ended December 31, 2010 were
payroll related expenses of approximately $1,773,000, advertising and trade show expenses of
approximately $185,000, commission expense of approximately $809,000 stock-based compensation costs
of approximately $84,000, business development costs of approximately $119,000 and travel and
lodging costs of approximately $109,000.
Significant elements of sales, marketing and customer service expense for the year ended
December 31, 2009 were payroll related expenses of approximately $1,695,000, advertising and trade
show expenses of approximately $311,000, commission expense of approximately $461,000 stock-based
compensation costs of approximately $136,000, franchise conversion costs of approximately $309,000
and travel and lodging costs of approximately $135,000.
Engineering, design and product management expense Engineering, design and product
management expenses were approximately $947,000 and $939,000 for the year ended December 31, 2010
and 2009, respectively. As a percentage of net sales, product development expenses were 2.8% and 1.8%
for the years ended December 31, 2010 and 2009, respectively. Significant elements of engineering,
design and product management expense for the year ended December 31, 2010 were payroll and related
expenses of approximately $599,000, product certification and testing of approximately $159,000 and
stock-based compensation expense of $60,000. The Company expects these expenses to continue in
2011.
Significant elements of engineering, design and product management expense for the year ended
December 31, 2009 were payroll and related expenses of approximately $478,000, product
certification and testing of approximately $377,000 and stock-based compensation expense of
$37,000.
Interest income / expense Interest expense, net was approximately $450,000 and $37,000 for
the years ended December 31, 2010 and 2009, respectively. Interest expense, net consisted primarily
of approximately $188,000 paid on the loan securing our power generating facility at Aerojet,
approximately $29,000 paid on our installment loans and capital leases and approximately $233,000
of finance charges on the Companys accounts payable to cell vendors.
Interest expense, net consisted of interest income of approximately $6,000 from earnings on
the Companys idle cash, approximately $6,000 from earnings on a note receivable, offset by
interest expense of approximately $49,000 on the Companys short term borrowings in fiscal year
2009.
Other income / expense Other expense, net was approximately $1,138,000 and approximately
$21,000 for the years ended December 31, 2010 and 2009,
respectively. In 2010, other income, net consisted
primarily of income related to a government stimulus of approximately $70,000 from the Chinese
government, other income of approximately $6,000 and expenses of $1,000 related to the sub-lease of
the Companys retail outlet, approximately $142,000 of costs related to the preliminary design of a
new factory facility and currency exchange losses of approximately $1,071,000.
In
2009, other expense, net consisted primarily of income related to a government stimulus of
approximately $87,000 from the Chinese government and expenses of $16,000 related to the sub-lease
of the Companys former corporate headquarters and currency exchange losses of approximately
$92,000 in fiscal 2009.
Net loss Net loss was approximately $8,870,000 and $6,970,000 for the years ended December
31, 2010 and 2009, respectively. The decreased revenue from our photovoltaic installation,
integration and sales segment was the driver of the increased operating loss in 2010. The Company
expects that it will be profitable in fiscal 2011.
24
Liquidity
A summary of the sources and uses of cash and cash equivalents is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in thousands) |
|
2010 |
|
|
2009 |
|
| | |
Net cash used in operating activities |
|
$ |
(3,947 |
) |
|
$ |
(15,572 |
) |
Net cash used in by investing activities |
|
|
(63 |
) |
|
|
(53 |
) |
Net cash provided by financing activities |
|
|
2,333 |
|
|
|
12,849 |
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(1,677 |
) |
|
$ |
(2,776 |
) |
|
|
|
From our inception until the closing of our private placement on October 4, 2006, we
financed our operations primarily through short-term borrowings. We received net proceeds of
approximately $14,500,000 from the private placement made by Solar Power, Inc., a Nevada
corporation (formerly Welund Fund, Inc.) when we completed our reverse merger with them in December
2006.
In December 2007, we completed a private placement of 4,513,911 shares of our common stock
with proceeds of approximately $10,185,000, net of expenses of approximately $1,551,000.
In October 2009, we completed a private placement of 14,077,000 shares of our common with
proceeds of approximately $12,867,000, net of expenses of approximately $1,211,000
As of December 31, 2010, we had approximately $1,441,000 in cash and cash equivalents and as
of December 31, 2009, we had approximately $3,136,000 in cash and cash equivalents. This change in
cash and cash equivalents is primarily attributable to cash used in operating activities offset by
cash generated from financing activities.
Net cash used in operating activities of approximately $3,947,000 for the year ended December
31, 2010 was a result of a net loss of approximately $8,870,000, offset by non-cash items included
in net loss, consisting of depreciation of approximately $526,000, amortization of loan fees of
approximately $5,000, warranty provision of approximately $296,000, stock-based compensation
expense of approximately $306,000, bad debt expense of approximately $523,000, an income tax
benefit of approximately $141,000 and loss on disposal of fixed assets of approximately $21,000.
Cash used in operations also included a decrease in accounts and related notes receivable of
approximately $11,474,000 primarily related to collections from a construction contract for which
we used the zero margin method of revenue recognition, decrease in costs and estimated earnings in
excess of billings on uncompleted projects of approximately $18,000 related to the construction
project we now carry as an asset held for sale, decreases in inventories of approximately
$1,126,000 primarily due to decreases in raw material and finished goods inventory, increase in an
asset held for sale of approximately $1,112,000 related to our assumption of the contract for the
Aerojet 2 project, decreases in prepaid expenses and other current assets of approximately $821,000
due to decreased supplier deposits at our PRC manufacturing facility, increases in deferred
revenues of approximately $35,000 from the billings in advance of our asset management services, a
decrease in accounts payable of approximately $10,055,000 related to payment on our accounts
payable, decreases in accrued liabilities of approximately $420,000 for our solar project
development activities, increase in our billings in excess of costs and estimated earnings on
uncompleted contracts of approximately $1,613,000 due to prepayment from our development contracts
and decreases in income taxes payable of approximately $113,000 due to estimated tax payments
required at our Hong Kong subsidiary. As we continue to seek out and undertake larger solar system
projects we anticipate that the cash provided by or used in operating activities will continue to
be significantly influenced by the payment terms of our projects and the financing terms provided
to us by our solar cell vendors.
Net cash used in operating activities of approximately $15,572,000 for the year ended December
31, 2009 was a result of a net loss of approximately $6,970,000, offset by non-cash items included
in net loss, consisting of depreciation of approximately $827,000, stock-based compensation expense
of approximately $709,000, bad debt expense of approximately $418,000, stock issued for services of
approximately $127,000. Cash used in operations also included an increase in accounts and related
notes receivable of approximately $15,394,000 primarily related to a construction contract for
which we used the zero margin method of revenue recognition, increase in costs and estimated
earnings in excess of billings on uncompleted projects of approximately $7,506,000 related to two
construction contracts, increases in inventories of approximately $546,000 primarily due to raw
material purchases required by one cable, wire and mechanical assemblies customer, increases in
prepaid expenses and other current assets of approximately $363,000 due to increased supplier
deposits at our PRC manufacturing facility, and decreases in deferred revenues of approximately
$125,000 from the conversion of our franchise operations to an authorized dealer network, offset by
an increase in accounts payable of approximately $12,194,000 related to extended payment terms from our solar
cell vendors, and increases in accrued liabilities of approximately $1,005,000 for our solar
project development activities.
25
Net cash used in investing activities of approximately $63,000 for the year ended December 31,
2010 primarily related to acquisition of property and equipment.
Net cash used in investing activities of approximately $53,000 for the year ended December 31,
2009 primarily relates to acquisition of property and equipment.
Net cash generated from financing activities of approximately $2,333,000 for the year ended
December 31, 2010 was a result of approximately $3,899,000 generated from loan proceeds from the
financing of our Aerojet 2 solar facility by our subsidiary, Solar Tax Partners 2, LLC, offset by
an increase in restricted cash of approximately $1,064,000 primarily related to reserves required
by our lender, principal payments on notes and capital leases payable of approximately $400,000 and
prepayment of loan fees of approximately $102,000.
Net cash generated from financing activities of approximately $12,849,000 for the year ended
December 31, 2009 was a result of approximately $12,943,000 generated from net proceeds of our
private placement of 14,077,000 shares of our common stock and exercise of stock options, decrease
in restricted cash of approximately $247,000 collateralizing our letters of credit and ACH
transactions, offset by approximately $341,000 in principal payments on notes and capital leases
payable.
Capital Resources and Material Known Facts on Liquidity
In the short-term we do not expect any material change in the mix or relative cost of our
capital resources. As of December 31, 2010, we had approximately $1,441,000 in cash and cash
equivalents, approximately $1,344,000 of restricted cash held in our name in interest bearing
accounts consisting of approximately $285,000 with the lender financing our power generation
facility and approximately $1,004,000 held by the lender of our customer as collateral for such
loan, approximately $35,000 held by our bank as collateral for our merchant account transactions
and approximately 20,000 as collateral for a credit card issued to the Company, accounts receivable
of approximately $5,988,000 and costs and estimated earnings in excess of billings on uncompleted
contracts of approximately $2,225,000. Our focus will be to continue development and manufacturing
of our solar modules and racking systems.
The current economic conditions of the U.S. market, coupled with reductions of solar
incentives in Europe have presented challenges to us in generating the revenues and or margins
necessary for us to create positive working capital. While our sales pipeline of solar system
construction projects continues to grow such projects encumber associated working capital until
project completion or earlier customer payment, and our revenues are highly dependent on third
party financing for these projects. As a result, revenues remain difficult to predict and we cannot
assure shareholders and potential investors that we will be successful in generating positive cash
from operations. Knowing that revenues are unpredictable, our strategy has been to manage spending
tightly by reducing to a core group of employees in our China and U.S. offices, and to outsource
the majority of our construction workforce.
Over the past three years we have sustained losses from operations and have relied on equity
financing to provide working capital. We have been actively working with additional potential
investors to ensure that we have additional equity available to us as needed. In addition, we are
working on sources of project financing as well as asset backed credit facilities. The issues
involved with closing and receiving payment on two major projects (Aerojet 1 and Aerojet 2) have
severely hindered the Companys ability to create and leverage working capital. The Company had an
outstanding receivable of approximately $9 million dollars from its customer, Solar Tax Partners 1,
LLC (STP1) on the Aerojet 1 project for the first eight months or 2010 which it originally
expected to collect in December, 2009. The impact of waiting for that working capital required the
Company to optimize cash on hand and negotiate extended terms with our suppliers resulting in
increased accounts payable. The limits on available working capital caused by these events and
inability to obtain additional credit from our suppliers impacted the Companys ability to start
and complete projects per original schedules. The inability of our customer to complete its
purchase of the Aerojet 2 project, resulting in the Company taking possession of the project and
recording it as an asset held for sale caused further constraints on our working capital. The
company received payment for the majority of the outstanding receivable due on Aerojet 1 from STP1
in August 2010, allowing the Company to satisfy obligations to suppliers and enabled more effective
management working capital. To mitigate future impact on working capital requirements the Company
is planning to finance future projects through construction financing or payment terms from the end
customer.
26
We believe the funds generated by the collection of our accounts receivable, notes receivable
and costs and estimated earnings in excess of billings on uncompleted contracts, the anticipated
revenues of our operations, the sale of our asset held for sale and reductions in operating
expenses, continued management of our supply chain, and potential funds available to us through
debt and equity financing, are adequate to fund our anticipated cash needs through the next twelve
months. We anticipate that we will retain all earnings, if any, to fund future growth in the
business. Although we believe we have effectively implemented cash management controls to meet
ongoing obligations, there are no assurances that we will not be required to seek additional
working capital through debt or equity offerings. If such additional working capital is required,
there are no assurances that such financing will be available on favorable terms to the Company, if
at all.
Additionally, subsequent to year end, on January 5, 2011, we entered into a Stock Purchase
Agreement (SPA) with LDK Solar Co., Ltd. (LDK) in connection with the sale and issuance by the
Company of convertible Series A Preferred Stock and Common Stock. At the first closing on January
10, 2011, we issued 42,835,947 shares of our common stock at $0.25 per share and received proceeds
net of expenses of approximately $10,505,000. At the second closing, expected to occur before the
end of the first quarter of 2011, we will issue 20,000,000 shares of our Series A Preferred Stock
receiving proceeds of approximately $22,228,000.
Contractual Obligations
Letters of Credit At December 31, 2009, the Company had outstanding standby letters
of credit of approximately $225,413 as collateral for its capital lease. The standby letter of
credit is issued for a term of one year, mature beginning in September 2009 and the Company paid
one percent of the face value as an origination fee. These letters of credit are collateralized by
$255,000 of the Companys cash deposits. In July, 2010, the Company made the final payment on the
capital lease, the letter of credit was released and the restricted cash deposit collateralizing
the lease was released.
