Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Solar Power, Inc.Financial_Report.xls
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R7.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R2.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R3.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R1.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R6.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R9.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R4.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R17.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R24.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R12.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R18.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R22.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R23.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R11.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R25.htm
EX-32 - CERTIFICATION OF PEO AND PFO PURSUANT TO SECTION 906 - Solar Power, Inc.d320123dex32.htm
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - Solar Power, Inc.d320123dex312.htm
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Solar Power, Inc.d320123dex311.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R5.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R13.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R20.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R19.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R15.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R21.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R26.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R16.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R14.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R10.htm
XML - IDEA: XBRL DOCUMENT - Solar Power, Inc.R8.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q/A

 

 

 

x Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

 

¨ Transition Report Under 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)

 

 

 

California   20-4956638

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

2240 Douglas Boulevard, Suite 200

Roseville, CA 95661-3875

(Address of principal executive offices)

(916) 770-8100

(Issuer’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

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):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 184,413,923 shares of $0.0001 par value common stock outstanding as of March 22, 2012.

 

 

 


Table of Contents

Explanatory Note

Solar Power, Inc. (the “Company”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 15, 2011. This filing amends and restates our previously reported financial statements for the three and six month periods ended June 30, 2011 and 2010 to reflect revised accounting treatment for a single solar development project under the financing method as opposed to the percentage of completion method as was previously reported, as discussed in Note 3 to the Condensed Consolidated Financial Statements.

Based on its review, the management determined that the Company improperly recognized revenue at the date of the initial sale on a solar development project initiated in 2009 under the percentage of completion method for construction work for the new owner. The transaction should have been accounted for in accordance with accounting standards for sales of real estate and due to continuing involvement with the project after the transaction, no sale should have been recognized. Instead the transaction should have been accounted for using the financing method.

In May 2009, the Company entered into a Power Purchase Agreement (“PPA”) with Aerojet General Corp. (“Aerojet”) to supply solar energy and commenced construction of a Solar Energy Facility (“SEF”). In September 2009, the Company transferred the partially completed SEF to Solar Tax Partners 1 (the “Buyer”), and entered into contracts with the Buyer to assign them the rights under the associated PPA, and complete construction of the SEF. The Company accounted for this transaction under the percentage of completion method in its third quarter 2009 Consolidated Financial Statements.

In the fourth quarter 2009, the Company completed construction of the SEF for a price of $19.6 million and received $6.7 million in cash, $3.6 million in a promissory note with $9.3 million balance amount outstanding. The Company applied the cost recovery method of revenue recognition to this transaction due to the degree of uncertainty of the collectability of the outstanding amount. Accordingly, for the year ended December 31, 2009, the Company recorded total revenue of $14.9 million and an equivalent cost of goods sold amount of $14.9 million.

Prior to September 30, 2009, the only parties to the SEF arrangement were Aerojet and the Company, pursuant to the PPA. Since the Company had access to the Aerojet property under an implied easement and had completed a significant portion of the physical construction of the SEF, it was determined to be the owner of the partially completed SEF. Therefore, the Company reassessed the accounting treatment and determined that the project should be accounted for as a sale of real estate. As a result, while the Company maintains its continuing involvement, it will apply the financing method. The results of this change on the Consolidated Balance Sheet as of June 30, 2011, Consolidated Statements of Operations for the three months and six months ended June 30, 2011 and 2010, and Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010, are discussed under Note 3 to the Condensed Consolidated Financial Statements.

This Amendment No. 1 amends and restates the following items of our Form 10-Q/A as affected by the revised accounting treatment for the solar development project: (i) Part I, Item 1 — Financial Statements; (ii) Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations; (iii) Part I, Item 4 — Controls and Procedures; and, (iv) Part II, Item 6 — Exhibits.

All information in our Quarterly Report on Form 10-Q/A for the three months and six months ended June 30, 2011 and 2010, as amended by this Amendment No. 1, speaks as of the date of the original filing of our Form 10-Q for such periods and does not reflect any subsequent information or events, except as expressly noted in this Amendment No. 1 and except for Exhibits 31.1, 31.2, and 32. All information contained in this Amendment No. 1 is subject to updating and supplementing as provided in our reports, as amended, filed with the Securities and Exchange Commission subsequent to the date of the initial filing of our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2011 and 2010.

 

2


Table of Contents

TABLE OF CONTENTS

 

         Page  

Explanatory paragraph

     2   

PART I — Financial Information

     4   

Item 1 —

 

Financial Statements (unaudited)

     4   
 

Consolidated Balance Sheets as of June 30, 2011 (as restated) and December 31, 2010 (as restated)

     4   
 

Consolidated Statements of Operations for the three months and six months ended June  30, 2011 (as restated) and 2010 (as restated)

     5   
 

Consolidated Statements of Cash Flows for the six months ended June  30, 2011 (as restated) and 2010 (as restated)

     6   

Item 2 —

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 4 —

 

Controls and Procedures

     37   

Part II — Other Information

     38   

Item 6 —

 

Exhibits

     39   

Signatures

     40   

 

3


Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOLAR POWER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except for share data)

(unaudited)

 

     As of
June 30, 2011
    As of
December 31, 2010
 
     (as restated, see Note 3)     (as restated, see Note 3)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 18,479      $ 1,441   

Accounts receivable, net of allowance for doubtful accounts of $56 and $28

     9,670        5,988   

Accounts receivable, related party

     2,034        —     

Costs and estimated earnings in excess of billings on uncompleted contracts

     2,656        2,225   

Costs and estimated earnings in excess of billings on uncompleted contracts, related party

     5,033        —     

Inventories, net

     14,254        4,087   

Asset held for sale

     6,269        6,669   

Prepaid expenses and other current assets

     806        702   

Restricted cash

     250        285   
  

 

 

   

 

 

 

Total current assets

     59,451        21,397   

Goodwill

     435        435   

Restricted cash

     455        1,059   

Property, plant and equipment, net

     14,503        15,024   
  

 

 

   

 

 

 

Total assets

   $ 74,844      $ 37,915   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 3,925      $ 6,055   

Accounts payable, related party

     9,380        —     

Accrued liabilities

     2,092        4,298   

Income taxes payable

     2        2   

Billings in excess of costs and estimated earnings on uncompleted contracts

     3,241        1,767   

Loans payable and capital lease obligations

     4,517        3,808   
  

 

 

   

 

 

 

Total current liabilities

     23,157        15,930   

Loans payable, financing and capital lease obligations, net of current portion

     14,321        14,633   

Other liabilities

     1,379        —     
  

 

 

   

 

 

 

Total liabilities

     38,857        30,563   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Stockholders’ equity:

    

Preferred stock, par $0.0001, 20,000,000 shares authorized, 0 issued and outstanding

     —          —     

Common stock, par $0.0001, 250,000,000 shares authorized, 184,013,923 and 52,292,576 shares issued and outstanding

     18        5   

Additional paid in capital

     74,969        42,114   

Accumulated other comprehensive loss

     (277     (240

Accumulated deficit

     (38,723     (34,527
  

 

 

   

 

 

 

Total stockholders’ equity

     35,987        7,352   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 74,844      $ 37,915   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

4


Table of Contents

SOLAR POWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except for share data)

(unaudited)

 

     For Three Months Ended     For the Six Months Ended  
     June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
     (as restated, see
Note 3)
    (as restated, see
Note 3)
    (as restated, see
Note 3)
    (as restated, see
Note 3)
 

Net Sales:

        

Net sales

   $ 10,159      $ 11,523      $ 15,149      $ 17,602   

Net sales, related party

     5,369        —          6,129        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     15,528        11,523        21,278        17,602   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of goods sold:

        

Cost of goods sold

     9,205        10,033        13,579        15,439   

Cost of goods sold, related party

     4,653        —          5,413        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     13,858        10,033        18,992        15,439   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,670        1,490        2,286        2,163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

General and administrative

     1,930        2,381        3,499        4,394   

Sales, marketing and customer service

     916        965        1,387        2,058   

Engineering, design and product management

     209        379        341        583   

Impairment charge

     400        —          400        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,455        3,725        5,627        7,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (1,785     (2,235     (3,341     (4,872

Other income (expense):

        

Interest expense

     (523     (286     (900     (542

Interest income

     21        —          23        —     

Other income, net

     37        (650     32        (1,185
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (465     (936     (845     (1,727
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (2,250     (3,171     (4,186     (6,599

Income tax expense

     3        —          10        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,253   $ (3,171   $ (4,196   $ (6,602
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share

        

Basic and Diluted

   $ (0.02   $ (0.06   $ (0.04   $ (0.13
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares used in computing per share amounts

        

Basic and Diluted

     102,926,965        52,292,576        96,919,322        52,292,576   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

5


Table of Contents

SOLAR POWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

     For the Six Months Ended  
     June 30, 2011     June 30, 2010  
     (as restated, see
Note 3)
    (as restated, see
Note 3)
 

Cash flows from operating activities:

    

Net loss

   $ (4,196   $ (6,602

Adjustments to reconcile loss to net cash used in operating activities:

    