Guaranty On December 22, 2009, in connection with an equity funding of our
customer, Solar Tax Partners 1, LLC (STP1), of the Aerojet I project, the Company along with the
STP1s other investors entered into a Guaranty (Guaranty) to provide the equity investor,
Greystone Renewable Energy Equity Fund (Greystone), with certain guarantees, in part, to secure
investment funds necessary to facilitate STPs payment to the Company under the Engineering,
Procurement and Construction Agreement (EPC). Specific guarantees made by the Company include the
following in the event of the other investors failure to perform under the operating agreement:
|
|
|
Recapture Event The Company shall be responsible for providing Greystone with payments
for losses due to any recapture, reduction, requirement to repay, loss or disallowance of
certain tax credits (Energy Credits under Section 48 of Code) or Cash Grant (any payment
made by US Dept. of Treasure under Section 1603 of the ARRT of 2009) or if the actual Cash
Grant received by Master Tenant is less that the Anticipated Cash Grant (equal to
$6,900,000); |
|
|
|
|
Repurchase obligation If certain criteria occur prior to completion of the Facility,
including event of default, if the managing member defaults under the operating agreement or
the property or project are foreclosed on, or if the property qualifies for less than 70% of
projected credits (computed as an attachment to Master Tenants operating agreement), SPI
would be required to fund the purchase of Greystones interest in Master Tenant if the
managing member failed to fund the repurchase; |
|
|
|
|
Fund Excess Development Costs The Company would be required to fund costs in excess of
certain anticipated development costs; |
|
|
|
|
Operating Deficit Loans The Company would be required to loan Master Tenant or STP1
monies necessary to fund operations to the extent costs could not be covered by Master
Tenants or STP1s cash inflows. The loan would be subordinated to other liabilities of the
entity and earn no interest; and |
|
|
|
|
Exercise of Put Options At the option of Greystone, the Company may be required to
fund the purchase by managing member of Greystones interest in Master Tenant under an
option exercisable for 9 months following a 63 month period commencing with operations of
the Facility. The purchase price would be equal to the greater of the fair value of
Greystones equity interest in Master Tenant or $951,985. |
27
Guaranty provisions related to the Recapture Event, Repurchase Obligation and Excess Development
Costs guarantees have effectively expired or were no longer applicable as of December 31, 2009.
This is because the trigger event for the Companys potential obligation has either lapsed or been
negated. The Company determined that the fair value of such guarantees was immaterial.
At December 31, 2009, the Company recorded on its balance sheet, the fair value of the remaining
guarantees, at their estimated fair value of $142,000. At December 31, 2010 the amount recorded on
the Companys balance sheet was approximately $127,000, net of amortization.
Operating leases The Company leases premises under various operating leases which
expire through 2012. Rental expenses under operating leases included in the statement of operations
were approximately $703,000 and $806,000 for the years ended December 31, 2010 and 2009,
respectively.
Our manufacturing facilities consist of 123,784 square feet, including 101,104 square feet of
factories and 23,680 square feet of dorms, situated in an industrial suburb of Shenzhen, Southern
China known as Long Gang. Only the state may own land in China. Therefore, we lease the land under
our facilities, and our lease agreement gives us the right to use the land until December 31, 2010
at an annual rent of $229,134. We have an option to renew this lease for 2 additional years on the
same terms. While we continue to operate our manufacturing in the existing facility, we are
actively seeking alternatives that will provide lower cost, higher quality or other incentives that
may benefit the company. The Company did not exercise its option to renew the lease at December 31,
2010 but continues to occupy the facility on a month-to-month tenancy.
On December 1, 2010 we leased approximately 3,900 square feet of office space to accommodate
our support services operations in Shenzhen, China. The tem of the lease is three years and
expires on November 30, 2013 at an annual rent of approximately $38,334.
Our corporate headquarters are located in Roseville, California in a space of approximately
19,000 square feet. The five year lease commenced on August 1, 2007 and expires in July 2012. The
rent is currently $342,972 per year for the first year, $351,540 for the second year, $360,336 for
the third year, $369,336 for the fourth year and $378,576 for the remainder of the lease. The
Company has an option to renew for an additional five years.
Our retail outlet is located in Roseville, California in a space of approximately 2,000 square
feet. The five year lease commenced in October 2007 and expires in December 2012. The rent is
currently $79,426 per year and increase to $84,252 in the fifth year. The Company has an option to
renew for an additional five years. In October 2010, in conjunction with the discontinuance of our
residential installation business, we closed our retail outlet. The premises are currently
subleased at a monthly rent equal to our leasing costs of the premises.
The Company is obligated under operating leases requiring minimum rentals as follows (in
thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
499 |
|
2012 |
|
|
316 |
|
2013 |
|
|
|
|
|
|
|
|
Total minimum payments |
|
$ |
815 |
|
|
|
|
|
The Company receives rental income from a sublease of its former retail outlet which offsets rental expense.
The Company was obligated under loans payable requiring minimum payments as follows (in thousands):
|
|
|
|
|
Years ending December 31, |
|
2011 |
|
$ |
3,804 |
|
2012 |
|
|
5 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
3,809 |
|
Less current portion |
|
|
(3,804 |
) |
|
|
|
|
Long-term portion |
|
$ |
5 |
|
|
|
|
|
The loans payable are collateralized by trucks used in the Companys solar photovoltaic
business, bear interest rates between 1.9% and 2.9% and are payable over sixty months and our
wholly-owned subsidiary, Solar Tax Partners 2, LLCs power generating facility, bearing interest at
8% and is payable over 120 months. The primary asset is a power generating facility recorded as an asset held for sale which is discussed in Note 13
above. The note payable of $3,782,000 has been recorded as a current liability in the December 31, 2010 balance
sheet since if the facility is sold the Loan could contractually be required to be paid and the facility is expected to be
sold in twelve months.
28
The Company leases equipment under capital leases. The leases expire from 2012 to 2013. The
Company was obligated for the following minimum payments under these leases (in thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
7 |
|
2012 |
|
|
6 |
|
2013 |
|
|
2 |
|
Less amounts representing interest |
|
|
(3 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
12 |
|
Less current portion |
|
|
(4 |
) |
|
|
|
|
Long-term portion |
|
$ |
8 |
|
|
|
|
|
Restricted Cash At December 31, 2010, the Company had restricted bank deposits of
approximately $1,344,000. The restricted bank deposits consist of approximately $1,004,000 as a
reserve pursuant to our guarantees of our customer Solar Tax Partners 1, LLC with the bank
providing the debt financing on their solar generating facility (subsequent to year end, our
customer STP1 refinanced this project reducing our reserve requirement to $400,000), approximately
$285,000 as a reserve pursuant to our loan agreement with the bank providing the debt financing for
the solar generating facility owned by our subsidiary, Solar Tax Partners 2, LLC, approximately
$20,000 securing our corporate credit card and approximately $35,000 as retention by our bank for
our merchant credit card services. At December 31, 2009, the Companys restricted bank deposits
were $280,000 as collateral for the outstanding letter of credits in the amount of $255,000 and the
Company bank credit card of $25,000.
Legal Proceeding -Subsequent to fiscal year end, on January 25, 2011, a putative
class action was filed by William Rogers against the Company, the Companys directors Stephen C.
Kircher, Francis Chen, Timothy B. Nyman, Ronald A. Cohan, D. Paul Regan, and LDK Solar Co., Ltd.
(LDK), in the Superior Court of California, County of Placer. The complaint alleges violations
of fiduciary duty by the individual director defendants concerning a proposed transaction announced
on January 6, 2011, pursuant to which defendant LDK agreed to acquire 70% interest in the Company.
Plaintiff contends that the independence of the individual director defendants was compromised
because they are allegedly beholden to defendant LDK for continuation of their positions as
directors and possible future employment. Plaintiff further contends that the proposed transaction
is unfair because it allegedly contains onerous and preclusive deal protection devices, such as no
shop, standstill and no solicitation provisions and a termination fee that operates to effectively
prevent any competing offers. The complaint alleges that the Company aided and abetted the
breaches of fiduciary duty by the individual director defendants by providing aid and assistance.
Plaintiff asks for class certification, the enjoining of the sale, or if the sale is completed
prior to judgment, rescission of the sale and damages.
The case is in its early stages and the Company is gathering facts and information to refute
the applicants claims. The Company intends to vigorously defend this action. Because the
complaint was recently filed, it is difficult at this time to fully evaluate the claims and
determine the likelihood of an unfavorable outcome or provide an estimate of the amount of any
potential loss. The Company does have insurance coverage for this type of action.
Off-Balance Sheet Arrangements
At December 31, 2010 and 2009, we did not have any transactions, obligations or relationships
that could be considered off-balance sheet arrangements.
ITEM 8 FINANCIAL STATEMENTS
The Financial Statements that constitute Item 8 are included at the end of this report
beginning on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
29
Item 9A CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide
assurance that the information required to be disclosed in the reports filed or submitted
under the Exchange Act is recorded, processed, summarized, and reported within the time
periods required by the Securities and Exchange Commission. An evaluation of the effectiveness
of the design and operations of the Companys disclosure controls and procedures at the end of
the period covered by this report was carried out under the supervision and with the participation
of the management of Solar Power, Inc., including the Chief Executive Officer and the Chief
Financial Officer. Based on such an evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded the Companys disclosure controls and procedures were effective as
of the end of such period.
Managements Report on Internal Control over Financial Reporting
Solar Power, Inc. is responsible for the preparation, integrity, and fair presentation of the
consolidated financial statements included in this annual report. The consolidated financial
statements and notes included in this annual report have been prepared in conformity with
United States generally accepted accounting principles and necessarily include some amounts
that are based on managements best estimates and judgments.
We, as management of Solar Power, Inc., are responsible for establishing and maintaining
effective internal control over financial reporting that is designed to produce reliable
financial statements in conformity with United States generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that pertain to
the maintenance of records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the Company; provide reasonable assurance that the transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles; provide a reasonable assurance that receipts and expenditures of the
company are only being made in accordance with authorizations of management and directors of the Company;
and provide a reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the Companys assets that could have a material effect on the financial statements.
The system of internal control over financial reporting as it relates to the financial statements is
evaluated for effectiveness by management and tested for reliability through a program of internal audits.
Actions are taken to correct potential deficiencies as they are noted.
Any system of internal control, no matter how well designed, has inherent limitations, including the
possibility that a control can be circumvented or overridden and misstatements due to error or fraud
may occur and not be detected. Also, because of changes in conditions, internal control effectiveness
may vary over time. Accordingly, even an effective system of internal control will provide only
reasonable assurance with respect to financial statement preparation.
Management assessed the Companys system of internal control over financial reporting as of
December 31, 2010, in relation to the criteria for effective control over financial reporting
as described in Internal Control Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management concludes that,
as of December 31, 2010, its system of internal control over financial reporting is effective
and meets the criteria of the Internal Control Integrated Framework.
This annual report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial reporting.
Managements report is not subject to attestation by the Companys independent registered
public accounting firm pursuant to rules of the Securities and Exchange Commission that
permit the Company to provide only managements report in this Annual Report.
No changes were made in Managements internal control over financial reporting during the
three months ended December 31, 2010 that have materially affected, or that are reasonably likely
to materially affect, Managements internal control over financial reporting.
30
ITEM 9B OTHER INFORMATION
None
31
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be included in and is hereby incorporated by
reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders.
We have adopted a Code of Ethics applicable to all employees including our CEO and CFO.
A copy of the Code of Ethics is available at
www.solarpowerinc.net.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in and is hereby incorporated by
reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be included in and is hereby incorporated by reference
from our Proxy Statement for the 2010 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be included in and is hereby incorporated by reference
from our Proxy Statement for the 2010 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be included in and is hereby incorporated
by reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders.
32
PART IV
ITEM 15 EXHIBITS
|
|
|
Exhibit No. |
|
Description |
2.1
|
|
Agreement and Plan of Merger dated as of January 25, 2006 between Welund Fund, Inc. (Delaware) and Welund
Fund, Inc. (Nevada) (1) |
|
|
|
2.2
|
|
Agreement and Plan of Merger by and among Solar Power, Inc., a California corporation, Welund Acquisition
Corp., a Nevada corporation, and Welund Fund, Inc. a Nevada corporation dated as of August 23, 2006(2) |
|
|
|
2.3
|
|
First Amendment to Agreement and Plan of Merger dated October 4, 2006(3) |
|
|
|
2.4
|
|
Second Amendment to Agreement and Plan of Merger dated December 1, 2006(4) |
|
|
|
2.5
|
|
Third Amendment to Agreement and Plan of Merger dated December 21, 2006(5) |
|
|
|
2.6
|
|
Agreement of Merger by and between Solar Power, Inc., a California corporation, Solar Power, Inc., a Nevada
corporation and Welund Acquisition Corp., a Nevada corporation dated December 29, 2006(7) |
|
|
|
2.7
|
|
Agreement of Merger by and between Solar Power, Inc., a Nevada corporation and Solar Power, Inc., a California
corporation, dated February 14, 2007 (6) |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation(6) |
|
|
|
3.2
|
|
Bylaws(6) |
|
|
|
3.3
|
|
Specimen (7) |
|
|
|
3.4
|
|
Certificate of Determination of Rights, Preferences, Privileges and Restrictions of the Series A Preferred
Stock of Solar Power (12) |
|
|
|
10.1
|
|
Form of Securities Purchase Agreement, by and among Solar
Power, Inc. and the purchasers named therein (9) |
|
|
|
10.2
|
|
Form of Registration Rights Agreement, by and among Solar Power,
Inc. and the purchasers named therein (9) |
|
|
|
10.3
|
|
Loan Agreement with Five Star Bank dated June 1, 2010 (10) |
|
|
|
10.4
|
|
Deposit Account Pledge Agreement dated June 22, 2010 (11) |
|
|
|
10.5
|
|
Intercreditor Agreement dated June 22, 2010 (11) |
|
|
|
10.6
|
|
Acknowledgment, Confirmation and Estoppel dated June 22, 2010 (11) |
|
|
|
10.7
|
|
Continuing Guaranty by Steven C. Kircher dated June 22, 2010 (11) |
|
|
|
10.8
|
|
Continuing Guaranty by Kircher Family Irrevocable Trust dated June 22, 2010 (11) |
|
|
|
10.9
|
|
Stock Pledge Agreement by Kircher Family Irrevocable Trust dated June 22, 2010 (11) |
|
|
|
10.10
|
|
Stock Purchase Agreement with LDK Solar Co., Ltd. dated January 5, 2010 (12) |
|
|
|
10.11
|
|
Form of Lock-up Agreements (12) |
|
|
|
10.12
|
|
Voting Agreement (Steven C. Kircher) dated January 5, 2010 (12) |
|
|
|
10.13
|
|
2006 Equity Incentive Plan (7) |
|
|
|
10.14
|
|
Form of Nonqualified Stock Option Agreement(7) |
|
|
|
10.15
|
|
Form of Restricted Stock Award Agreement(7) |
33
|
|
|
|
|
|
14.1
|
|
Code of Ethics (13) |
|
|
|
21.1
|
|
List of Subsidiaries(14) |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm Perry-Smith, LLP* |
|
|
|
23.2
|
|
Consent of Independent Registered Public Accounting Firm Macias Gini & OConnell, LLP* |
|
|
|
31.1
|
|
Rule 13(a) 14(a)/15(d) 14(a) Certification (Principal Executive Officer)* |
|
|
|
31.2
|
|
Rule 13(a) 14(a)/15(d) 14(a) Certification (Principal Financial Officer)* |
|
|
|
32
|
|
Section 1350 Certifications* |
Footnotes to Exhibits Index
(1) |
|
Incorporated by reference to Form 8-K filed with the SEC on February 3, 2006. |
|
(2) |
|
Incorporated by reference to Form 8-K filed with the SEC on August 29, 2006. |
|
(3) |
|
Incorporated by reference to Form 8-K filed with the SEC on October 6, 2006. |
|
(4) |
|
Incorporated by reference to Form 8-K filed with the SEC on December 6, 2006. |
|
(5) |
|
Incorporated by reference to Form 8-K filed with the SEC on December 22, 2006. |
|
(6) |
|
Incorporated by reference to Form 8-K filed with the SEC on February 20, 2007. |
|
(7) |
|
Incorporated by reference to the Form SB-2 filed with the SEC on January 17, 2007. |
|
(8) |
|
(Reserved) |
|
(9) |
|
Incorporated by reference to Form 8-K filed with the SEC on September 23, 2009. |
|
(10) |
|
Incorporated by reference to Form 8-K filed with the SEC on June 7, 2010. |
|
(11) |
|
Incorporated by reference to Form 8-K filed with the SEC on August 4, 2010. |
|
(12) |
|
Incorporated by reference to Form 8-K filed with the SEC on January 6, 2011. |
|
(13) |
|
Incorporated by reference to Form 10KSB filed with the SEC on April 16, 2007 |
|
(14) |
|
Incorporated by reference to the Pre-Effective Amendment No. 1 to Form SB-2 filed with the
SEC on March 6, 2007 |
34
SIGNATURES
In accordance with Section 13 or 15(d) 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.
|
|
|
|
|
|
SOLAR POWER, INC.
|
|
March 14, 2011 |
/s/ Stephen C. Kircher
|
|
|
By: Stephen C. Kircher |
|
|
Its: Chief Executive Officer and Chairman of the
Board (Principal Executive Officer) |
|
|
|
|
|
March 14, 2011 |
/s/ Joseph G. Bedewi
|
|
|
By: Joseph G. Bedewi |
|
|
Its: Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer) |
|
|
Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated:
|
|
|
|
|
Signature |
|
Capacity |
|
Date |
|
|
|
|
|
/s/ Stephen C. Kircher
Stephen C. Kircher
|
|
Director
|
|
March 14, 2011 |
|
|
|
|
|
|
|
Director
|
|
March 14, 2011 |
Xiaofeng Peng |
|
|
|
|
|
|
|
|
|
/s/ Jack K. Lai
Jack K. Lai
|
|
Director
|
|
March 14, 2011 |
|
|
|
|
|
/s/ Ronald A. Cohan
Ronald A. Cohan
|
|
Director
|
|
March 14, 2011 |
|
|
|
|
|
|
|
Director
|
|
March 14, 2011 |
D. Paul Regan |
|
|
|
|
|
|
|
|
|
/s/ Timothy B. Nyman
Timothy B. Nyman
|
|
Director
|
|
March 14, 2011 |
|
|
|
|
|
/s/ Francis Chen
Francis Chen
|
|
Director
|
|
March 14, 2011 |
35
Index to Financial Statements
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Solar Power, Inc.
We have audited the accompanying consolidated balance sheet of Solar Power, Inc. and subsidiaries
(the Company) as of December 31, 2010 and the related consolidated statements of operations,
stockholders equity and comprehensive loss, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Solar Power, Inc. and subsidiaries at December 31,
2010, and the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America.
/s/ Perry-Smith LLP
Sacramento, California
March 14, 2011
F-2
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Solar Power, Inc.
Roseville, California
We have audited the accompanying consolidated balance sheet of Solar Power, Inc. and subsidiaries
(the Company) as of December 31, 2009 and the related consolidated statements of
operations, stockholders equity and comprehensive loss, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Solar Power, Inc. and subsidiaries at December 31,
2009, and the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America.
/s/ Macias Gini & OConnell LLP
Sacramento, California
May 14,
2010, except for the restatement discussed in Note 18, as to which the
date is March 14, 2011.
F-3
SOLAR POWER, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2010 and 2009
(dollars in thousands, except for par value and share data)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,441 |
|
|
$ |
3,136 |
|
Accounts receivable, net of allowance for doubtful accounts of $28 and $395 at December 31, 2010 and 2009,
respectively and net of deferred revenues at December 31, 2009 (note 12) |
|
|
5,988 |
|
|
|
17,985 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
2,225 |
|
|
|
7,800 |
|
Note receivable, net of deferred revenue current portion at December 31, 2009 (note 12) |
|
|
|
|
|
|
|
|
Inventories, net |
|
|
4,087 |
|
|
|
5,213 |
|
Asset held for sale (Note 2 and 13) |
|
|
6,669 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
702 |
|
|
|
1,275 |
|
Restricted cash |
|
|
285 |
|
|
|
280 |
|
|
|
|
Total current assets |
|
|
21,397 |
|
|
|
35,689 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
435 |
|
|
|
435 |
|
Note receivable, net of deferred revenue long term portion at December 31, 2009 (note 12) |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
1,059 |
|
|
|
|
|
Property, plant and equipment at cost, net |
|
|
915 |
|
|
|
1,390 |
|
|
|
|
Total assets |
|
$ |
23,806 |
|
|
$ |
37,514 |
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,055 |
|
|
$ |
16,110 |
|
Accrued liabilities |
|
|
4,298 |
|
|
|
4,201 |
|
Income taxes payable |
|
|
2 |
|
|
|
291 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
1,767 |
|
|
|
154 |
|
Loans payable and capital lease obligations |
|
|
3,808 |
|
|
|
260 |
|
|
|
|
Total current liabilities |
|
|
15,930 |
|
|
|
21,016 |
|
Loans payable and capital lease obligations, net of current portion |
|
|
13 |
|
|
|
53 |
|
|
|
|
Total liabilities |
|
|
15,943 |
|
|
|
21,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock, par $0.0001, 20,000,000 shares authorized,
none issued and outstanding at December 31, 2010 and 2009 |
|
|
|
|
|
|
|
|
Common stock, par $0.0001, 100,000,000 shares authorized 52,292,576 shares issued and
outstanding at December 31, 2010 and 2009 |
|
|
5 |
|
|
|
5 |
|
Additional paid in capital |
|
|
42,114 |
|
|
|
41,808 |
|
Accumulated other comprehensive loss |
|
|
(240 |
) |
|
|
(222 |
) |
Accumulated deficit |
|
|
(34,016 |
) |
|
|
(25,146 |
) |
|
|
|
Total stockholders equity |
|
|
7,863 |
|
|
|
16,445 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
23,806 |
|
|
$ |
37,514 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-4
SOLAR POWER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010 and 2009
(dollars in thousands, except for per share and share data)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Net sales |
|
$ |
34,036 |
|
|
$ |
52,551 |
|
Cost of goods sold |
|
|
29,282 |
|
|
|
45,788 |
|
|
|
|
Gross profit |
|
|
4,754 |
|
|
|
6,763 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
General and administrative |
|
|
7,578 |
|
|
|
8,849 |
|
Sales, marketing and customer service |
|
|
3,652 |
|
|
|
3,841 |
|
Engineering, design and product management |
|
|
947 |
|
|
|
939 |
|
|
|
|
Total operating expenses |
|
|
12,177 |
|
|
|
13,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(7,423 |
) |
|
|
(6,866 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(450 |
) |
|
|
(49 |
) |
Interest income |
|
|
|
|
|
|
12 |
|
Other expense |
|
|
(1,138 |
) |
|
|
(21 |
) |
|
|
|
Total other expense |
|
|
(1,588 |
) |
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(9,011 |
) |
|
|
(6,924 |
) |
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
|
|
(141 |
) |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,870 |
) |
|
$ |
(6,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.17 |
) |
|
$ |
(0.17 |
) |
|
|
|
Diluted |
|
$ |
(0.17 |
) |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in computing per
share amounts |
|
|
|
|
|
|
|
|
Basic |
|
|
52,292,576 |
|
|
|
41,787,637 |
|
|
|
|
Diluted |
|
|
52,292,576 |
|
|
|
41,787,637 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010 and 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,870 |
) |
|
$ |
(6,970 |
) |
Adjustments
to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
526 |
|
|
|
827 |
|
Amortization of loan fees |
|
|
5 |
|
|
|
|
|
Stock issued for services |
|
|
|
|
|
|
127 |
|
Stock-based compensation expense |
|
|
306 |
|
|
|
709 |
|
Bad debt expense |
|
|
523 |
|
|
|
418 |
|
Income tax expense |
|
|
|
|
|
|
43 |
|
Loss on disposal of fixed assets |
|
|
21 |
|
|
|
15 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
11,474 |
|
|
|
(15,394 |
) |
Costs and estimated earnings in excess of billing on uncompleted contracts |
|
|
18 |
|
|
|
(7,506 |
) |
Inventories |
|
|
1,126 |
|
|
|
(546 |
) |
Asset held for sale |
|
|
(1,112 |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
856 |
|
|
|
(363 |
) |
Accounts payable |
|
|
(10,055 |
) |
|
|
12,194 |
|
Income taxes payable |
|
|
(289 |
) |
|
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
1,613 |
|
|
|
(6 |
) |
Deferred revenue |
|
|
|
|
|
|
(125 |
) |
Accrued liabilities |
|
|
(89 |
) |
|
|
1,005 |
|
|
|
|
Net cash used in operating activities |
|
|
(3,947 |
) |
|
|
(15,572 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisitions of property, plant and equipment |
|
|
(63 |
) |
|
|
(53 |
) |
|
|
|
Net cash used in investing activities |
|
|
(63 |
) |
|
|
(53 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
12,943 |
|
Restricted cash |
|
|
(1,064 |
) |
|
|
247 |
|
Principal payments on notes and capital leases payable |
|
|
(400 |
) |
|
|
(341 |
) |
Net proceeds from loan payable |
|
|
3,899 |
|
|
|
|
|
Payment of loan fees |
|
|
(102 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,333 |
|
|
|
12,849 |
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(1,677 |
) |
|
|
(2,776 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,136 |
|
|
|
5,915 |
|
Effect of exchange rate changes on cash |
|
|
(18 |
) |
|
|
(3 |
) |
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,441 |
|
|
$ |
3,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
435 |
|
|
$ |
44 |
|
|
|
|
Cash paid for income taxes |
|
$ |
126 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Equipment acquired through notes payable and capital leases |
|
$ |
9 |
|
|
$ |
|
|
Amounts reclassified from costs and estimated earnings in excess of billing on uncompleted contracts to assets held
for sale |
|
$ |
5,557 |
|
|
|
|
|
Stock issued for services |
|
|
|
|
|
|
127 |
|
|
|
|
|
|
$ |
5,566 |
|
|
$ |
127 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-6
SOLAR POWER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
For the Years Ended December 31, 2010 and 2009
(dollars in thousands, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
Accumulated |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Paid-In Capital |
|
|
Deficit |
|
|
Loss |
|
|
Total |
|
|
|
|
Balance January 1, 2009 |
|
|
37,771,325 |
|
|
$ |
4 |
|
|
$ |
28,029 |
|
|
$ |
(18,176 |
) |
|
$ |
(222 |
) |
|
$ |
9,635 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,970 |
) |
|
|
|
|
|
|
(6,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for option
exercises |
|
|
76,750 |
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock |
|
|
237,501 |
|
|
|
|
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for services |
|
|
130,000 |
|
|
|
|
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock, net of costs |
|
|
14,077,000 |
|
|
|
1 |
|
|
|
12,866 |
|
|
|
|
|
|
|
|
|
|
|
12,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
|
52,292,576 |
|
|
|
5 |
|
|
|
41,808 |
|
|
|
(25,146 |
) |
|
|
(222 |
) |
|
|
16,445 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,870 |
) |
|
|
|
|
|
|
(8,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
306 |
|
|
|
|
Balance December 31, 2010 |
|
|
52,292,576 |
|
|
$ |
5 |
|
|
$ |
42,114 |
|
|
$ |
(34,016 |
) |
|
$ |
(240 |
) |
|
$ |
7,863 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
F-7
SOLAR POWER, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Financial Statement Presentation
Solar Power, Inc. and its subsidiaries, (collectively the Company) is engaged in
development, sales, installation and integration of photovoltaic systems and manufactures and sells
solar panels and related hardware and cable, wire and mechanical assemblies.