Depreciation

     498        685   

Amortization

     7        —     

Stock-based compensation expense

     150        197   

Bad debt expense

     168        471   

Loss on disposal of fixed assets

     —          4   

Operating income from solar system subject to financing obligation

     (304     (270

Impairment charge

     400        —     

Changes in operating assets and liabilities:

    

Accounts receivable

     (3,850     3,732   

Accounts receivable, related party

     (2,034     —     

Costs and estimated earnings in excess of billing on uncompleted contracts

     (431     (3,358

Costs and estimated earnings in excess of billing on uncompleted contracts, related party

     (5,033     —     

Inventories

     (10,167     314   

Asset held for sale

     —          (251

Prepaid expenses and other current assets

     3        60   

Accounts payable

     (2,130     279   

Accounts payable, related party

     9,380        —     

Income taxes payable

     —          (126

Billings in excess of costs and estimated earnings on uncompleted contracts

     1,474        599   

Accrued liabilities and other liabilities

     (835     (120
  

 

 

   

 

 

 

Net cash used in operating activities

     (16,900     (4,386

Cash flows from investing activities:

    

Acquisitions of property, plant and equipment

     (41     (25
  

 

 

   

 

 

 

Net cash used in investing activities

     (41     (25

Cash flows from financing activities:

    

Proceeds from issuance of common and preferred stock, net

     32,719        —     

Decrease (increase) in restricted cash

     639        (285

Net proceeds from loans payable

     4,500        3,899   

Loan fees

     (107     (101

Principal payments on loans payable and capital lease obligations

     (3,797     (168
  

 

 

   

 

 

 

Net cash provided by financing activities

     33,954        3,345   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     25        6   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     17,038        (1,060

Cash and cash equivalents at beginning of period

     1,441        3,136   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 18,479      $ 2,076   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 398      $ 16   
  

 

 

   

 

 

 

Cash paid for income taxes

   $ 10      $ 126   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

    

Equipment acquired through loans payable and capital lease obligations

   $ —        $ 14   
  

 

 

   

 

 

 

Amounts reclassified from costs and estimated earnings in excess of billing on uncompleted contracts to assets held for sale

   $ —        $ 9,765   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

6


Table of Contents

SOLAR POWER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of Business and Basis of Presentation

Description of Business

Solar Power, Inc., and its subsidiaries, (collectively the “Company”) is engaged in development, sales, installation and integration of photovoltaic systems and sells its contract manufactured racking and balance of system products and cable, wire and mechanical assemblies.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. They should be read in conjunction with the financial statements and related notes to the financial statements of the Company, Inc. for the years ended December 31, 2010 and 2009 appearing in the Company’s Form 10-K/A filed with the Securities and Exchange Commission (“SEC”) on April 16, 2012. The June 30, 2011 and 2010 unaudited interim Condensed Consolidated Financial Statements on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for smaller reporting companies. Certain information and note disclosures normally included in the annual financial statements on Form 10-K/A have been condensed or omitted pursuant to those rules and regulations, although the Company’s management believes the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal recurring adjustments (except for restatement related adjustments, in Note 3) necessary for a fair presentation of the results of operation for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

The consolidated financial statements include the accounts of Solar Power, Inc., and its subsidiaries. Intercompany balances, transactions and cash flows are eliminated in consolidation.

2. Summary of Significant Accounting Policies

Cash and cash equivalents — Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and all highly liquid investments with original maturities of three months or less, when purchased.

Inventories — Inventories are stated at the lower of cost or market, determined by the first in first out cost method. 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 — Basic earnings per share are 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 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 three and six months ended June 30, 2011 and 2010, potentially dilutive securities excluded from the computation of diluted earnings per share were 5,530,175 and 6,204,070, respectively.

 

7


Table of Contents

The following table illustrates the computation of the weighted average shares outstanding used in computing earnings per share in our financial statements:

 

     Three Months Ended      Six Months Ended  
     June 30, 2011      June 30, 2010      June 30, 2011      June 30, 2010  

Weighted Average of Shares Outstanding

           

Basic

     102,926,965         52,292,576         96,919,322         52,292,576   

Dilutive effect of warrants outstanding

     —           —           —           —     

Dilutive effect of stock options outstanding

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     102,926,965         52,292,576         96,919,322         52,292,576   
  

 

 

    

 

 

    

 

 

    

 

 

 

Plant, plant 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
Automobiles    3 years
Leasehold improvements    the shorter of the estimated life or the lease term
Solar energy facilities    20 years

Impairment of long-lived assets — Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

Revenue recognition — The Company’s 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, there are two revenue streams.

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.

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 a customer’s credit worthiness at the time the order is accepted. Sudden and unexpected changes in a customer’s financial condition could put recoverability at risk.

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.

 

8


Table of Contents

For those projects where the Company is considered to be the owner, the project is accounted for under the rules of real estate accounting. In the event of a sale, the method of revenue recognition is determined by considering the extent of the buyer’s initial and continuing involvement. Generally, revenue is recognized at the time of title transfer if the buyers investment is sufficient to demonstrate a commitment to pay for the property and the Company does not have a substantial continuing involvement with the property. When continuing involvement is substantial and not temporary, the Company applies the financing method, whereby the asset remains on the balance sheet and the proceeds received are recorded as a financing obligation. When a sale is not recognized due to continuing involvement and the financing method is applied the Company records revenue and expenses related to the underlying operations of the asset in the Company’s Consolidated Financial Statements.

Cable, wire and mechanical assemblies — In the Company’s 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 a determination of a customer’s credit worthiness at the time we accept their order.

Goodwill — Goodwill is the excess of purchase price over the fair value of net assets acquired. The carrying value of goodwill is evaluated for impairment on an annual basis, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented.

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 and 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 June 30, 2011 and December 31, 2010, the Company recorded an allowance of $56,000 and $28,000, respectively.

Stock-based compensation — The Company measures the stock-based compensation costs of share-based compensation arrangements based on the grant-date fair value of awards and generally recognizes the costs in the financial statements over the employee requisite service period.

Shipping and handling costs — Shipping and handling costs related to the delivery of finished goods are included in cost of goods sold. During the three months ended June 30, 2011 and 2010, shipping and handling costs expensed to cost of goods sold were $425,000 and $199,000, respectively. During the six months ended June 30, 2011 and 2010, shipping and handling costs expensed to cost of goods sold were $554,000 and $409,000, 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 $28,000 and $31,000 during the three months ended June 30, 2011 and 2010, respectively and $43,000 and $92,000 during the six months ended June 30, 2011 and 2010, respectively.

Product warranties — The Company offers the industry standard of 25 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 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. Certain photovoltaic construction contracts entered into during the year ended December 31, 2007 included provisions under which the Company agreed to provide warranties to the buyer, and during the quarter ended September 30, 2007 and continuing through the fourth quarter of 2010, the Company installed its own manufactured solar panels. As a result, the Company recorded the provision for the estimated warranty exposure on these contracts within cost of sales. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to our own historical data in combination with historical data reported by other solar system installers and manufacturers. The Company now only installs panels manufactured by unrelated third parties and its parent LDK Solar

 

9


Table of Contents

Co., Ltd. We provide their pass through warranty, and reserve for unreimbursed costs to replace these panels. The Company has recorded a warranty expense of $103,000 and $100,000 for the three months ended June 30, 2011 and 2010, respectively, and recorded a warranty expense of $109,000 and $177,000 for the six months ended June 30, 2011 and 2010, respectively.

Performance Guaranty — 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, California. The guaranty provides for compensation to STP’s system lessee for shortfalls in production related to the design and operation of the system, but excluding shortfalls outside the Company’s control such as government regulation. The Company believes that probability of shortfalls is unlikely and if they should occur are covered under the provisions of its current panel and equipment warranty provisions.

Income taxes — The Company accounts 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 future taxable income. 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 based on the weight of available evidence, including expected future earnings.

 

10


Table of Contents

The Company recognizes uncertain tax positions in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. 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 accrues 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’s expenditures are substantially all in U.S. dollars.

All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at period-end exchange rates. All income and expenditure items in the income statements of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at average annual exchange rates. Translation gains and losses arising from the translation of the financial statements of foreign subsidiaries whose functional currency is other than the U.S. dollar are not included in determining net income but are accumulated in a separate component of stockholders’ equity as a component of comprehensive income. The functional currency of the Company’s operations in the People’s Republic of China is the Renminbi.

Gains and losses resulting from the transactions denominated in foreign currencies are included in other expense, net.

Aggregate net foreign currency transaction gains (losses) included in the statements of operations were $60,000 for the three months ended June 30, 2011 and ($660,000) for the three months ended June 30, 2010 and $62,000 for the six months ended June 30, 2011 and ($1,195,000) for the six months ended June 30, 2010, primarily due to the fluctuations of the value of China’s Renminbi to the U.S. Dollar in 2011 and the Euro to the U.S. Dollar during the comparative periods in 2010.

Comprehensive income (loss) — 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 three months ended June 30, 2011, comprehensive loss was $2,279,000 (as restated) composed of a net loss of $2,253,000 (as restated) and currency translation loss of $26,000. For the three months ended June 30, 2010, comprehensive loss was $3,171,000 (as restated), composed of a net loss of $3,171,000 (as restated). For the six months ended June 30, 2011, comprehensive loss was $4,233,000 (as restated) composed of a net loss of $4,196,000 (as restated) and currency translation loss of $37,000. For the six months ended June 30, 2010, comprehensive loss was $6,602,000 (as restated), composed of a net loss of $6,602,000 (as restated).