Solar Power, Inc. was incorporated in the State of California in 2006. In August 2006, the
Company entered into a merger agreement with International Assembly Solutions, Limited (IAS HK)
which was incorporated in Hong Kong in January 2005. Effective November 2006, the equity owners of
IAS HK transferred all their equity interests to Solar Power, Inc.
In August 2006, the Company, Dale Renewable Consulting Inc. (DRCI) and Dale Stickney
Construction, Inc., (DSCI) formalized an acquisition agreement (the Merger Agreement) and entered
into an Assignment and Interim Operating Agreement (the Operating Agreement). As a result of the
Operating Agreement the Company began consolidating the operations of DRCI from June 1, 2006.
In December 2006, Solar Power, Inc., a California corporation, became a public company through
its reverse merger with Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) We
were considered the accounting acquirer after that merger. The accompanying consolidated financial
statements reflect the results of the operations of Solar Power, Inc., a California corporation and
its subsidiaries.
2. Summary of Significant Accounting Policies
Basis of Presentation The consolidated financial statements include the accounts of Solar
Power, Inc., and its subsidiaries. Intercompany balances, transactions and cash flows are
eliminated in consolidation.
Cash and cash equivalents Cash and cash equivalents include cash on hand, cash accounts and
interest bearing savings accounts. At times, cash balances may be in excess of the various limits
of the country in which such balances are held. Limits in the jurisdictions in which we maintain
cash deposits are as follows: U.S. FDIC limits are unlimited for checking accounts and $250,000 per
depositor for other types of deposits, Hong Kong limits are HK$100,000 (approximately US$12,800)
per account, but through 2010, that limit is raised to 100% of the deposit and in the PRC coverage
is not afforded on any cash deposit. The Company has not experienced any losses with respect to
bank balances in excess of government provided insurance. At December 31, 2010 and 2009, the
Company held approximately $2,255,000 and $3,099,000 in cash and cash equivalents and restricted
cash balances in excess of the insurance limits.
Inventories Inventories are stated at the lower of cost or market, determined by the first
in first out cost method.
Prior to January 1, 2009, inventories were determined using the
weighted average cost method. The conversion to first in first out cost method had no material
effect on the financial statements for the fiscal year ended December 31, 2009 or on prior
fiscal years. Work-in-progress and finished goods inventories consist of raw materials, direct
labor and overhead associated with the manufacturing process. Provisions are made for obsolete or
slow-moving inventory based on management estimates. Inventories are written down based on the
difference between the cost of inventories and the net realizable value based upon estimates about
future demand from customers and specific customer requirements on certain projects.
Anti-dilutive Shares Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 260 Earnings Per Share, provides for the calculation of basic and diluted
earnings per share. Basic earnings per share includes no dilution and is computed by dividing
income attributable to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential dilution of
securities by adding other common stock
F-8
equivalents, including common stock options, warrants, and
restricted common stock, in the weighted average number of common shares outstanding for a period,
if dilutive. Potentially dilutive securities are excluded from the computation if their effect is
anti-dilutive. For the years ended December 31, 2010 and 2009 nil and 298,785 shares of common
stock equivalents, respectively were excluded from the computation of diluted earnings per share
since their effect would be anti-dilutive.
The following table illustrates the computation of the weighted average shares outstanding
used in computing earnings per share in our financial statements:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
52,292,576 |
|
|
|
41,787,637 |
|
Dilutive effect of warrants outstanding |
|
|
|
|
|
|
|
|
Dilutive effect of stock options outstanding |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
52,292,576 |
|
|
|
41,787,637 |
|
|
|
|
Property and equipment Property, plant and equipment is stated at cost including the cost
of improvements. Maintenance and repairs are charged to expense as incurred. Depreciation and
amortization are provided on the straight line method based on the estimated useful lives of the
assets as follows:
|
|
|
Plant and machinery
|
|
5 years |
Furniture, fixtures and equipment
|
|
5 years |
Computers and software
|
|
3 5 years |
Equipment acquired under capital leases
|
|
3 5 years |
Trucks
|
|
3 years |
Leasehold improvements
|
|
the shorter of the estimated life
or the lease term |
Goodwill Goodwill is the excess of purchase price over the fair value of net assets
acquired. The Company applies FASB ASC 350-20 Goodwill and other Intangible Assets, which requires
the carrying value of goodwill to be evaluated for impairment on an annual basis, using a
fair-value-based approach. The Company evaluated the carrying value of its goodwill at December 31,
2010 and 2009, and determined that no impairment of goodwill was identified during any of the
periods presented.
Revenue recognition
Photovoltaic installation, integration and sales In our photovoltaic systems installation,
integration and sales segment, revenue on product sales is recognized when there is evidence of an
arrangement, title and risk of ownership have passed (generally upon delivery), the price to the
buyer is fixed or determinable and collectability is reasonably assured. Customers do not have a
general right of return on products shipped therefore we make no provisions for returns. During the
year ended December 31, 2009, the Company did recognize one product sale on a bill and hold
arrangement. The customer requested that we store product to combine with a subsequent order in
order to reduce their transportation costs. Since all criteria for revenue recognition had been met
the Company recognized revenue on the sale. There were no bill and hold arrangements during the
year ended December 31, 2010.
Revenue on photovoltaic system construction contracts is generally recognized using the percentage
of completion method of accounting. At the end of each period, the Company measures the cost
incurred on each project and compares the result against its estimated total costs at completion.
The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are
generally defined by the contract and as a result may not match the timing of the costs incurred by
the Company and the related recognition of revenue. Such differences are recorded as costs and
estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs
and estimated earnings on uncompleted contracts. The Company determines its customers credit
worthiness at the time the order is accepted. Sudden and unexpected changes in customers financial
condition could put recoverability at risk.
For the year ended December 31, 2009, the Company recognized revenue for one photovoltaic system
construction contract using the zero margin method of revenue recognition. In the third quarter of
2009, the Company recognized revenue of approximately $13,061,000 and gross profit of approximately
$3,209,000 related to this contract using the percentage-of-completion method of
F-9
revenue recognition. However, in the fourth quarter of 2009 the Company modified its revenue recognition
method on this contract to the zero margin method since the financing structure the customer had in
place to pay the outstanding balance on the contract did not fund as expected. The contract was for
approximately $19,557,000. As of December 31, 2009 the Company had recognized revenue on the
contract up to the incurred contract cost of approximately $14,852,000, deferring revenue of
approximately $4,563,000. In December 2009 the Company made certain guarantees to assist its
customer in obtaining financing for the contract. The Company recorded a liability at the estimated
fair value of approximately $142,000 related to these guarantees. At December 31, 2010 the fair
value of the guarantee, net of amortization was approximately $127,000. As of December 31, 2009,
the deferred revenue of $4,563,000 had been netted on our balance sheet against the note and
accounts receivable related to this contract. On December 22, 2010, the Company entered into a
Note Purchase and Sale Agreement discounting the note receivable and receiving a cash payment of
$1,000,000. The purchase price of the note was determined based on the present value of the
obligation over the likely repayment period, the risk involved with the payment of such term, and
the unsecured nature of the obligation, and the release of any claims
against the Company by the issuer of the note related to the finance structure and assumptions. As
a result of the transaction, the Company recognized approximately $464,000 of
the revenue that had been previously deferred and that as a result
of the transaction there was no additional revenue to be recognized
and the note has been settled.
Additionally,
in 2009, for a separate construction contract the Company determined the use of the completed
contract method of revenue recognition was appropriate. At December 31, 2009 we recorded on our
balance sheet approximately $5,557,000 of cost related to this contract in the caption cost and
estimated earnings in excess of billings on uncompleted contracts. In our second fiscal quarter
ended June 30, 2010 it was determined that the customer was unable to perform on its payment
obligations under the contract. The Company took possession of the facility and its related Power
Purchase Agreement (PPA) in lieu of payment. The Company reclassified the amount recorded in
costs and estimated earnings in excess of billings on uncompleted contracts (approximately
$5,557,000) and the remaining costs to complete the contract (approximately $4,459,000) to assets
held for sale on its balance sheet. At December 31, 2010, the value of the asset held for sale on
our balance sheet is approximately $6,669,000, the cost of the project (approximately $10,016,000)
less the Section 1603 grant-in-lieu of tax credits of approximately $3,347,000.
In our solar photovoltaic business, contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Selling and general and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the
period in which such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty provisions, and final
contract settlements may result in revisions to costs and income and are recognized in the period
in which the revisions are determined. Profit incentives are included in revenues when their
realization is reasonably assured.
The asset, Costs and estimated earnings in excess of billings on uncompleted contracts represents
revenues recognized in excess of amounts billed. The liability, Billings in excess of costs and
estimated earnings on uncompleted contracts, represents billings in excess of revenues recognized.
Cable, wire and mechanical assemblies In our cable, wire and mechanical assemblies business
the Company recognizes the sales of goods when there is evidence of an arrangement, title and risk
of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable
and collectability is reasonably assured. There are no formal customer acceptance requirements or
further obligations related to our assembly services once we ship our products. Customers do not
have a general right of return on products shipped therefore we make no provisions for returns. We
make determination of our customers credit worthiness at the time we accept their order.
Allowance for doubtful accounts The Company regularly monitors and assesses the risk of not
collecting amounts owed to the Company by customers. This evaluation is based upon a variety of
factors including: an analysis of amounts current and past due along with relevant history and
facts particular to the customer. It requires the Company to make significant estimates, and
changes in facts and circumstances could result in material changes in the allowance for doubtful
accounts. At December 31, 2010 and 2009 the Company has recorded an allowance of approximately
$28,000 and $395,000, respectively.
F-10
Allowance for bad debts as of December 31, 2010 and 2009 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Balance January 1 |
|
$ |
395 |
|
|
$ |
49 |
|
Provision |
|
|
523 |
|
|
|
418 |
|
Write offs |
|
|
(890 |
) |
|
|
(72 |
) |
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
Balance December 31 |
|
$ |
28 |
|
|
$ |
395 |
|
|
|
|
Shipping and handling cost Shipping and handling costs related to the delivery of
finished goods are included in cost of goods sold. During the years ended December 31, 2010 and
2009, shipping and handling costs expensed to cost of goods sold were approximately $724,000 and
$1,001,000, respectively.
Advertising costs Costs for newspaper, television, radio, and other media and design are
expensed as incurred. The Company expenses the production costs of advertising the first time the
advertising takes place. The costs for this type of advertising were approximately $131,000 and
$198,000 during the years ended December 31, 2010 and 2009, respectively.
Stock-based compensation The Company accounts for stock-based compensation under the
provisions of FASB ASC 718 Share-Based Payment, which requires the Company to measure the
stock-based compensation costs of share-based compensation arrangements based on the grant-date
fair value and generally recognizes the costs in the financial statements over the employee
requisite service period.
Product Warranties We offer the industry standard of 20 years for our solar modules and
industry standard five (5) years on inverter and balance of system components. Due to the warranty
period, we bear the risk of extensive warranty claims long after we have shipped product and
recognized revenue and our cable, wire and mechanical assemblies business, historically our
warranty claims have not been material. In our cable, wire and mechanical assemblies segment our
current standard product warranty for our mechanical assembly products ranges from one to five
years. In our solar photovoltaic business, our greatest warranty exposure is in the form of product
replacement. Until the third quarter of fiscal 2007, the Company purchased its solar panels from
third-party suppliers and since the third-party warranties are consistent with industry standards
we considered our financial exposure to warranty claims immaterial. Since the Company does not have
sufficient historical data to estimate its exposure, we have looked to our historical data and the
historical data reported by other solar system installers and manufacturers. The Company has
provided a warranty reserve of approximately $296,000 and $503,000 for the years ended December 31,
2010 and 2009, respectively.
The accrual for warranty claims consisted of the following at December 31, 2010 and 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Beginning balance |
|
$ |
1,246 |
|
|
$ |
743 |
|
Provision charged to warranty expense |
|
|
296 |
|
|
|
503 |
|
Less: warranty claims |
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,542 |
|
|
$ |
1,246 |
|
|
|
|
Performance Guarantee
On December 18, 2009, the Company entered into a 10-year energy output guaranty related to the
photovoltaic system installed for Solar Tax Partners 1, LLC (STP) at the Aerojet facility in
Rancho Cordova, CA. The guaranty provided for compensation to STPs system lessee for shortfalls in
production related to the design and operation of the system, but excluding shortfalls outside the
Companys control such as government regulation. The Company believes that the probability of a
shortfall is unlikely and if they should occur be covered under the provisions of its current panel
and equipment warranty provisions. For the fiscal year ended December 31, 2010 there were no
charges against our reserves related to this performance guarantee.
F-11
Accrued guarantee costs at December 31, 2010 and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Balance January 1 |
|
$ |
142 |
|
|
$ |
|
|
Additions |
|
|
|
|
|
|
142 |
|
Amortization |
|
|
(15 |
) |
|
|
|
|
|
|
|
Balance December 31 |
|
$ |
127 |
|
|
$ |
142 |
|
|
|
|
Income taxes We account for income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are determined based on differences between
financial reporting and tax reporting bases of assets and liabilities and are measured using
enacted tax rates and laws that are expected to be in effect when the differences are expected to
reverse. Realization of deferred tax assets is dependent upon the weight of available evidence,
including expected future earnings. A valuation allowance is recognized if it is more likely than
not that some portion, or all of a deferred tax asset will not be realized.
The Company accounts for income taxes using FASB ASC 740 Accounting for Income Taxes, which is
intended to create a single model to address uncertainty in income tax positions. ASC 740 clarifies
the accounting for uncertainty in income tax positions by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements.
In addition, ASC 740 clearly scopes out income taxes from FASB ASC 450.
ASC 740 outlines a two step approach in accounting for uncertain tax positions. First is
recognition, which occurs when the Company concludes that a tax position is more likely than not to
be sustained upon examination based solely on its technical merits. ASC 740
specifically prohibits the use of a valuation allowance as a substitute for de-recognition of tax
positions. Second is measurement. Only after a tax position passes the first step of recognition
will measurement be required. Under the measurement step, the tax benefit is measured as the
largest amount of benefit that is more likely than not to be realized upon effective settlement.
This is determined on a cumulative probability basis.
The Company elects to accrue any interest or penalties related to its uncertain tax positions as
part of its income tax expense.
Foreign currency translation The consolidated financial statements of the Company are
presented in U.S. dollars and the Company conducts substantially all of its business in U.S.
dollars.
All assets and liabilities in the balance sheets of foreign subsidiaries whose functional
currency is other than U.S. dollars are translated at period-end exchange rates. All income and
expenditure items in the income statements of these subsidiaries are translated at average annual
exchange rates. Gains and losses arising from the translation of the financial statements of these
subsidiaries are not included in determining net income but are accumulated in a separate component
of stockholders equity as comprehensive income. The functional currency of the Companys
operations in the Peoples Republic of China is the Renminbi.
Gains and losses resulting from the translation of foreign currency transactions are included
in income.
Aggregate net foreign currency transaction expense included in the income statement was
approximately $1,025,000 and $91,000 for the years ended December 31, 2010 and 2009, respectively.
Comprehensive income (loss) FASB ASC 220 Reporting Comprehensive Income, establishes
standards for reporting comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive income, as defined,
includes all changes in equity during the period from non-owner sources. Examples of items to be
included in comprehensive income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gain (loss) of available-for-sale securities. For the years
ended December 31, 2010 and 2009, comprehensive loss was approximately $8,888,000 composed of a net
loss of approximately $8,870,000 and currency translation loss of approximately $18,000 and
$6,970,000, composed entirely of a net loss, respectively.
Post-retirement and post-employment benefits The Companys subsidiaries which are located
in the Peoples Republic of China and Hong Kong contribute to a state pension scheme on behalf of
its employees. The Company recorded approximately $118,000 and $66,000 in expense related to its
pension contributions for the years ended December 31, 2010 and 2009, respectively. Neither the
Company nor its subsidiaries provide any other post-retirement or post-employment benefits.
Use of estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-12
Presentation Prior period presentations have been modified to conform to current
presentations.
3. Recently Issued Accounting Pronouncements
In January 2010, FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).
ASU 2010-06 amends Subtopic 820-10 requiring new disclosures for transfers in and out of Levels 1
and 2, activity in Level 3 fair value measurements, level of disaggregation and disclosures about
inputs and valuation techniques. The new disclosures and clarifications of existing disclosures
are effective for interim and annual reporting periods beginning after December 15, 2009, except
for disclosures about purchases, sales, issuances and settlements in the roll forward activity of
Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The adoption of ASU 2010-06
had no impact on results of operations, cash flows or financial position.
In December 2010, the FASB issued ASU 2010-28, Intangibles Goodwill and Other (Topic 350).
ASU 2010-28 modify Step 1 of the goodwill impairment test for reporting units with zero or negative
carrying amounts. For those units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. ASU 2010-28 is
effective for fiscal years, and interim periods within those years, beginning after December 15,
2011. The Company expects that the adoption of ASU 2010-28 will have no material impact on results
of operations, cash flows or financial position.
In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805). ASU 2010-29
specify that a public entity as defined by Topic 805, who presents comparative financial
statements, must disclose revenue and earnings of the combined entity as though the business
combination that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. ASU 2010-29 is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. Early adoption is permitted. The
Company expects that the adoption of ASU 2010-29 will have no impact on the results of operations, cash flows or financial
position.
In June 2009, FASB issued ASU 2009-16. ASU 2009-16 applies to all entities and is effective
for annual financial periods beginning after November 15, 2009 and for interim periods within those
years. Earlier application is prohibited. A calendar year-end company must adopt this statement as
of January 1, 2010. This statement retains many of the criteria of FASB ASC 860 (FASB 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities) to
determine whether a transfer of financial assets qualifies for sale accounting, but there are some
significant changes as discussed in the statement. Its disclosure and measurement requirements
apply to all transfers of financial assets occurring on or after the effective date. Its disclosure
requirements, however, apply to transfers that occurred both before and after the effective date.
In addition, because ASU 2009-16 eliminates the consolidation exemption for Qualifying Special
Purpose Entities, a company will have to analyze all existing QSPEs to determine whether they must
be consolidated under FASB ASC 810. The adoption of ASU 2009-16 had no impact on results of
operations, cash flows or financial position.
In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value. ASU
2009-05 applies to all entities that measure liabilities at fair value within the scope of FASB ASC
820, Fair Value Measurements and Disclosures. ASU 2009-05 is effective for the first reporting
period (including interim periods) beginning after issuance, October 1, 2009 for the Company. The
adoption of ASU 2009-05 had no impact on results of operations, cash flows or financial position.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. ASU 2010-20 applies to all entities with
financing receivables, excluding short-term trade accounts receivable or receivables measured at
fair value or lower of cost or fair value. ASU 2010-20 is effective for interim and annual
reporting periods ending after December 15, 2010. The adoption of ASU 2010-20 did not have a
material impact on results of operations, cash flows or financial position.
In October 2009, the FASB ratified FASB ASU 2009-13 (the EITFs final consensus on Issue 08-1,
Revenue Arrangements with Multiple Deliverables). ASU 2009-13 is effective for fiscal years
beginning on or after June 15, 2010. Earlier adoption is permitted on a prospective or
retrospective basis. The Company does not anticipate the adoption of FASB ASC 605-25 to have an
impact on results of operations, cash flows or financial position.
F-13
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition Milestone Method (Topic
605). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the
milestones method of revenue recognition is appropriate. ASU 2010-17 is effective on a prospective
basis for fiscal years, and interim periods within those years, beginning on or after June 15,
2010. Early adoption is permitted. The Company expects that the adoption of ASU 2010-17 will have no impact on results of
operations, cash flows or financial position.
4. Restricted Cash
At December 31, 2010, the Company had restricted bank deposits of approximately $1,344,000.
The restricted bank deposits consist of approximately $1,004,000 as a reserve pursuant to our
guarantees of our customer Solar Tax Partners 1, LLC with the bank providing the debt financing on
their solar generating facility (subsequent to year end, in January, 2011, Solar Tax Partners 1,
LLC refinanced their loan reducing the amount of restricted cash to $400,000), approximately
$285,000 as a reserve pursuant to our loan agreement with the bank providing the debt financing for
the solar generating facility owned by our subsidiary, Solar Tax Partners 2, LLC, approximately
$20,000 securing our corporate credit card and approximately $35,000 as retention by our bank for
our merchant credit card services. At December 31, 2009, the Companys restricted bank deposits of
$280,000 as collateral for the outstanding letter of credits in the amount of $255,000 and the
Companys bank credit card of $25,000.
5. Inventories
Inventories consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Raw material |
|
$ |
2,137 |
|
|
$ |
2,348 |
|
Finished goods |
|
|
2,079 |
|
|
|
2,882 |
|
Provision for obsolete stock |
|
|
(129 |
) |
|
|
(17 |
) |
|
|
|
|
|
$ |
4,087 |
|
|
$ |
5,213 |
|
|
|
|
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at December 31 were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Rental, equipment and utility deposits |
|
$ |
177 |
|
|
$ |
189 |
|
Supplier deposits |
|
|
24 |
|
|
|
606 |
|
Insurance |
|
|
94 |
|
|
|
188 |
|
Advertising |
|
|
105 |
|
|
|
160 |
|
Taxes |
|
|
141 |
|
|
|
|
|
Loan fees |
|
|
96 |
|
|
|
|
|
Other |
|
|
65 |
|
|
|
132 |
|
|
|
|
|
|
$ |
702 |
|
|
$ |
1,275 |
|
|
|
|
7. Property and Equipment
Property and equipment consisted of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Plant and machinery |
|
$ |
686 |
|
|
$ |
669 |
|
Furniture, fixtures and equipment |
|
|
351 |
|
|
|
345 |
|
Computers and software |
|
|
1,437 |
|
|
|
1,424 |
|
Trucks |
|
|
118 |
|
|
|
246 |
|
Leasehold improvements |
|
|
402 |
|
|
|
410 |
|
|
|
|
Total cost |
|
|
2,994 |
|
|
|
3,094 |
|
Less: accumulated depreciation |
|
|
(2,079 |
) |
|
|
(1,704 |
) |
|
|
|
|
|
$ |
915 |
|
|
$ |
1,390 |
|
|
|
|
Depreciation expense was approximately $526,000 and $827,000 for the years ended December 31,
2010 and 2009, respectively.
F-14
8. Accrued Liabilities
Other accrued liabilities at December 31 were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Accrued payroll and related costs |
|
$ |
462 |
|
|
$ |
770 |
|
Sales tax payable |
|
|
965 |
|
|
|
874 |
|
Warranty reserve |
|
|
1,542 |
|
|
|
1,246 |
|
Customer deposits |
|
|
368 |
|
|
|
566 |
|
Insurance premium financing |
|
|
|
|
|
|
141 |
|
Accrued commission |
|
|
|
|
|
|
276 |
|
Accrued financing costs |
|
|
578 |
|
|
|
|
|
Accrued guarantee reserve, net |
|
|
127 |
|
|
|
142 |
|
Other |
|
|
256 |
|
|
|
186 |
|
|
|
|
|
|
$ |
4,298 |
|
|
$ |
4,201 |
|
|
|
|
9. Stockholders Equity
Issuance of common stock
On October 6, 2009, the Company issued 120,000 shares of its common stock pursuant to a
resolution of the Companys Board of Directors, on October 6, 2009, in settlement of an obligation.
The shares were fair-valued at $1.00, the closing price of the Companys common stock on October 6,
2009 and the Company settled approximately $120,000 in accounts payable related to this
transaction.
On September 23, 2009 and October 2, 2009, we completed a private placement of 14,077,000
shares of restricted common stock at a purchase price of $1.00 per share to 31 accredited
investors. After the costs of the transaction, the Company recorded net proceeds of approximately
$12,867,000.
On May 15, 2009, the Company issued 10,000 shares of its common stock pursuant to a resolution
of the Companys Board of Directors, on February 27, 2009, as compensation for services. The shares
were fair-valued at $0.74, the closing price of the Companys common stock on May 15, 2009 and the
Company recorded approximately $7,400 in expense related to this transaction.
On January 12, 2009, the Company issued 162,501 shares of its common stock to its independent
directors, under the Companys 2006 Equity Incentive plan, for fiscal 2009. The shares were fair
valued at $0.60 per share, the closing price of the Companys common stock on January 2, 2009, the
date of grant.
Issuance of warrants to purchase common stock
In October 2010, in conjunction with a consulting agreement, we issued a warrant to purchase
500,000 shares of our common stock to a consultant at an exercise price of $0.25 per share. The
warrant is exercisable over a five-year period and vests based on certain performance criteria.
This warrant was fair-valued at $0.23 per share using the Black-Scholes model. The warrant expires
on October 1, 2015. Since the warrant is performance based no expense was recorded for the fiscal
year ended December 31, 2010.
F-15
The following table summarizes the Companys warrant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Exercise Price Per |
|
|
Remaining |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Share |
|
|
Contractual Term |
|
|
Value ($000) |
|
|
Outstanding as of January 1, 2009 |
|
|
2,366,302 |
|
|
|
2.88 |
|
|
|
2.35 |
|
|
$ |
|
|
Issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
2,366,302 |
|
|
|
2.88 |
|
|
|
1.91 |
|
|
|
|
|
Issued |
|
|
500,000 |
|
|
|
0.25 |
|
|
|
5.00 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010 |
|
|
2,866,302 |
|
|
$ |
2.42 |
|
|
|
2.11 |
|
|
$ |
|
|
|
|
|
Exercisable December 31, 2010 |
|
|
2,366,302 |
|
|
$ |
2.88 |
|
|
|
1.55 |
|
|
$ |
|
|
|
|
|
Assumptions used in the determination of the fair value of warrants issued during 2010 using the
Black-Scholes model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected |
|
Risk-free |
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
Fair-Value |
|
Term in |
|
interest |
|
Remaining |
|
|
|
|
|
Dividend |
|
|
Date Issued |
|
Price |
|
(in thousands) |
|
years |
|
rate |
|
Contractual Life |
|
Volatility |
|
Yield |
In conjunction with a project
development agreement
|
|
10/01/2010
|
|
$ |
0.25 |
|
|
$ |
113 |
|
|
|
5.00 |
|
|
|
1.70 |
% |
|
|
4.75 |
|
|
|
169.2 |
% |
|
|
0 |
% |
10. Income Taxes
Loss before provision for income taxes is attributable to the following geographic locations
for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
United States |
|
$ |
(8,216 |
) |
|
$ |
(8,498 |
) |
Foreign |
|
|
(795 |
) |
|
|
1,574 |
|
|
|
|
|
|
$ |
(9,011 |
) |
|
$ |
(6,924 |
) |
|
|
|
As of December 31, 2010, the Company had a net operating loss carry forward for federal
income tax purposes of approximately $34.8 million, which will start to expire in the year 2027.