Post-retirement and post-employment benefits — The Company’s subsidiaries which are located in the People’s Republic of China contribute to a state pension scheme on behalf of their employees. The Company recorded $15,000 and $19,000 for expense related to its pension contribution for the three months ended June 30, 2011 and 2010, respectively. The Company recorded $30,000 and $37,000 for expense related to its pension contribution for the six months ended June 30, 2011 and 2010, respectively.

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. Key estimates used in the preparation of our financial statements include: contract percentage of completion and cost estimates, allowance for doubtful accounts, stock-based compensation, warranty reserve, deferred taxes, valuation of inventory, and valuation of goodwill. Actual results could differ from these estimates.

3. Restatement

This filing amends and restates our previously reported consolidated financial statements for the three and six month periods ended June 30, 2011 and 2010 to reflect revised accounting treatment for a single solar development project under the financing method for a sale of real estate as opposed to percentage of completion method as was previously used.

Based on its review, management determined that the Company improperly recognized revenue at the date of the initial sale on a solar development project initiated in 2009 under the percentage of completion method for construction work for the new owner. The transaction should have been accounted for in accordance with accounting standards for sales of real estate and due to continuing involvement with the project after the transaction, no sale should have been recognized. Instead the transaction should have been accounted for using the financing method.

 

11


Table of Contents

In May 2009, the Company entered into a Power Purchase Agreement (“PPA”) with Aerojet General Corp. (“Aerojet”) to supply solar energy and commenced construction of a Solar Energy Facility (“SEF”). In September 2009, the Company transferred the partially completed SEF to Solar Tax Partners 1 (the “Buyer”), and entered into contracts with the Buyer to assign them the rights under the associated PPA, and complete construction of the SEF. The Company accounted for this transaction under the percentage of completion method in its third quarter 2009 consolidated financial statements.

In the fourth quarter 2009, the Company completed construction of the SEF for a price of $19.6 million and received $6.7 million in cash, $3.6 million in promissory note and with $9.3 million balance amount outstanding. The Company applied the cost recovery method of revenue recognition to this transaction due to degree of uncertainty for the collectability of the outstanding amount. Accordingly, for the year ended December 31, 2009, the Company recorded total revenue of $14.9 million and an equivalent cost of goods sold amount of $14.9 million.

Prior to September 30, 2009, the only parties to the SEF arrangement were Aerojet and the Company, pursuant to the PPA. The Company had access to the Aerojet property under an implied easement, had completed a significant portion of the physical construction of the SEF, and was therefore considered the owner of the partially completed SEF. Accordingly, the Company reassessed the accounting treatment and determined that the project should be accounted for as a sale of real estate. As a result, while the Company maintains its continuing involvement through guarantees given to the investor, it will apply the financing method.

The following tables disclose the impact of the changes on the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010. Consolidated Statements of Operations for the three months and six months ended June 30, 2011 and 2010, and on the Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010:

 

Consolidated Balance Sheets    As of June 30, 2011     As of December 31, 2010  
(Dollars in thousands)    As reported     Adjustments     As restated     As reported     Adjustments     As restated  

Property, plant and equipment at cost, net

   $ 765      $ 13,738      $ 14,503      $ 915      $ 14,109      $ 15,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ 61,106      $ 13,738      $ 74,844      $ 23,806      $ 14,109      $ 37,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans payable, financing and capital lease obligations, net of current portion

   $ 5      $ 14,316      $ 14,321      $ 13      $ 14,620      $ 14,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   $ 24,541      $ 14,316      $ 38,857      $ 15,943      $ 14,620      $ 30,563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated deficit

   $ (38,145   $ (578   $ (38,723   $ (34,016   $ (511   $ (34,527
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 36,565      $ (578   $ 35,987      $ 7,863      $ (511   $ 7,352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 61,106      $ 13,738      $ 74,844      $ 23,806      $ 14,109      $ 37,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Consolidated Statements of Operations

  For three months ended June 30     For six months ended June 30  
(Dollars in thousands)   2011     2010     2011     2010  
    As
reported
    Adjustments     As
restated
    As
reported
    Adjustments     As
restated
    As
reported
    Adjustments     As
restated
    As
reported
    Adjustments     As
restated
 

Net Sales

  $ 14,940      $ 588      $ 15,528      $ 10,950      $ 573      $ 11,523      $ 20,430      $ 848      $ 21,278      $ 16,782      $ 820      $ 17,602   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of goods sold

  $ 13,662      $ 196      $ 13,858      $ 9,838      $ 195      $ 10,033      $ 18,600        392      $ 18,992      $ 15,048        391      $ 15,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

  $ 1,278      $ 392      $ 1,670      $ 1,112      $ 378      $ 1,490      $ 1,830        456      $ 2,286      $ 1,734        429      $ 2,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $ —                   

General and administrative

  $ 1,915      $ 15      $ 1,930      $ 2,365      $ 16      $ 2,381      $ 3,468        31      $ 3,499      $ 4,363        31      $ 4,394   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

  $ (2,162   $ 377      $ (1,785   $ (2,597   $ 362      $ (2,235   $ (3,766     425      $ (3,341   $ (5,270     398      $ (4,872
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

  $ (277   $ (246   $ (523   $ (38   $ (248   $ (286   $ (408     (492   $ (900   $ (43     (499   $ (542
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2,384   $ 131      $ (2,253   $ (3,285   $ 114      $ (3,171   $ (4,129     (67   $ (4,196   $ (6,501     (101   $ (6,602
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

12


Table of Contents
Consolidated Statements of Cash Flow       
(Dollars in thousands)    For six months ended June 30, 2011     For six months ended June 30, 2010  
     As reported     Adjustments     As restated     As reported     Adjustments     As restated  

Net loss

   $ (4,129     (67   $ (4,196   $ (6,501     (101   $ (6,602
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

   $ 127        371      $ 498      $ 314        371      $ 685   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income from solar system subject to financing obligation

   $ —          (304   $ (304   $ —          (270   $ (270
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The effect of the restatement on the consolidated statements of stockholders’ equity and comprehensive loss for the six months ended June 30, 2011 and 2010 is $(67,000) and $(101,000), respectively.

4. Recently Issued Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 fair value measurements, 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.

 

13


Table of Contents

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 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 adoption of ASU 2010-17 did not have a material 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 modifies 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 June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. ASU 2011-05 increases the prominence of other comprehensive income in financial statements. Under this ASU, an entity will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. ASU 2011-05 is effective on a retrospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects that the adoption of ASU 2011-05 will not have a material impact on results of operations, cash flows or financial position.

5. Restricted Cash

At June 30, 2011, the Company had restricted bank deposits of $705,000. The restricted bank deposits consist of $400,000 as a reserve pursuant to our guarantees of Solar Tax Partners 1, LLC with the bank providing the debt financing on their solar generating facility (see Note 8 — Property, Plant and Equipment), $250,000 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, $20,000 securing our corporate credit card and $35,000 as retention by our bank for our merchant credit card services.

At December 31, 2010, the Company had restricted bank deposits of $1,344,000. The restricted bank deposits consist of $1,004,000 as a reserve pursuant to our guarantees of Solar Tax Partners 1, LLC with the bank providing the debt financing on their solar generating facility, $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, $20,000 securing our corporate credit card and $35,000 as retention by our bank for our merchant credit card service.

6. Inventories

Inventories consisted of the following (in thousands):

 

     June 30, 2011      December 31, 2010  

Raw material

   $ 1,575       $ 2,008   

Finished goods

     12,679         2,079   
  

 

 

    

 

 

 
   $ 14,254       $ 4,087   
  

 

 

    

 

 

 

7. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

     June 30, 2011      December 31, 2010  

Rental, equipment and utility deposits

   $ 317       $ 177   

Supplier deposits

     38         24   

VAT — recoverable

     37         —     

Insurance

     83         94   

Advertising

     105         105   

Taxes

     27         141   

 

14


Table of Contents
     June 30, 2011      December 31, 2010  

Loan fees

     106         96   

Commissions

     26         —     

Other

     67         65   
  

 

 

    

 

 

 
   $ 806       $ 702   
  

 

 

    

 

 

 

8. Property, Plant and Equipment

In 2009, the Company capitalized a photovoltaic (“PV”) solar system relating to the Aerojet 1 solar development project along with the associated financing obligation, recorded under loans payable, financing and capital lease obligations on its consolidated financial statements. Due to certain guarantee arrangements as disclosed in Note 16 — Commitments and Contingencies, the Company will continue to record this solar system within its property, plant and equipment along with its associated financing obligation in loans payable and capital lease obligations as long as it maintains its continuing involvement with this project. The income and expenses relating to the underlying operation of the Aerojet 1 project are recorded in the Company’s consolidated financial statements. The Company has restricted bank deposits of $400,000 as a reserve pursuant to guarantees with the bank providing the debt financing on this project as disclosed in Note 5 — Restricted Cash.

Property, plant and equipment consisted of the following (in thousands):

 

     June 30, 2011     December 31, 2010  
     (as restated, see Note 3)     (as restated, see Note 3)  

PV solar system

   $ 14,852      $ 14,852   

Plant and machinery

     727        686   

Furniture, fixtures and equipment

     351        351   

Computers and software

     1,460        1,437   

Trucks

     118        118   

Leasehold improvements

     406        402   
  

 

 

   

 

 

 

Total cost

     17,914        17,846   

Less: accumulated depreciation

     (3,411     (2,822
  

 

 

   

 

 

 
   $ 14,503      $ 15,024   
  

 

 

   

 

 

 

Depreciation expense for the three months ended June 30, 2011 and 2010 was $212,000 and $325,000, respectively. Depreciation for the six months ended June 30, 2011 and 2010 was $498,000 and $685,000, respectively.

9. Accrued Liabilities and Other Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     June 30, 2011      December 31, 2010  

Accrued payroll and related costs

   $ 551       $ 462   

Sales tax payable

     220         965   

Warranty reserve — current portion

     200         1,542   

Customer deposits

     425         368   

Deposits — other

     409         —     

Accrued financing costs

     56         578   

Accrued guaranty reserve

     127         127   

Accrued interest

     23         —     

Other

     81         256   
  

 

 

    

 

 

 
   $ 2,092       $ 4,298   
  

 

 

    

 

 

 

Other liabilities consisted of the following (in thousands):

 

     June 30, 2011      December 31, 2010  

Warranty reserve — noncurrent

   $ 1,379       $ —     
  

 

 

    

 

 

 
   $ 1,379       $ —     
  

 

 

    

 

 

 

 

15


Table of Contents

10. Stockholders’ Equity

Pursuant to a Stock Purchase Agreement (“SPA”) dated January 5, 2011, on January 10, 2011, the Company and LDK Solar (“LDK”) consummated the transactions contemplated by the First Closing of the SPA whereby the Company issued 42,835,947 shares of Common Stock for an aggregate purchase price of $10,709,000. Proceeds recorded in stockholders’ equity are net of issuance costs of $218,000. Such shares represented approximately 44.9% of the Company’s outstanding Common Stock.

On March 31, 2011, the Company and LDK consummated the transactions contemplated by the Second Closing of the SPA whereby the Company issued 20,000,000 shares of Series A Preferred Stock for an aggregate purchase price of $22,228,000. Each share of Series A Preferred Stock has a dividend preference equal to $0.04 per annum, to the extent declared, and shall automatically be converted into approximately 4.44552 shares of common stock (subject to adjustments) upon the Company amending its Articles of Incorporation to increase the authorized number of shares of common stock in an amount sufficient to effect the conversion of the Series A Preferred Stock. Each share of Series A Preferred Stock is entitled to a number of votes per share equal to the number of shares of common stock into which the Series A Preferred Stock would convert. On June 22, 2011, the shareholders of the Company approved an amendment to the Company’s Articles of Incorporation increasing the authorized shares and enabling the automatic conversion of the 20,000,000 Series A Preferred Stock to 88,910,400 shares of the Company’s common stock. The 20,000,000 shares of Series A Preferred Stock were cancelled pursuant to the conversion.

11. Income Taxes

Income taxes are recorded based on current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities. We base our estimate of current and deferred taxes on the tax laws and rates that are currently in effect in the appropriate jurisdiction. Changes in laws or rates may affect the current amounts payable or refundable as well as the amount of deferred tax assets or liabilities.

The Company did not have any unrecognized tax benefits or liabilities as of June 30, 2011 and December 31, 2010. The Company does not anticipate that its unrecognized tax benefits or liability position will change significantly over the next twelve months.

The Company is currently in a cumulative loss position and has significant net operating loss carry forwards. Accordingly, we have provided only for statutory minimum taxes.

12. Stock-based Compensation

The Company measures the stock-based compensation costs of share-based compensation arrangements based on the grant-date fair value and recognizes the costs in the financial statements over the employee requisite service period.

The following table summarizes the consolidated stock-based compensation expense, by type of awards for the three and six months ended June 30, 2011 and 2010 (in thousands):

 

     For Three Months Ended      For Six Months Ended  
     June 30, 2011      June 30, 2010      June 30, 2011      June 30, 2010  

Employee stock options

   $ 94       $ 90       $ 142       $ 181   

Stock grants

     —           8         8         16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 94       $ 98       $ 150       $ 197   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the consolidated stock-based compensation by line item for the three and six months ended June 30, 2011 and 2010 (in thousands):

 

     For Three Months Ended      For Six Months Ended  
     June 30, 2011      June 30, 2010      June 30, 2011      June 30, 2010  

General and administrative

   $ 82       $ 49       $ 118       $ 99   

Sales, marketing and customer service

     10         25         25         50   

Engineering, design and product management

     2         24         7         48   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

     94         98         150         197   

Tax effect on stock-based compensation expense

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense after taxes

   $ 94       $ 98       $ 150       $ 197   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

Stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimated its average pre-vesting forfeiture rate at 17.7% and 10.7% for the six months ended June 30, 2011 and 2010, respectively.

Valuation Assumptions

Valuation and Amortization Method — The Company estimates the fair value of service-based and performance-based stock options granted using the Black-Scholes-Merton 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. Service-based and performance-based options typically have a five-year life from date of grant and vesting periods of three to four years.

 

17


Table of Contents

Expected Term — The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. For awards granted subject only to service vesting requirements, the Company utilizes the simplified method for estimating the expected term of the stock-based award, instead of historical exercise data. For its performance-based awards, the Company has determined the expected term to be five years based on contractual life and the seniority of the recipient.

Expected Volatility — The Company uses the historical volatility of the price of its common shares.

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-Merton 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.

During the three and six months ended June 30, 2011, the Company granted 3,700,000 service-based options fair-valued at $0.46 per option using the Black-Scholes-Merton model. The vesting for these options will occur over a four-year period beginning one year from the date of grant. During the three and six months ended June 30, 2010, the Company granted 805,000 service-based options fair-valued between $0.24 and $0.52 per option, respectively using the Black-Scholes-Merton model. The vesting for 705,000 of the service-based options will occur over a four-year period beginning one year from the date of grant and the vesting period for 100,000 of the service-based options will occur over a one-year period beginning on the date of grant.

Assumptions used in the determination of the fair value of share-based payment awards using the Black-Scholes-Merton model for stock option grants during the three and six months ended June 30, 2011 and 2010 were as follows:

 

     2011
Service-based
    2010
Service-based

Expected term

     3.75      3.0-3.75

Risk-free interest rate

     0.94   1.47%

Volatility

     201   54%

Dividend yield

     0   0%

Equity Incentive Plan

At June 30, 2011 there were 16,819,220 total shares available to be issued under the plan (9% of the outstanding shares of 184,013,923 plus outstanding warrants of 2,866,302). There were 6,056,043 options and restricted shares issued and outstanding under the plan; 164,195 options have been exercised; and 10,598,982 shares are available to be issued.

The following table summarizes the Company’s stock option activities for the three and six month periods ended June 30, 2011 and 2010:

 

     2011      2010  
                  Weighted-                          Weighted-         
           Weighted-      Average                   Weighted-      Average         
           Average      Remaining                   Average      Remaining         
           Exercise Price      Contractual      Aggregate Intrinsic            Exercise Price      Contractual      Aggregate Intrinsic  
     Shares     Per Share      Term      Value ($000)      Shares     Per Share      Term      Value ($000)  

Outstanding January 1

     2,505,175      $ 0.92         2.99       $ —           2,694,400      $ 1.20         2.80       $ 80,832   

Granted

     —          —           —           —           805,000        1.24         4.76         —     

Exercised

     —          —           —           —           —          —           —           —     

Forfeited

     (25,000     0.55         —           —           (202,500     1.00         —           —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding March 31

     2,480,175        0.91         2.75         —           3,296,900        1.22         3.18         197,814   

Granted

     3,700,000        0.49         3.75         —           —          —           —           —     

Exercised

     —          —           —           —           —          —           —           —     

Forfeited

     (650,000     —           —           —           (10,000     1.00         —           —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding June 30

     5,530,175      $ 0.68         3.84       $ —           3,286,900      $ 1.22         2.93       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable June 30

     1,381,175      $ 1.09         1.34       $ —           1,708,775      $ 1.23         2.24       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The weighted-average grant-date fair value of the options granted during the six months ended June 30, 2011 was $0.46. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2010 was $0.48.