The Company had a total state net operating loss carry forward of approximately $34.4 million,
which will start to expire in the year 2017.
Utilization of the federal and state net operating loss may be subject to an annual limitation
due to the change in ownership provisions of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating losses and credits
before utilization.
F-16
The (benefit) provision for income taxes consists of the following for the year ended December
31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Current: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
State |
|
|
3 |
|
|
|
3 |
|
Foreign |
|
|
(144 |
) |
|
|
43 |
|
|
|
|
Total provision (benefit) for income taxes |
|
$ |
(141 |
) |
|
$ |
46 |
|
|
|
|
The reconciliation between the actual income tax expense and income tax computed by
applying the statutory U.S. Federal income tax rate of 35% to pre-tax loss before provision for
income taxes for the years ended December 31 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
(Benefit) Provision for income taxes at U.S. Federal
statutory rate |
|
$ |
(3,154 |
) |
|
$ |
(2,432 |
) |
State taxes, net of federal benefit |
|
|
2 |
|
|
|
2 |
|
Foreign taxes at different rate |
|
|
134 |
|
|
|
(509 |
) |
Non-deductible expenses |
|
|
5 |
|
|
|
8 |
|
Valuation allowance |
|
|
2,872 |
|
|
|
2,978 |
|
Other |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
$ |
(141 |
) |
|
$ |
46 |
|
|
|
|
Deferred income taxes reflect the net tax effects of loss carry forwards and temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the Companys deferred tax
assets for federal, state and foreign income taxes are as follows at December 31 are presented
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
$ |
14,282 |
|
|
$ |
11,621 |
|
Temporary differences due to accrued warranty costs |
|
|
631 |
|
|
|
550 |
|
Temporary
differences due to Compensation related accruals |
|
|
1,015 |
|
|
|
337 |
|
Other temporary differences |
|
|
49 |
|
|
|
133 |
|
|
|
|
|
|
|
15,977 |
|
|
|
12,641 |
|
Valuation allowance |
|
|
(15,977 |
) |
|
|
(12,641 |
) |
|
|
|
Total deferred income tax assets |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
FASB ACS 740-10-05 provides for the recognition of deferred tax assets if it is more
likely than not that those deferred tax assets will be realized. Management reviews deferred tax
assets periodically for recoverability and makes estimates and judgments regarding the expected
geographic sources of taxable income in assessing the need for a valuation allowance to reduce
deferred tax assets to their estimated realizable value. Realization of our deferred tax assets is
dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of
our lack of earnings history, the net deferred tax assets have been fully offset by a valuation
allowance. The valuation allowance increased by approximately $3.3 million during the year ended
December 31, 2010, primarily as a
result of operating losses. The valuation allowance increased by $3.8 million during the year
ended December 31, 2009, primarily as a result of operating losses.
The Company has not provided for U.S. income taxes on undistributed earnings of its Hong Kong
subsidiary because they are considered permanently invested outside of the U.S. Upon repatriation,
some of these earnings could generate foreign tax credits
which may reduce the U.S. tax liability associated with any future dividend. At December 31,
2010, the cumulative amount of earnings upon which U.S. income taxes have not been provided was
approximately $621 thousand.
F-17
The Company has no unremitted foreign earnings as of December 31, 2010 from its PRC
operations.
PRC Taxation Our PRC subsidiary of the Company is a foreign investment enterprise
established in Shenzhen, the PRC, and is engaged in production-oriented activities; under the
corporate income tax laws enacted in 2007, a foreign investment enterprise is generally subject to
income tax at a 25% rate. The subsidiary of the Company was granted income tax incentives prior to
2007 and will continue to enjoy the tax incentives under the grandfather rules provided by the 2007
law. The incentive provides that the subsidiary is exempted from the PRC enterprise income tax for
two years starting from the first profit-making year, followed by a 50% tax exemption for the next
three years. The subsidiarys first profitable year was 2007. As a result of operating losses for
the fiscal year ended December 31, 2010, no provision was made. A provision of $15,000 has been
provided for the year ended December 31, 2009.
Hong Kong Taxation A subsidiary of the Company is incorporated in Hong Kong and is subject
to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted
in Hong Kong and income arising in or derived from Hong Kong. The applicable profits tax rate for
all periods is 17.5%. A provision of approximately $11,000 and $28,000 for profits tax was recorded
for the years ended December 31, 2010 and 2009, respectively.
We evaluate our income tax positions and record tax benefits for those tax positions where it
is more likely than not that a tax benefit will be sustained. We have recorded the largest amount
of tax benefit with a greater than 50% likelihood of being realized upon ultimate or effective
settlement with a taxing authority that has full knowledge of all relevant information. For those
tax positions where it is not more likely than not that a tax position will be sustained, no tax
benefit has been recognized in the financial statements. When applicable, associated interest and
penalties have been recognized as a component of income tax expense. During 2010 the company filed tax returns and settled all uncertain tax positions recorded during
2009 and previous years for approximately $120,000. At December 31, 2010 and 2009, the liabilities
related to total unrecognized tax positions were zero and $275 thousand respectively, all of which
had an impact on the effective tax rate in 2010. While the Company does not expect that the total
amount of unrecognized benefit will significantly change over the next 12 months, it is reasonably
possible that a change could occur. The Company had no accrued interest and penalties at December
31, 2010 and 2009, and had insignificant interest and penalty expense for the years ending December
31, 2010 and 2009.
We file income tax returns in the U.S., as well as California, Colorado, and certain other
foreign jurisdictions. We are currently not the subject of any income tax examinations. The
Companys tax returns remain open for examination for years beginning in 2007 and subsequent years.
Reconciliation of the unrecognized tax benefits for the years ended December 31, 2010 and 2009 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
275 |
|
|
$ |
248 |
|
Additions for current year tax positions |
|
|
|
|
|
|
27 |
|
Reductions for current year tax positions |
|
|
|
|
|
|
|
|
Additions for prior year tax positions |
|
|
|
|
|
|
|
|
Reductions for prior year tax positions |
|
|
(155 |
) |
|
|
|
|
Settlements |
|
|
(120 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
275 |
|
|
|
|
11. Stock-based Compensation
Stock-based compensation expense for all stock-based compensation awards granted was based on
the grant-date fair value estimated in accordance with the provisions of FASB ACS 715. Prior to
2006 the Company had not issued stock options or other forms of stock-based compensation.
F-18
The following table summarizes the consolidated stock-based compensation expense, by type of
awards (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
Employee stock options |
|
$ |
272 |
|
|
$ |
512 |
|
Restricted stock |
|
|
34 |
|
|
|
197 |
|
|
|
|
Total stock-based compensation expense |
|
$ |
306 |
|
|
$ |
709 |
|
|
|
|
The following table summarizes the consolidated stock-based compensation by line items
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2010 |
|
|
2009 |
|
General and administrative |
|
$ |
162 |
|
|
$ |
536 |
|
Sales, marketing and customer service |
|
|
84 |
|
|
|
136 |
|
Engineering, design and product development |
|
|
60 |
|
|
|
37 |
|
|
|
|
Total stock-based compensation expense |
|
|
306 |
|
|
|
709 |
|
Tax effect on stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense after income taxes |
|
$ |
306 |
|
|
$ |
709 |
|
|
|
|
Effect on net loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.001 |
) |
|
$ |
(0.017 |
) |
|
|
|
As stock-based compensation expense recognized in the consolidated statements of
operations is based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures are required to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates.
Determining Fair Value
Valuation and Amortization Method The Company estimates the fair value of service-based and
performance-based stock options granted using the Black-Scholes option-pricing formula. The fair
value is then amortized on a straight-line basis over the requisite service periods of the awards,
which is generally the vesting period. In the case of performance-based stock options, amortization
does not begin until it is determined that meeting the performance criteria is probable.
Service-based and performance-based options typically have a five year life from date of grant and
vesting periods of three to four years. Prior to September 23, 2007 the fair value of share awards
granted was determined by the last private placement price of our common stock since our shares
were not trading during that time.
Expected Term The Companys expected term represents the period that the Companys
stock-based awards are expected to be outstanding. For awards granted subject only to service
vesting requirements, the Company utilizes the simplified method under the provisions of Staff
Accounting Bulletin No. 107 (SAB No. 107) for estimating the expected term of the stock-based
award, instead of historical exercise data. Prior to 2006 the Company did not issue share-based
payment awards and as a result there is no historical data on option exercises. For its
performance-based awards, the Company has determined the expected term life to be 5 years based on
contractual life, the seniority of the recipient and absence of historical data on the exercise of
such options.
Expected Volatility The Company has chosen to use its historical volatility rates to
calculate the volatility for its granted options.
Expected Dividend The Company has never paid dividends on its common shares and currently
does not intend to do so, and accordingly, the dividend yield percentage is zero for all periods.
Risk-Free Interest Rate The Company bases the risk-free interest rate used in the
Black-Scholes valuation method upon the implied yield curve currently available on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected term used as the assumption in the
model.
F-19
Assumptions used in the determination of the fair value of share-based payment awards using
the Black-Scholes model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Service-based |
|
|
Performance-based |
|
|
Service-based |
|
|
Performance-based |
|
Expected term |
|
|
3.25-3.75 |
|
|
|
N/A |
|
|
|
3.25 - 3.75 |
|
|
|
N/A |
|
Risk-free interest rate |
|
|
1.70 |
% |
|
|
N/A |
|
|
|
1.72 |
% |
|
|
N/A |
|
Volatility |
|
|
72%-75 |
% |
|
|
N/A |
|
|
|
74% - 88 |
% |
|
|
N/A |
|
Dividend yield |
|
|
0 |
% |
|
|
N/A |
|
|
|
0 |
% |
|
|
N/A |
|
Equity Incentive Plan
On November 15, 2006, subject to approval of the stockholders, the Company adopted the 2006
Equity Incentive Plan (the Plan) which permits the Company to grant stock options to directors,
officers or employees of the Company or others to purchase shares of common stock of the Company
through awards of incentive and nonqualified stock options (Option), stock (Restricted Stock or
Unrestricted Stock) and stock appreciation rights (SARs). The Plan was approved by the
stockholders on February 7, 2007.
The Company currently has service-based and performance-based options and restricted stock
grants outstanding. The service-based options vest in 25% increments and expire five years from the
date of grant. Performance-based options vest upon satisfaction of the performance criteria as
determined by the Compensation Committee of the Board of Directors and expire five years from the
date of grant. The restriction period on restricted shares shall expire at a rate of 25% per year
over four years.
Total number of shares reserved and available for grant and issuance pursuant to this Plan is
equal to nine percent (9%) of the number of outstanding shares of the Company. Not more than two
million (2,000,000) shares of stock shall be granted in the form of incentive stock options.
Shares issued under the Plan will be drawn from authorized and un-issued shares or shares now
held or subsequently acquired by the Company.
Outstanding shares of the Company shall, for purposes of such calculation, include the number
of shares of stock into which other securities or instruments issued by the Company are currently
convertible (e.g. convertible preferred stock, convertible debentures, or warrants for common
stock), but not outstanding options to acquire stock.
At December 31, 2010 there were approximately 4,964,299 shares available to be issued under
the plan (9% of the outstanding shares of 52,292,576 plus outstanding warrants of 2,866,302). There
were 3,056,043 options and restricted shares issued under the plan, 164,195 options exercised under
the plan and 1,744,061 shares available to be issued.
The exercise price of any Option will be determined by the Company when the Option is granted
and may not be less than 100% of the fair market value of the shares on the date of grant, and the
exercise price of any incentive stock option granted to a stockholder with a 10% or greater
shareholding will not be less than 110% of the fair market value of the shares on the date of
grant. The exercise price per share of a SAR will be determined by the Company at the time of
grant, but will in no event be less than the fair market value of a share of Companys stock on the
date of grant.