 

18


Table of Contents

The following table summarizes the Company’s restricted stock activities for the three and six month periods ended June 30, 2011 and 2010:

 

     2011     2010  
     Shares  

Outstanding as of January 1

     550,868        550,868   

Granted

     —          —     

Exercised

     —          —     

Forfeited

     (25,000     —     
  

 

 

   

 

 

 

Outstanding March 31

     525,868        550,868   

Granted

     —          —     

Exercised

     —          —     

Forfeited

     —          —     
  

 

 

   

 

 

 

Outstanding June 30

     525,868        550,868   
  

 

 

   

 

 

 

Vested as of June 30

     525,868        500,868   
  

 

 

   

 

 

 

Changes in the Company’s non-vested stock options are summarized as follows:

 

     Service-based Options      Restricted Stock  
           Weighted-Average            Weighted-Average  
           Grant Date Fair            Grant Date Fair  
     Shares     Value Per Share      Shares     Value Per Share  

Non-vested as of January 1, 2011

     1,334,125      $ 0.78         25,000      $ 1.34   

Granted

     —          —           —          —     

Vested

     (140,375     0.29         —          —     

Forfeited

     (25,000     0.59         (25,000     1.34   
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-vested as of March 31, 2011

     1,168,750        0.74         —          1.34   

Granted

     3,700,000        0.46         —          —     

Vested

     (69,750     0.68         —          —     

Forfeited

     (650,000     0.39         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-vested as of June 30, 2011

     4,149,000      $ 0.54         —        $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

As of June 30, 2011, there was approximately $1,662,000, $0 and $0 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 3.84 years for service-based options. Performance-based options are fully vested. During the six months ended June 30, 2011 there were no changes to the contractual life of any fully vested options.

13. Asset Held for Sale

During the year ended December 31, 2010 the Company recorded an asset held for sale of $10,016,000. The Company used the guidance under FASB ACS 360-10-45-9 to evaluate the classification. The asset held for sale resulted from the Company taking possession of a solar facility for which the customer was unable to complete payment. During 2010, the asset held for sale was reduced by $3,347,000 to $6,669,000 by funds received from the United States Treasury under Section 1603, Payment for Specified Energy Property in Lieu of Tax Credits. Although this asset has been held for sale for the past twelve months, during the period the Company was going through the acquisition by LDK it was not actively marketed to third parties at LDK’s request. The Company is once again actively marketing the asset to third parties and expects that this asset will be sold within the next twelve months. Accordingly, the asset held for sale is recorded as a current asset in the consolidated balance sheets as of June 30, 2011 and December 31, 2010. During the quarter ended June 30, 2011, the Company recorded an impairment charge of $400,000 to reduce the carrying amount to the estimate of fair value less cost to sell. The fair value was estimated based on a discounted cash flow analysis using level 3 unobservable inputs.

14. Loan Payable

On June 1, 2010, the Company and Five Star Bank (“Five Star”) entered into a Loan Agreement (the “Original Loan Agreement”). Under the Original Loan Agreement, Five Star agreed to advance a loan in an amount equal to $3,899,000 at an interest rate equal to 8.00% per annum. The Original Loan Agreement is evidenced by a Promissory Note, which is payable in 120 equal monthly payments of $48,000, commencing on July 15, 2010 through the maturity date of the loan, which is June 15, 2020. The secured asset is a power generating facility recorded as an asset held for sale which is discussed in Note 12 above.

 

19


Table of Contents

On June 1, 2011, the Company refinanced the above Original Loan by entering into a Term Loan Agreement (the “Loan Agreement”) with East West Bank (“East West”). Under the Loan Agreement, East West agreed to advance a loan in an amount equal to $4,500,000 at a variable interest rate based on the Prime Rate plus 1.25% as provided in the Loan Agreement, not to be less than 6.00% per annum. The Loan Agreement is evidenced by a Promissory Note which is payable in 108 monthly payments, and has a maturity date of May 1, 2020. In connection with the refinance, the Company wrote off the remaining loan fees related to the Original Loan Agreement of $92,000.

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 11.00% per annum. Borrowings under the Loan Agreement are secured by (i) a blanket security interest in all of the assets of our wholly owned subsidiary, Solar Tax Partners 2, LLC, and (ii) a first priority lien on the easement interest, improvements, fixtures and other real and personal property related thereto located on the property described in the Loan Agreement.

The loan payable of $4,500,000 has been recorded as a current liability in the June 30, 2011 condensed consolidated 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 within twelve months.

15. Commitments and Contingencies

Restricted Cash — The Company has restricted cash of $705,000 consisting of $250,000 held in an interest bearing account in our name with the lender financing our power generation facility, $400,000 held by the lender of our customer as collateral for such loan, $35,000 held by our bank as collateral for our merchant account transactions and $20,000 as collateral for a credit card issued to the Company.

Operating leases — The Company leases premises under various operating leases. Rental expense under operating leases included in the consolidated statements of operations was $148,000 and $168,000 for the three months ended June 30, 2011 and 2010, respectively, and $272,000 and $365,000 for the six months ended June 30, 2011 and 2010, respectively.

In June, 2011, the Company entered into an office lease agreement for approximately 11,275 rentable square feet of office space in Roseville, California. The Company plans to use the office space for its corporate headquarters. The initial term of the lease will commence for a term of six (6) years on August 1, 2011. No rent will be due during the first twelve (12) months of the lease. Following the first twelve (12) months, the monthly rent shall be $19,731.25 or $1.75 per square foot with rent increasing approximately $.05 per square foot each year thereafter for the duration of the lease. In addition, the Company has the option to extend the Lease for an additional five-year term, with rent to be determined according to the then-prevailing market rates.

Guarantee — On December 22, 2009, in connection with an equity funding of STP related to the Aerojet 1 (see Notes 3 and 8) project, the Company along with STP’s 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 STP’s 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:

 

   

Operating Deficit Loans — The Company would be required to loan Master Tenant 2008-c, LLC (“Master Tenant”) or STP monies necessary to fund operations to the extent costs could not be covered by Master Tenant’s or STP1’s 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 the managing member of Greystone’s interest in Master Tenant under an option exercisable for nine 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 Greystone’s equity interest in Master Tenant or $952,000.

The Company has recorded on its consolidated balance sheet the fair value of the guarantees, at their estimated fair value of $142,000. This amount, less related amortization, is included in Accrued Liabilities.

 

20


Table of Contents

16. Operating Risk

Concentrations of Credit Risk and Major Customers — A substantial percentage of the Company’s net revenue comes from sales made to a small number of customers and typically are made on an open account basis. Details of customers accounting for 10% or more of total net sales for the six months ended June 30, 2011 and 2010, respectively are as follows (in thousands):

 

     Six Months Ended  

Customer

   June 30, 2011      June 30, 2010  

380 Middlesex Solar, LLC

   $ 8,705       $ —     

North Palm Springs Investment, LLC*

     5,033         —     

Solarmarkt Sued GmbH

     —           2,053   

Bayer & Raach GmbH

     —           2,899   

Details of customers representing 10% or more of accounts receivable balances and costs and estimated earnings in excess of billings on uncompleted contracts at June 30, 2011 and December 31, 2010, respectively are (in thousands):

 

Customer

   June 30, 2011      December 31, 2010  

North Palm Springs Investment, LLC*

   $ 5,033       $ —     

380 Middlesex Solar, LLC

     6,109         —     

Temescal Canyon RV Park

     2,512         1,897   

 

* North Palm Springs Investment, LLC is a wholly owned subsidiary of LDK Solar USA, Inc.

Product Warranties — The Company offers the industry standard of 25 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 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. Certain photovoltaic construction contracts entered into during the year ended December 31, 2007 included provisions under which the Company agreed to provide warranties to the buyer, and during the quarter ended September 30, 2007 and continuing through the fourth quarter of 2010, the Company installed its own manufactured solar panels. As a result, the Company recorded the provision for the estimated warranty exposure on these contracts within cost of sales. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to our own historical data in combination with historical data reported by other solar system installers and manufacturers. The Company now only installs panels manufactured by unrelated third parties and its parent LDK Solar Co., Ltd. We provide their pass through warranty and reserve for unreimbursed costs to replace these panels. The Company has recorded a warranty expense of $103,000 and $100,000 for the three months ended June 30, 2011 and 2010, respectively, and has recorded a warranty expense of $109,000 and $177,000 for the six months ended June 30, 2011 and 2010, respectively.

The accrual for warranty claims consisted of the following at June 30, 2011 and 2010 (in thousands):

 

     2011     2010  

Beginning balance, January 1,

   $ 1,542      $ 1,246   

Provision charged to warranty expense

     109        177   

Less: warranty claims

     (72     —     
  

 

 

   

 

 

 

Ending balance, June 30

   $ 1,579      $ 1,423   
  

 

 

   

 

 

 

Current portion of warranty liability

   $ 200      $ —     

Non-current portion of warranty liability

   $ 1,379      $ —     

17. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, prepaid expenses, loans 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.

 

21


Table of Contents

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 management’s 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 $142,000 at December 31, 2009. At June 30, 2011 the value of the guarantee on our consolidated balance sheet, net of amortization, was $127,000.

18. Segment and Geographical Information

The Company’s two primary business segments include: (1) photovoltaic installation, integration, and sales and (2) cable, wire and mechanical assemblies.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Contributions of the major activities, profitability information and asset information of the Company’s reportable segments for the three and six months ended June 30, 2011 and 2010 are as follows:

 

     For the Three Months Ended
June 30, 2011
    For the Three Months Ended
June 30, 2010
 
     (as restated, see Note 3)     (as restated, see Note 3)  

Segment (in thousands)

   Net sales      Income (loss)
before  taxes
    Net sales      Income (loss)
before  taxes
 

Photovoltaic installation, integration and sales

   $ 15,344       $ (2,166   $ 10,659       $ (3,485

Cable, wire and mechanical assemblies

     184         (84     864         314   
  

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated totals

   $ 15,528       $ (2,250   $ 11,523       $ (3,171
  

 

 

    

 

 

   

 

 

    

 

 

 
     For the Six Months  Ended
June 30, 2011
    For the Six Months  Ended
June 30, 2010
 
     (as restated, see Note 3)     (as restated, see Note 3)  

Segment (in thousands)

   Net sales      Income (loss)
before  taxes
    Net sales      Income (loss)
before  taxes
 

Photovoltaic installation, integration and sales

   $ 20,472       $ (4,382   $ 15,233       $ (7,422

Cable, wire and mechanical assemblies

     806         196        2,369         823   
  

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated totals

   $ 21,278       $ (4,186   $ 17,602       $ (6,599
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     For the Three Months Ended
June 30, 2011
     For the Three Months Ended
June 30, 2010
     For the Six Months  Ended
June 30, 2011
     For the Six Months  Ended
June 30, 2010
 
     (as restated, see Note 3)      (as restated, see Note 3)      (as restated, see Note 3)      (as restated, see Note 3)  

Segment (in thousands)

   Interest
income
     Interest
Expense
     Interest
income
     Interest
expense
     Interest
income
     Interest
expense
     Interest
income
     Interest
expense
 

Photovoltaic installation, integration and sales

   $ 21       $ 523       $ —         $ 286       $ 23       $ 900       $ —         $ 542   

Cable, wire and mechanical assemblies

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated total

   $ 21       $ 523       $ —         $ 286       $ 23       $ 900       $ —         $ 542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2011      December 31, 2010  
     (as restated, see Note 3)      (as restated, see Note 3)  

Segment (in thousands)

   Identifiable
assets
     Capital
expenditure
     Depreciation  and
amortization
     Identifiable
assets
     Capital
expenditure
     Depreciation  and
amortization
 

Photovoltaic installation, integration and sales

   $ 74,555       $ 41       $ 496       $ 35,273       $ 63       $ 1,261   

Cable, wire and mechanical assemblies

     289         —           2         2,642         —           8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated total

   $ 74,844       $ 41       $ 498       $ 37,915       $ 63       $ 1,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The locations of the Company’s identifiable assets are as follows:

 

Location (in thousands)

   June 30, 2011      December 31, 2010  
     (as restated, see Note 3)      (as restated, see Note 3)  

United States

   $ 70,337       $ 35,365   

China (including Hong Kong)

     4,507         2,550   
  

 

 

    

 

 

 

Total

   $ 74,844       $ 37,915   
  

 

 

    

 

 

 

 

22


Table of Contents

Sales by geographic location for the Company’s reportable segments are as follows:

 

     Three Months Ended June 30, 2011      Three Months Ended June 30, 2010  
     (as restated, see Note 3)      (as restated, see Note 3)  

Segment (in thousands)

   Photovoltaic
installation,
integration and
sales
     Cable, wire  and
mechanical
assemblies
     Total      Photovoltaic
installation,
integration and
sales
     Cable, wire  and
mechanical
assemblies
     Total  

United States

   $ 15,290       $ —         $ 15,290       $ 3,123       $ 461       $ 3,584   

Asia

     54         —           54         716         —           716   

Europe

     —           171         171         6,765         —           6,765   

Mexico

     —           13         13         —           403         403   

Other

     —           —           —           55         —           55   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,344       $ 184       $ 15,528       $ 10,659       $ 864       $ 11,523   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents
     Six Months Ended June 30, 2011      Six Months Ended June 30, 2010  
     (as restated, see Note 3)      (as restated, see Note 3)  

Segment (in thousands)

   Photovoltaic
installation,
integration and
sales
     Cable, wire  and
mechanical
assemblies
     Total      Photovoltaic
installation,
integration and
sales
     Cable, wire  and
mechanical
assemblies
     Total  

United States

   $ 19,605       $ —         $ 19,605       $ 6,698       $ 1,421       $ 8,119   

Asia

     867         —           867         316         —           316   

Europe

     —           793         793         8,142         —           8,142   

Mexico

     —           13         13         —           948         948   

Other

     —           —           —           77         —           77   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,472       $ 806       $ 21,278       $ 15,233       $ 2,369       $ 17,602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

19. Related Parties

In the fourth quarter of 2009, the Company completed a system installation under an EPC Contract entered into with STP. Subsequent to the end of 2009, Stephen C. Kircher, our Chief Executive Officer, 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 HEK, LLC (“HEK”), a member of STP. The Trust made a capital contribution of $20,000 and received a 35% membership interest in HEK. Stephen C. Kircher, as trustee of the Trust was appointed a co-manager of HEK. Neither Stephen C. Kircher nor Lari K. Kircher is a beneficiary under the Trust.

In June 2011, the Company transferred to LDK Solar USA, Inc. its interest in North Palm Springs Investments, LLC (“NPSLLC”) and entered into two Engineering, Procurement and Construction (“EPC”) agreements with NPSLLC for the construction of two utility scale solar projects with anticipated revenues to the Company of $29.2 million.

At June 30, 2011, the Company had accounts receivable of $2,034,000 from its seventy percent shareholder, LDK Solar Co., Ltd., consisting of $1,096,000 for raw material for the manufacture of solar products valued at its carrying value, and $938,000 expenses incurred on their behalf related to operations in our China and Hong Kong subsidiaries.

At June 30, 2011, the Company had accounts payable of $9,380,000 to LDK Solar Co., Ltd. for purchase of solar panels for its projects currently under development.

During the three months ended June 30, 2011 the Company recorded net sales to LDK Solar Co., Ltd. of $5,369,000, consisting of $336,000 in raw material sales and $5,033,000 of net sales related to solar development projects. Related cost of goods sold was $4,653,000. Solar development costs were $4,317,000 and the raw material was sold at carrying value of $336,000.

During the six months ended June 30, 2011 the Company recorded net sales to LDK Solar Co., Ltd. of $6,129,000, consisting of $1,096,000 in raw material sales and $5,033,000 of net sales related to solar development projects. Related cost of goods sold was $5,413,000. Solar development costs were $4,317,000 and the raw material was sold at carrying value of $1,096,000.

 

24


Table of Contents

Related party transactions with LDK Solar Co., Ltd or is subsidiaries are summarized in the following table:

 

     Three Months
Ended June 30, 2011
     Six Months
Ended June 30, 2011
 

Costs and estimated earnings in excess of billing to North Palm Springs Investment, LLC**

     5,033         5,033   

Raw material sales at carrying value

     336         1,096   

Cost of goods sold related to North Palm Springs Investment, LLC*

     4,317         4,317   

Accounts receivable for expenses incurred on their behalf related to operations in our China and Hong Kong subsidiaries

     355         938   

Solar panel purchases

     12,425         12,425   

 

* North Palm Springs Investments, LLC is a wholly owned subsidiary of LDK Solar USA, Inc.
** EPC Contract revenue from North Palm Springs Investments, LLC

20. Litigation

On January 25, 2011, a putative class action was brought against the Company, the Company’s 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 the Stock Purchase Agreement the Company and LDK entered into on January 5, 2011 (as described in note 9), 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.

21. Subsequent Event

On July 26, 2011, the Company entered into a Limited Partnership Purchase Agreement (“LPPA”) to purchase the limited partnership interest of EDF EN GREECE ANONIMI ETERIA PARAGOGIS KE EKMETALEFSIS ILEKTRIKIS ENERGIAS ME CHRISI ANANEOSIMON PIGON ENERGIAS KE SIA — EVROS 3 E.E. (“EDF EN GREECE SA”) for 1.953 million Euros (the equivalent of $2.8 million at current exchange rates). The LPPA transferred to the Company the necessary approvals and documents, such as purchase power agreements, permits and approvals necessary to develop a solar power generating facility of approximately 4.4 megawatts. Construction of the project is expected to begin in the fourth quarter of 2011. The Company plans to sell the project and become the Engineering Procurement and Construction contractor for the project prior to the commencement of construction.

 

25


Table of Contents

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors That May Affect Future Results

This Amendment No. 1to the Quarterly Report on Form 10-Q/A and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors described in the Company’s filings with the SEC, especially the Company’s Annual Report on Form 10-K (as amended) and the Company’s Quarterly Reports on Form 10-Q. In various filings the Company has identified important factors that could cause actual results to differ from expected or historic results. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete list of all potential risks or uncertainties.

The following discussion is presented on a consolidated basis, and analyzes our financial condition and results of operations (as restated) for the three and six months ended June 30, 2011 and 2010.

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. and its subsidiaries.

 

26


Table of Contents

Restatement of Financial Statements

The Company is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q/A filed with the Securities and Exchange Commission on August 15, 2011. This filing amends and restates our previously reported financial statements for the three and six months ended June 30, 2011 and 2010 to reflect revised accounting treatment for a single solar development project under the financing methods as opposed to the percentage of completion method as was previously done, as discussed in Note 3 to the Condensed Consolidated Financial Statements.