F-20
The following table summarizes the Companys stock option activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Exercise Price Per |
|
|
Remaining |
|
|
Aggregate Intrinsic |
|
|
|
Shares |
|
|
Share |
|
|
Contractual Term |
|
|
Value ($000) |
|
|
Outstanding as of January 1, 2009 |
|
|
2,356,900 |
|
|
|
1.28 |
|
|
|
3.45 |
|
|
$ |
|
|
Granted |
|
|
489,500 |
|
|
|
1.10 |
|
|
|
3.78 |
|
|
|
63,635 |
|
Exercised |
|
|
(76,750 |
) |
|
|
1.00 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(75,250 |
) |
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
2,694,400 |
|
|
|
1.20 |
|
|
|
2.80 |
|
|
|
80,832 |
|
Granted |
|
|
1,331,000 |
|
|
|
0.84 |
|
|
|
4.38 |
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,520,225 |
) |
|
|
1.34 |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010 |
|
|
2,505,175 |
|
|
$ |
0.92 |
|
|
|
2.99 |
|
|
$ |
|
|
|
|
|
Exercisable December 31, 2010 |
|
|
1,171,050 |
|
|
$ |
1.08 |
|
|
|
1.59 |
|
|
$ |
|
|
|
|
|
The weighted-average grant-date fair value of options granted during 2010 and 2009 was
$0.84 and $0.75, respectively. The total intrinsic value of options exercised during 2010 and 2009
was nil.
The following table summarizes the Companys restricted stock activities:
|
|
|
|
|
|
|
Shares |
|
Outstanding January 1, 2009 |
|
|
313,367 |
|
Granted |
|
|
237,501 |
|
Forfeited |
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
550,868 |
|
Granted |
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010 |
|
|
550,868 |
|
|
|
|
|
Vested as of December 31, 2010 |
|
|
525,868 |
|
|
|
|
|
Changes in the Companys non-vested stock options are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Options |
|
|
Performance-based Options |
|
|
Restricted Stock |
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
|
|
|
Grant Date Fair |
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value Per Share |
|
|
Shares |
|
|
Value Per Share |
|
|
Shares |
|
|
Value Per Share |
|
Non-vested as of January 1, 2009 |
|
|
1,124,334 |
|
|
$ |
0.84 |
|
|
|
50,000 |
|
|
$ |
0.73 |
|
|
|
75,000 |
|
|
$ |
1.20 |
|
Granted |
|
|
489,500 |
|
|
|
0.45 |
|
|
|
|
|
|
|
|
|
|
|
237,501 |
|
|
|
0.83 |
|
Vested |
|
|
(494,334 |
) |
|
|
0.79 |
|
|
|
(50,000 |
) |
|
|
0.73 |
|
|
|
(262,501 |
) |
|
|
1.34 |
|
Forfeited |
|
|
(75,250 |
) |
|
|
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2009 |
|
|
1,044,250 |
|
|
|
0.71 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
1.34 |
|
Granted |
|
|
1,331,000 |
|
|
|
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(288,875 |
) |
|
|
0.69 |
|
|
|
|
|
|
|
|
|
|
|
(25,000 |
) |
|
|
1.34 |
|
Forfeited |
|
|
(752,250 |
) |
|
|
0.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2010 |
|
|
1,334,125 |
|
|
$ |
0.78 |
|
|
|
|
|
|
$ |
|
|
|
|
25,000 |
|
|
$ |
1.34 |
|
|
|
|
As of December 31, 2010, there was approximately $504,000, $0 and $31,000 of unrecognized
compensation cost related to non-vested service-based options, performance-based options and
restricted stock grants, respectively. The cost is expected to be recognized over a
weighted-average of 3.25 years for service-based options and 1.0 years for restricted stock grants.
The total fair value of shares vested during the year ended
December 31, 2010 was $272,000, $0 and
$34,000 for service-based options,
performance-based options and restricted stock grants, respectively. The total fair value of
shares vested during the year ended December 31, 2009 was
$479,000, $33,000 and $197,000 for
service-based options, performance-based options and restricted stock grants, respectively. There
were no changes to the contractual life of any fully vested options during the years ended December
31, 2010 and 2009.
F-21
12. Note Receivable
On December 22, 2009 the Company entered into a Promissory Note (Note) in the amount of
three million six hundred thirty thousand one hundred sixty four dollars ($3,630,164) with HEK
Partners, LLC (HEK) in connection with a completed Engineering, Procurement and Construction
Agreement (EPC) between Solar Tax Partners 1, LLC (STP1) and the Company. The note receivable
represented partial consideration for the total commitment due under the EPC of $19,557,000. HEK,
the maker of the Note, is the managing partner of STP1 and has agreed to assume this obligation as
part of its capital contribution to STP1. HEK will make periodic payments under this Note with a
payment of one million dollars ($1,000,000) on or before December 31, 2010 and thereafter will make
annual payments, prior to the maturity date, in amounts equal to the percent (10%) of the
outstanding principal balance on the Note, with a final payment due on December 31, 2016. Payments
will be applied first to any fees or charges due under the Note, second to accrued interest and
third to the principal balance. The Note bears interest of 6.5% per annum. The Note was issued in
connection with a construction contract recorded under the zero margin method (see Note 2). At
December 31, 2009 deferred revenue of approximately $4,563,000 has been netted against the note
receivable and accounts receivable related to the contract. The deferred revenue will be recognized
in income as the Note and receivable is collected.
On December 22, 2010, the Company entered into a Note Purchase and Sale Agreement, discounting the
note receivable and receiving a cash payment of $1,000,000. The purchase price of the note was
determined based on the present value of the obligation over the likely repayment period, the risk
involved with the payment of such term, and the unsecured nature of the obligation, and the release
of any claims against the Company by the issuer of the Note related to the finance structure and
assumptions. As a result of the transaction, the Company recognized approximately $464,000 of the
revenue that had been previously deferred and that as a result of the
transaction the is no additional revenue to be recognized and the note
has been settled.
13. Asset Held for Sale
During the twelve months ended December 31, 2010 the Company recorded an asset held for sale
of approximately $10,016,000. The Company used the guidance under FASB ACS 360-10-45-9 to evaluate
the classification, as discussed in Note 2. The asset held for sale resulted from the Company
taking possession of a solar facility for which the customer was unable to complete payment. The
Company expects that this asset will be sold within the next twelve months and is currently
marketing the facility for sale. At December 31, 2010, the asset held for sale on the consolidated
balance sheet was reduced by approximately $3,347,000 to $6,669,000 for funds received from the
United States Treasury under Section 1603, Payment for Specified Energy Property in Lieu of Tax
Credits. Accordingly, the asset held for sale is recorded as a current asset in the consolidated
balance sheet as of December 31, 2010.
14.
Loans Payable and Capital Lease Obligations
On June 1, 2010, our wholly-owned subsidiary, Solar Tax Partners 2, LLC (STP 2), and Five Star
Bank (Five Star) entered into a Loan Agreement (the Loan Agreement). Under the Loan Agreement,
Five Star agreed to advance a loan in an amount equal to $3,898,560 at an interest rate equal to
8.00% per annum. The Loan Agreement is evidenced by a Promissory Note, which is payable in 120
equal monthly payments of $47,535 commencing on July 15, 2010 through the maturity date of the
loan, which is the earlier of June 15, 2020 or the date on which Aerojet General Corporation
terminates that certain Power Purchase Agreement with STP 2 (the PPA) or purchases the solar
power generation facility pursuant to the PPA. The Loan Agreement contains customary
representations, warranties and financial covenants. In the event of default as described in the
Loan Agreement, the accrued and unpaid interest and principal immediately becomes due and payable
and the interest rate increases to 12.00% per annum. Borrowings under the Loan Agreement are
secured by (i) a blanket security interest in all of the assets of STP 2, and (ii) a first priority
lien on the easement interest, improvements, and fixtures and other real and personal property
related thereto located on the property described in the Loan Agreement. The primary asset is a power generating facility recorded as an asset held for sale which is discussed in Note 13
above. The note payable of $3,782,000 has been recorded as a current liability in the December 31, 2010 balance
sheet since if the facility is sold the Loan could contractually be required to be paid and the facility is expected to be
sold in twelve months.
The Company was obligated under loans payable requiring minimum payments as follows (in thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
3,804 |
|
2012 |
|
|
5 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
3,809 |
|
Less current portion |
|
|
(3,804 |
) |
|
|
|
|
Long-term portion |
|
$ |
5 |
|
|
|
|
|
F-22
The loans payable are collateralized by trucks used in the Companys solar photovoltaic
business, bear interest rates between 1.9% and 2.9% and are payable over sixty months and our
wholly-owned subsidiary, Solar Tax Partners 2, LLCs power generating facility, bearing interest at
8% and is payable over 120 months.
The Company leases equipment under capital leases. The leases expire from 2012 to 2013. The
Company was obligated for the following minimum payments under these leases (in thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
7 |
|
2012 |
|
|
6 |
|
2013 |
|
|
2 |
|
Less amounts representing interest |
|
|
(3 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
12 |
|
Less current portion |
|
|
(4 |
) |
|
|
|
|
Long-term portion |
|
$ |
8 |
|
|
|
|
|
15. Commitments and Contingencies
Letters of Credit At December 31, 2009, the Company had outstanding standby letters
of credit of approximately $225,413 as collateral for its capital lease. The standby letter of
credit is issued for a term of one year, mature beginning in September 2009 and the Company paid
one percent of the face value as an origination fee. These letters of credit are collateralized by
$255,000 of the Companys cash deposits. In July, 2010, the Company made the final payment on the
capital lease, the letter of credit was released and the restricted cash deposit collateralizing
the lease was released.
Guaranty On December 22, 2009, in connection with an equity funding of our
customer, Solar Tax Partners 1, LLC (STP1), of the Aerojet I project, the Company along with the
STP1s other investors entered into a Guaranty (Guaranty) to provide the equity investor,
Greystone Renewable Energy Equity Fund (Greystone), with certain guarantees, in part, to secure
investment funds necessary to facilitate STPs payment to the Company under the Engineering,
Procurement and Construction Agreement (EPC). Specific guarantees made by the Company include the
following in the event of the other investors failure to perform under the operating agreement:
|
|
|
Recapture Event The Company shall be responsible for providing Greystone with payments
for losses due to any recapture, reduction, requirement to repay, loss or disallowance of
certain tax credits (Energy Credits under Section 48 of Code) or Cash Grant (any payment
made by US Dept. of Treasure under Section 1603 of the ARRT of 2009) or if the actual Cash
Grant received by Master Tenant is less that the Anticipated Cash Grant (equal to
$6,900,000); |
|
|
|
|
Repurchase obligation If certain criteria occur prior to completion of the Facility,
including event of default, if the managing member defaults under the operating agreement or
the property or project are foreclosed on, or if the property qualifies for less than 70% of
projected credits (computed as an attachment to Master Tenants operating agreement), SPI
would be required to fund the purchase of Greystones interest in Master Tenant if the
managing member failed to fund the repurchase; |
|
|
|
|
Fund Excess Development Costs The Company would be required to fund costs in excess of
certain anticipated development costs; |
|
|
|
|
Operating Deficit Loans The Company would be required to loan Master Tenant or STP1
monies necessary to fund operations to the extent costs could not be covered by Master
Tenants or STP1s cash inflows. The loan would be subordinated to other liabilities of the
entity and earn no interest; and |
|
|
|
|
Exercise of Put Options At the option of Greystone, the Company may be required to
fund the purchase by managing member of Greystones interest in Master Tenant under an
option exercisable for 9 months following a 63 month period
commencing with operations of
the Facility. The purchase price would be equal to the greater of the fair value of
Greystones equity interest in Master Tenant or $951,985. |
F-23
Guaranty provisions related to the Recapture Event, Repurchase Obligation and Excess Development
Costs guarantees have effectively expired or were no longer applicable as of December 31, 2009.
This is because the trigger event for the Companys potential obligation has either lapsed or been
negated. The Company determined that the fair value of such guarantees was immaterial.
At December 31, 2009, the Company recorded on its balance sheet, the fair value of the remaining
guarantees, at their estimated fair value of $142,000. At December 31, 2010 the amount recorded on
the Companys balance sheet was approximately $127,000, net of amortization.
Operating leases The Company leases premises under various operating leases which
expire through 2012. Rental expenses under operating leases included in the statement of operations
were approximately $703,000 and $780,000 for the years ended December 31, 2010 and 2009,
respectively.
Our manufacturing facilities consist of 123,784 square feet, including 101,104 square feet of
factories and 23,680 square feet of dorms, situated in an industrial suburb of Shenzhen, Southern
China known as Long Gang. Only the state may own land in China. Therefore, we lease the land under
our facilities, and our lease agreement gives us the right to use the land until December 31, 2010
at an annual rent of $229,134. We have an option to renew this lease for 2 additional years on the
same terms. While we continue to operate our manufacturing in the existing facility, we are
actively seeking alternatives that will provide lower cost, higher quality or other incentives that
may benefit the company. The Company did not exercise its option to renew the lease at December 31,
2010 but continues to occupy the facility on a month-to-month tenancy.
On December 1, 2010 we leased approximately 3,900 square feet of office space to accommodate
our support services operations in Shenzhen, China. The term of the lease is three years and
expires on November 30, 2013 at an annual rent of approximately $38,334.
Our corporate headquarters are located in Roseville, California in a space of approximately
19,000 square feet. The five year lease commenced on August 1, 2007 and expires in July 2012. The
rent is currently $342,972 per year for the first year, $351,540 for the second year, $360,336 for
the third year, $369,336 for the fourth year and $378,576 for the remainder of the lease. The
Company has an option to renew for an additional five years.
Our retail outlet is located in Roseville, California in a space of approximately 2,000 square
feet. The five year lease commenced in October 2007 and expires in December 2012. The rent is
currently $79,426 per year and increase to $84,252 in the fifth year. The Company has an option to
renew for an additional five years. In October 2010, in conjunction with the discontinuance of our
residential installation business, we closed our retail outlet. The premises are currently
subleased at a monthly rent equal to our leasing costs of the premises.