Based on its review, management determined that the Company improperly recognized revenue at the date of the initial sale on a solar development project initiated in 2009 under the percentage of completion method for construction work for the new owner. The transaction should have been accounted for in accordance with accounting standards for sales of real estate and due to continuing involvement with the project after the transaction, no sale should have been recognized. Instead the transaction should have been accounted for using the financing method.

In May 2009, the Company entered into a Power Purchase Agreement (“PPA”) with Aerojet General Corp. (“Aerojet”) to supply solar energy and commenced construction of a Solar Energy Facility (“SEF”). In September 2009, the Company transferred the partially completed SEF to Solar Tax Partners 1 (the “Buyer”), and entered into contracts with the Buyer to assign them the rights under the associated PPA, and complete construction of the SEF. The Company accounted for this transaction under the percentage of completion method in its third quarter 2009 consolidated financial statements.

In the fourth quarter 2009, the Company completed construction of the SEF a price of $19.6 million and received $6.7 million in cash, $3.6 million in promissory note and with $9.3 million balance amount outstanding. The Company applied the cost recovery method of revenue recognition to this transaction due to degree of uncertainty for the collectability of the outstanding amount. Accordingly, for the year ended December 31, 2009, he Company recorded total revenue of $14.9 million and an equivalent cost of goods sold amount of $14.9 million.

Prior to September 30, 2009, the only parties to the SEF arrangement were Aerojet and the Company, pursuant to the PPA. The Company had access to the Aerojet property under an implied easement, had completed a significant portion of the physical construction of the SEF, and was therefore considered the legal owner of the partially completed SEF. Accordingly, the Company reassessed the accounting treatment and determined that the project should be accounted for as a sale of real estate. As a result, while the Company maintains its continuing involvement, it will apply the financing method.

The following tables disclose the impact of the changes on the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, Consolidated Statements of Operations for the three months and six months ended June 30, 2011 and 2010, and on the Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010:

 

Consolidated Balance Sheets    As of June 30, 2011     As of December 31, 2010  
(Dollars in thousands)    As reported     Adjustments     As restated     As reported     Adjustments     As restated  

Property, plant and equipment at cost, net

   $ 765      $ 13,738      $ 14,503      $ 915      $ 14,109      $ 15,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ 61,106      $ 13,738      $ 74,844      $ 23,806      $ 14,109      $ 37,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans payable, financing and capital lease obligations, net of current portion

   $ 5      $ 14,316      $ 14,321      $ 13      $ 14,620      $ 14,633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   $ 24,541      $ 14,316      $ 38,857      $ 15,943      $ 14,620      $ 30,563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated deficit

   $ (38,145   $ (578   $ (38,723   $ (34,016   $ (511   $ (34,527
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 36,565      $ (578   $ 35,987      $ 7,863      $ (511   $ 7,352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 61,106      $ 13,738      $ 74,844      $ 23,806      $ 14,109      $ 37,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents
Consolidated Statements of Operations  
(Dollars in Thousands)   For three months ended June 30     For six months ended June 30  
    2011     2010     2011     2010  
    As
reported
    Adjustments     As
restated
    As
reported
    Adjustments     As
restated
    As
reported
    Adjustments     As
restated
    As
reported
    Adjustments     As
restated
 

Net Sales

  $ 14,940      $ 588      $ 15,528      $ 10,950      $ 573      $ 11,523      $ 20,430      $ 848      $ 21,278      $ 16,782      $ 820      $ 17,602   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of goods sold

  $ 13,662      $ 196      $ 13,858      $ 9,838      $ 195      $ 10,033      $ 18,600        392      $ 18,992      $ 15,048        391      $ 15,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

  $ 1,278      $ 392      $ 1,670      $ 1,112      $ 378      $ 1,490      $ 1,830        456      $ 2,286      $ 1,734        429      $ 2,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $ —                   

General and administrative

  $ 1,915      $ 15      $ 1,930      $ 2,365      $ 16      $ 2,381      $ 3,468        31      $ 3,499      $ 4,363        31      $ 4,394   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

  $ (2,162   $ 377      $ (1,785   $ (2,597   $ 362      $ (2,235   $ (3,766     425      $ (3,341   $ (5,270     398      $ (4,872
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

  $ (277   $ (246   $ (523   $ (38   $ (248   $ (286   $ (408     (492   $ (900   $ (43     (499   $ (542
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (2,384   $ 131      $ (2,253   $ (3,285   $ 114      $ (3,171   $ (4,129     (67   $ (4,196   $ (6,501     (101   $ (6,602
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Consolidated Statements of Cash Flow  
(Dollars in thousands)    For six months ended June 30, 2011     For six months ended June 30, 2010  
     As reported     Adjustments     As restated     As reported     Adjustments     As restated  

Net loss

   $ (4,129     (67   $ (4,196   $ (6,501     (101   $ (6,602
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

   $ 127        371      $ 498      $ 314        371      $ 685   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income from solar system subject to financing obligation

   $ —          (304   $ (304   $ —          (270   $ (270
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The effect of the restatement on the consolidated statements of stockholders’ equity and comprehensive loss for the six months ended June 30, 2011 and 2010 is $(67,000) and $(101,000), respectively.

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 original equipment manufacturer (“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. In the first quarter of 2011, our strategic partner, LDK Solar Co., Ltd. (“LDK”), 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.

The investment by LDK 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.

 

28


Table of Contents

Business Development

Our Subsidiaries

Our business was previously 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”). In 2010 we began to eliminate subsidiaries as we consolidated our business operations in the Company as we 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. SPIC’s 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 because 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

Revenue recognition The Company’s 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, there are two revenue streams.

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.

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 a customer’s credit worthiness at the time the order is accepted. Sudden and unexpected changes in a customer’s financial condition could put recoverability at risk.

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.

 

29


Table of Contents

The assets, “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.

For those projects where the Company is considered to be the owner, the project is accounted for under the rules of real estate accounting. In the event of a sale, the method of revenue recognition is determined by considering the extent of the buyer’s initial and continuing involvement. Generally, revenue is recognized at the time of title transfer if the buyers investment is sufficient to demonstrate a commitment to pay for the property and the Company does not have a substantial continuing involvement with the property. When continuing involvement is substantial and not temporary, the Company applies the financing method, whereby the asset remains on the balance sheet and the proceeds received are recorded as a financing obligation. When a sale is not recognized due to continuing involvement and the financing method is applied the Company records revenue and expenses related to the underlying operations of the asset in the Company’s consolidated financial statements.

Cable, wire and mechanical assemblies — In the Company’s 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 a determination of a customer’s credit worthiness at the time we accept their order.

Product warranties — The Company offers the industry standard of 25 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 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. Certain photovoltaic construction contracts entered into during the year ended December 31, 2007 included provisions under which the Company agreed to provide warranties to the buyer, and during the quarter ended September 30, 2007 and continuing through the fourth quarter of 2010, the Company installed its own manufactured solar panels. As a result, the Company recorded the provision for the estimated warranty exposure on these contracts within cost of sales. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to our own historical data in combination with historical data reported by other solar system installers and manufacturers. The Company now only installs panels manufactured by unrelated third parties and its parent LDK Solar Co., Ltd. We provide their pass through warranty, and reserve for unreimbursed costs to replace these panels. The Company has recorded a warranty expense of $103,000 and $100,000 for the three months ended June 30, 2011 and 2010, respectively, has recorded a warranty expense of $109,000 and $177,000 for the six months ended June 30, 2011 and 2010, respectively.

Performance Guaranty — 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 provides for compensation to STP’s system lessee for shortfalls in production related to the design and operation of the system, but excluding shortfalls outside the Company’s control such as government regulation. The Company believes that probability of shortfalls is unlikely and if they should occur are covered under the provisions of its current panel and equipment warranty provisions.

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.

Inventories are stated at the lower of cost or market, determined by the first in first out cost method. 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.

Stock based compensation — The Company measures the stock-based compensation costs of share-based compensation arrangements based on the grant-date fair value of awards and generally recognizes the costs in the financial statements over the employee requisite service period.

 

30


Table of Contents

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 management’s 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.

 

31


Table of Contents

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 and 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 June 30, 2011 and December 31, 2010, the Company recorded an allowance of $56,000 and $28,000, respectively.

Income taxes — The Company accounts 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 future taxable income. 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. Additionally, the Company has completed a Section 382 analysis of its ability to utilize its deferred tax assets as a result of change in control and has concluded that subject to annual limitations it will be able to use the previous net operating losses.

The Company recognizes uncertain tax positions in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. 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.

Foreign currency translation — The consolidated financial statements of the Company are presented in U.S. dollars and the Company’s expenditures are substantially all in U.S. dollars.

All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at period-end exchange rates. All income and expenditure items in the income statements of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at average annual exchange rates. Translation gains and losses arising from the translation of the financial statements of foreign subsidiaries whose functional currency is other than the U.S. dollar are not included in determining net income but are accumulated in a separate component of stockholders’ equity as a component of comprehensive income. The functional currency of the Company’s operations in the People’s Republic of China is the Renminbi.

Gains and losses resulting from the transactions denominated in foreign currencies are included in other expense, net.