The Company is obligated under operating leases requiring minimum rentals as follows (in
thousands):
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2011 |
|
$ |
499 |
|
2012 |
|
|
316 |
|
2013 |
|
|
|
|
|
|
|
|
Total minimum payments |
|
$ |
815 |
|
|
|
|
|
F-24
Litigation We are not a party to any pending legal proceeding. In the normal course of operations, we may have
disagreements or disputes with employees, vendors or customers. These disputes are seen by our management as a
normal part of business especially in the construction industry, and there are no pending actions currently or no
threatened actions that management believes would have a significant material impact on our financial position,
results of operations or cash flows.
16. Operating Risk
Concentrations of Credit Risk and Major Customers A substantial percentage of the Companys
net revenue comes from sales made to a small number of customers and are typically sold on an open
account basis. Details of customers accounting for 10% or more of total net sales for the years
ended December 31, 2010 and 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Customer |
|
2010 |
|
|
2009 |
|
Temescal Canyon RV, LLC |
|
$ |
7,659 |
|
|
$ |
|
|
Solar Tax Partners I LLC. |
|
|
|
|
|
|
14,853 |
|
Bayer & Roach GmbH |
|
|
|
|
|
|
5,857 |
|
Sun Technics Ltd. |
|
|
|
|
|
|
6,473 |
|
|
|
|
|
|
$ |
7,659 |
|
|
$ |
27,183 |
|
|
|
|
Details of the accounts receivable, and note receivable net of deferred revenue, and
costs and estimated earnings in excess of billings on uncompleted contracts from the customers with
the largest receivable balances (including all customers with accounts receivable balances of 10%
or more of accounts receivable) at December 31, 2010 and 2009, respectively are (in thousands):
|
|
|
|
|
|
|
|
|
Customer |
|
2010 |
|
|
2009 |
|
Temescal Canyon RV, LLC |
|
$ |
1,897 |
|
|
$ |
|
|
Solar Tax Partners 1, LLC accounts
receivable |
|
|
|
|
|
|
8,172 |
|
Solar Tax
Partners 2, LLC costs and estimated earnings in excess of
Billings on uncompleted projects |
|
|
|
|
|
|
5,557 |
|
|
|
|
|
|
$ |
1,897 |
|
|
$ |
13,729 |
|
|
|
|
Product Warranties We offer the industry standard of 20 years for our solar modules
and industry standard five (5) years on inverter and balance of system components. Due to the
warranty period, we bear the risk of extensive warranty claims long after we have shipped product
and recognized revenue. In our wire and mechanical assembly business, historically our warranty
claims have not been material. In our solar photovoltaic business our greatest warranty exposure is
in the form of product replacement. Until the third quarter of fiscal 2007, the Company purchased
its solar panels from third-party suppliers and since the third-party warranties are consistent
with industry standards we considered our financial exposure to warranty claims immaterial. During
the quarter ended September 30, 2007, the Company began installing its own manufactured solar
panels. As a result, the Company recorded the provision for the estimated warranty exposure on
these construction contracts within cost of sales. Since the Company does not have sufficient
historical data to estimate its exposure, we have looked to our historical data and historical data
reported by other solar system installers and manufacturers.
F-25
Performance Guarantee
On December 18, 2009, the Company entered into a 10-year energy output guaranty related to the
photovoltaic system installed for Solar Tax Partners 1, LLC (STP) at the Aerojet facility in
Rancho Cordova, CA. The guaranty provided for compensation to STPs system lessee for shortfalls in
production measured over a 12-month period. The Company believes that the probability of shortfalls
is unlikely and if they should occur be covered under the provisions of its current panel and
equipment warranty provisions.
17. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents and accounts receivable, prepayments, notes
payable, accounts payable, accrued liabilities, accrued payroll and other payables approximate
their respective fair values at each balance sheet date due to the short-term maturity of these
financial instruments.
Fair Value Guarantee
Guarantees In accordance with FASB ASC 820-10, the Company used multiple techniques to measure
the fair value of the guarantees using Level 3 inputs; the results of each technique have been
reasonably weighted based upon managements judgment to determine the fair value of the guarantees
at the measurement date. As a result of applying reasonable weights to each technique, the Company
believes a reasonable estimate of fair value for the guarantees was approximately $142,000 at
December 31, 2009. At December 31, 2010 the value of the guarantee on our consolidated balance
sheet, net of amortization, was approximately $127,000.
18. Geographical Information
The Companys two primary business segments include: (1) photovoltaic installation,
integration, and sales and (2) cable, wire and mechanical assemblies. Prior to the
quarter ended March 31, 2010, the Company operated in a third segment, franchise/product
distribution operations. During that quarter, the Company reorganized its internal reporting and
management structure, combining the operations of the franchise/product distribution segment with
its photovoltaic installation, integration and sales segment. Segment information for the twelve
months ended December 31, 2009 has been restated to give effect to this change. The Companys
reportable segments are strategic business units that offer different products and services. They
are managed separately because each business requires different technology and marketing
strategies.
During August and September 2009, the Company terminated all existing franchise agreements and
will no longer be seeking new franchisees. The Company entered into arrangements with most of its
former franchisees in which they will distribute our Yes! Solar SolutionsTM
branded products. Costs associated with the termination of franchise agreements were approximately
$283,000 and were recorded in the Statements of Operations under the sales, marketing and customer
service classification for the year ended December 31, 2009. The Company converted some of the
former franchisees to authorized dealers. In August and September 2010 the Company terminated its
dealer program. The Company determined that discontinued operations treatment was not required due to the fact
that revenue generated from this segment was not material to total revenue.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies.
F-26
Contributions of the major activities, profitability information and asset information of the
Companys reportable segments for the years ended December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2010 |
|
|
Year ended December 31, 2009 (restated) |
|
Segment (in thousands) |
|
Net sales |
|
|
Income (loss) |
|
|
Net Sales |
|
|
Income (loss) |
|
Photovoltaic installation, integration and sales |
|
$ |
30,719 |
|
|
$ |
(9,990 |
) |
|
$ |
47,623 |
|
|
$ |
(8,576 |
) |
Cable, wire and mechanical assemblies |
|
|
3,317 |
|
|
|
979 |
|
|
|
4,928 |
|
|
|
1,652 |
|
|
|
|
Segment total |
|
|
34,036 |
|
|
|
(9,011 |
) |
|
|
52,551 |
|
|
|
(6,924 |
) |
Reconciliation to consolidated totals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales eliminations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
34,036 |
|
|
|
|
|
|
$ |
52,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
|
|
|
$ |
(9,011 |
) |
|
|
|
|
|
$ |
(6,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
Year ended December 31, 2009 (restated) |
|
Segment (in thousands) |
|
Interest income |
|
|
Interest expense |
|
|
Interest income |
|
|
Interest expense |
|
Photovoltaic installation, integration and sales |
|
$ |
|
|
|
$ |
(450 |
) |
|
$ |
12 |
|
|
$ |
(49 |
) |
Cable, wire and mechanical assemblies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total |
|
$ |
|
|
|
$ |
(450 |
) |
|
$ |
12 |
|
|
$ |
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
Year ended December 31, 2009 (restated) |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and |
|
|
|
|
|
|
|
|
|
|
Depreciation and |
|
Segment (in thousands) |
|
Identifiable assets |
|
|
Capital expenditure |
|
|
amortization |
|
|
Identifiable assets |
|
|
Capital expenditure |
|
|
amortization |
|
Photovoltaic installation, integration and sales |
|
$ |
21,164 |
|
|
$ |
63 |
|
|
$ |
518 |
|
|
$ |
36,488 |
|
|
$ |
53 |
|
|
$ |
801 |
|
Cable, wire and mechanical assemblies |
|
|
2,642 |
|
|
|
|
|
|
|
8 |
|
|
|
1,026 |
|
|
|
|
|
|
|
26 |
|
|
|
|
Consolidated total |
|
$ |
23,806 |
|
|
$ |
63 |
|
|
$ |
526 |
|
|
$ |
37,514 |
|
|
$ |
53 |
|
|
$ |
827 |
|
|
|
|
Net sales by geographic location are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
Year ended December 31, 2009 (restated) |
|
|
|
Photovoltaic |
|
|
|
|
|
|
|
|
|
|
Photovoltaic |
|
|
|
|
|
|
|
|
|
installation, |
|
|
Cable, wire and |
|
|
|
|
|
|
installation, |
|
|
Cable, wire and |
|
|
|
|
|
|
integration and |
|
|
mechanical |
|
|
|
|
|
|
integration and |
|
|
mechanical |
|
|
|
|
Segment (in thousands) |
|
sales |
|
|
assemblies |
|
|
Total |
|
|
sales |
|
|
assemblies |
|
|
Total |
|
United States |
|
$ |
23,592 |
|
|
$ |
2,313 |
|
|
$ |
25,905 |
|
|
$ |
25,034 |
|
|
$ |
3,884 |
|
|
$ |
28,918 |
|
Asia |
|
|
236 |
|
|
|
|
|
|
|
236 |
|
|
|
6,630 |
|
|
|
|
|
|
|
6,630 |
|
Europe |
|
|
6,733 |
|
|
|
|
|
|
|
6,733 |
|
|
|
13,001 |
|
|
|
|
|
|
|
13,001 |
|
Australia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,958 |
|
|
|
|
|
|
|
2,958 |
|
Mexico |
|
|
|
|
|
|
1,004 |
|
|
|
1,004 |
|
|
|
|
|
|
|
1,044 |
|
|
|
1,044 |
|
Other |
|
|
158 |
|
|
|
|
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,719 |
|
|
$ |
3,317 |
|
|
$ |
34,036 |
|
|
$ |
47,623 |
|
|
$ |
4,928 |
|
|
$ |
52,551 |
|
|
|
|
The location of the Companys identifiable assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December |
|
|
Year ended December |
|
Segment (in thousands) |
|
31, 2010 |
|
|
31, 2009 |
|
United States |
|
$ |
21,256 |
|
|
$ |
31,421 |
|
China (including Hong Kong) |
|
|
2,550 |
|
|
|
6,093 |
|
|
|
|
Total |
|
$ |
23,806 |
|
|
$ |
37,514 |
|
|
|
|
F-27
Income tax expense by geographic location is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December |
|
|
Year ended December |
|
Segment (in thousands) |
|
31, 2010 |
|
|
31, 2009 |
|
China (including Hong Kong) |
|
$ |
(144 |
) |
|
$ |
43 |
|
United States |
|
|
3 |
|
|
|
3 |
|
|
|
|
Total |
|
$ |
(141 |
) |
|
$ |
46 |
|
|
|
|
19. Related Party Transactions
In the fourth quarter of 2009, the Company completed a system installation under an
Engineering, Procurement and Construction Contract (EPC) entered into with Solar Tax Partners I,
LLC, a California limited liability company (STP1). Subsequent to the end of fiscal 2009, Stephen
C. Kircher, our Chief Executive Officer and Chairman of the Board, and his wife, Lari K. Kircher,
as Co-Trustees of the Kircher Family Irrevocable Trust dated December 29, 2004 (Trust) was
admitted as a member of STP1. The trust made a capital contribution of $20,000 and received a 35%
membership interest in STP1. Stephen C. Kircher, as trustee of the Trust was appointed a co-manager
of STP1. Neither Stephen C. Kircher nor Lari K. Kircher are beneficiaries under the Trust.
19. Subsequent Events
Subsequent to year end, on January 5, 2011, we entered into a Stock Purchase Agreement (SPA)
with LDK Solar Co., Ltd. (LDK) in connection with the sale and issuance by the Company of
convertible Series A Preferred Stock and Common Stock. At
the first closing on January 10, 2011, we issued 42,835,947 shares of our common stock at
$0.25 per share, and received proceeds net of expenses of approximately $10,505,000. The
second closing, expected to occur before the end of the first quarter of 2011, we will issue
20,000,000 shares of our Series A Preferred Stock receiving proceeds of $22,227,669.
Litigation
Subsequent to fiscal year end, on January 25, 2011, a putative class action was against the Company, the
Companys directors and LDK Solar Co., Ltd. (LDK), in the Superior Court of California, County of Placer. The
complaint alleges violations of fiduciary duty by the individual director defendants concerning a proposed
transaction described above, pursuant to which defendant LDK agreed to acquire 70% interest in the Company.
Plaintiff contends that the independence of the individual director defendants was compromised because they are
allegedly beholden to defendant LDK for continuation of their positions as directors and possible further
employment. Plaintiff further contends that the proposed transaction is unfair because it allegedly contains onerous
and preclusive deal protection devices, such as no shop, standstill and no solicitation provisions and a termination
fee that operates to effectively prevent any competing offers. The complaint alleges that the Company aided and
abetted the breaches of fiduciary duty by the individual director defendants by providing aid and assistance.
Plaintiff asks for class certification, the enjoining of the sale, or if the sale is completed prior to judgment, rescission
of the sale and damages.
The case is in its early stages and the Company intends to vigorously defend this action. Because the complaint
was recently filed, it is difficult at this time to fully evaluate the claims and determine the likelihood of an
unfavorable outcome or provide an estimate of the amount of any potential loss. The Company does have insurance
coverage for this type of action.
F-28