Results of Operations

Three and Six Months Ended June 30, 2011 (as restated), compared to Three and Six Months Ended June 30, 2010 (as restated)

Net Sales

Net sales for the three months ended June 30, 2011 increased 34.8% to $15,528,000 from $11,523,000 for the three months ended June 30, 2010.

Net sales for the three months ended June 30, 2011, in the photovoltaic installation, integration and product sales segment, increased 41.1% to $15,044,000 from $10,659,000 for the three months ended June 30, 2010. Included in photovoltaic installation, integration and product sales for the three months ended June 30, 2011 were related party sales to LDK Solar of $5,033,000. The increase in sales in the photovoltaic installation, integration and product sales segment was primarily due to larger system development projects in construction as the Company concentrates on development of utility scale and larger distributive generation projects. The Company expects installation and integration revenues will increase during subsequent quarters as new projects under development begin the installation phase.

Net sales for the three months ended June 30, 2011, in the cable, wire and mechanical assemblies segment, decreased 78.7% to $184,000 from $864,000 for the three months ended June 30, 2010. The decrease is attributable to a decrease in sales to customers in general in this segment. This is the legacy segment of the Company’s business. The Company expects to continue to service the customers it has in this segment, but is not actively seeking new customers in the segment. Sales in this segment are expected to fluctuate from quarter to quarter during fiscal year 2011.

 

32


Table of Contents

Net sales for the six months ended June 30, 2011 increased 20.9% to $21,278,000 from $17,602,000 for the six months ended June 30, 2010.

Net sales for the six months ended June 30, 2011, in the photovoltaic installation, integration and product sales segment, increased 34.4% to $20,472,000 from $15,233,000 for the six months ended June 30, 2010. Included in photovoltaic installation, integration and product sales for the six months ended June 30, 2011 were related party sales to LDK Solar of $5,033,000. The increase in sales in the photovoltaic installation, integration and product sales segment was primarily due to larger system development projects in construction as the Company concentrates on development of utility scale and larger distributive generation projects. The Company expects installation and integration revenues will increase during subsequent quarters as new projects under development begin the installation phase.

Net sales for the six months ended June 30, 2011, in the cable, wire and mechanical assemblies segment, decreased 65.9% to $806,000 from $2,369,000 for the six months ended June 30, 2010. The decrease is attributable to a decrease in sales to customers in general in this segment. This is the legacy segment of the Company’s business. The Company expects to continue to service the customers it has in this segment, but is not actively seeking new customers in the segment. Sales in this segment are expected to fluctuate from quarter to quarter during fiscal year 2011.

Cost of Goods Sold

Cost of goods sold was $13,858,000 (89.3% of net sales) and $10,033,000 (87.1% of net sales) for the three months ended June 30, 2011 and 2010, respectively.

Cost of goods sold in the photovoltaic installation, integration and product sales segment was $13,590,000 (87.5% of net sales) for the three months ended June 30, 2011 compared to $9,500,000 (82.4% of net sales) for the three months ended June 30, 2010. Included in photovoltaic installation, integration and product sales cost of goods sold for the three months ended June 30, 2011 were costs related to sales to related party LDK Solar of $4,317,000. The decrease in costs of goods sold as a percentage of sales over the comparative period is attributable to the higher margin projects in construction as the Company transitions to utility scale and larger distributive generation projects. It is expected that cost of goods sold will decrease as a percentage of sales in future quarters during fiscal 2011.

Cost of goods sold in the cable, wire and mechanical assembly segment were $268,000 (145.6% of net sales) for the three months ended June 30, 2011 compared to $533,000 (61.7% of net sales) for the three months ended June 30, 2010. The increase is attributable to product mix during the quarter. The Company expects that costs will continue to vary with product mix in this segment.

Cost of goods sold was $18,992,000 (89.3% of net sales) and $15,439,000 (87.7% of net sales) for the six months ended June 30, 2011 and 2010, respectively.

Cost of goods sold in the photovoltaic installation, integration and product sales segment was $18,382,000 (86.4% of sales) for the six months ended June 30, 2011 compared to $13,946,000 (79.2% of net sales) for the six months ended June 30, 2010. Included in photovoltaic installation, integration and product sales costs of goods sold for the six months ended June 30, 2011 were costs related to related party sales to LDK Solar of $4,317,000. The decrease in costs of goods sold as a percentage of sales over the comparative period is attributable to the increase in construction on larger photovoltaic installations as the Company concentrates on utility scale and distributive generation projects and moves away from product sales. It is expected that cost of goods sold will decrease as a percentage of sales in future quarters during fiscal 2011.

Cost of goods sold in the cable, wire and mechanical assembly segment were $610,000 (75.7% of net sales) for the six months ended June 30, 2011 compared to $1,493,000 (63.0% of net sales) for the six months ended June 30, 2010. The increase is attributable to product mix during the quarter. The Company expects that costs will continue to vary with product mix in this segment.

General and Administrative Expense

General and administrative expense was $1,930,000 (12.4% of net sales) and $2,381,000 (20.7% of net sales) for the three months ended June 30, 2011 and 2010, respectively, a decrease of 18.9%. The decrease in costs for the three months ended June 30, 2011 over the comparative period is primarily due to decreases in employee-related costs and operating expenses primarily due to the change in our manufacturing operations to outsourcing from external sources and the discontinuance of our residential photovoltaic installation operations. Significant elements of general and administrative expense for the three months ended June 30, 2011 were employee

 

33


Table of Contents

related expenses of $763,000, professional and consulting fees of $495,000, rent, telephone and utilities of $94,000, travel and lodging of $53,000, depreciation expense of $66,000 and stock-based compensation expense of $82,000. Significant elements of general and administrative expense for the three months ended June 30, 2010 were employee related expenses of $902,000, professional and consulting fees of $409,000, rent, telephone and utilities of $99,000, travel and lodging of $39,000, depreciation expense of $93,000 and stock-based compensation expense of $50,000.The Company expects that due to its cost reduction efforts, general and administrative expense will remain at current levels in the future as a percentage of sales.

General and administrative expense was $3,499,000 (16.4% of net sales) and $4,394,000 (25.0% of net sales) for the six months ended June 30, 2011 and 2010, respectively, a decrease of 20.4%. The decrease in costs for the six months ended June 30, 2011 over the comparative period is primarily due to decreases in employee-related costs and operating expenses primarily due to the change in our manufacturing operations to outsourcing from external sources and the discontinuance of our residential photovoltaic installation operations. Significant elements of general and administrative expense for the six months ended June 30, 2011 were employee related expenses of $1,422,000, professional and consulting fees of $948,000, rent, telephone and utilities of $187,000, travel and lodging of $84,000, depreciation expense of $127,000 and stock-based compensation expense of $118,000. Significant elements of general and administrative expense for the six months ended June 30, 2010 were employee related expenses of $1,782,000, professional and consulting fees of $930,000, rent, telephone and utilities of $229,000, travel and lodging of $86,000, depreciation expense of $198,000 and stock-based compensation expense of $100,000.The Company expects that due to its cost reduction efforts, general and administrative expense will remain at current quarter levels in the future as a percentage of sales.

Sales, Marketing and Customer Service Expense

Sales, marketing and customer service expense was $916,000 (6.1% of net sales) and $965,000 (8.8% of net sales) for the six months ended June 30, 2011 and 2010, respectively, a decrease of 5.1%. The decrease in sales, marketing and customer service expense over the comparative period was primarily due to decreases in employee-related expenses, commission expense and consulting fees as a result of overall corporate reorganization and discontinuance of residential photovoltaic installations. Significant elements of sales, marketing and customer service expense for the three months ended June 30, 2011 were employee-related expense of $515,000, advertising expense of $28,000, stock-based compensation expense of $10,000, commission expense of $35,000, rent, telephone and utilities of $61,000, customer care costs of $26,000 and travel expenses of $70,000. Significant elements of sales, marketing and customer service expense for the three months ended June 30, 2010 were employee related expense of $457,000, advertising expense of $31,000, stock-based compensation expense of $25,000, commission expense of $182,000, rent, telephone and utilities of $64,000, consulting fees $40,000, customer care costs of $20,000 and travel expenses of $38,000. The Company expects that sales, marketing and customer service expense will remain at current quarter levels in future periods as a percentage of sales.

Sales, marketing and customer service expense was $1,387,000 (6.8% of net sales) and $2,058,000 (12.3% of net sales) for the six months ended June 30, 2011 and 2010, respectively, a decrease of 32.6%. The decrease in sales, marketing and customer service expense over the comparative period was primarily due to decreases in employee-related expenses, commission expense and consulting fees as a result of overall corporate reorganization and discontinuance of residential photovoltaic installations. Significant elements of sales, marketing and customer service expense for the six months ended June 30, 2011 were employee-related expense of $731,000, advertising expense of $43,000, stock-based compensation expense of $25,000, commission expense of $100,000, rent, telephone and utilities of $100,000, customer care costs of $31,000 and travel expenses of $90,000. Significant elements of sales, marketing and customer service expense for the six months ended June 30, 2010 were employee related expense of $877,000, advertising expense of $92,000, stock-based compensation expense of $49,000, commission expense of $378,000, rent, telephone and utilities of $146,000, consulting fees $198,000, customer care costs of $51,000 and travel expenses of $73,000. The Company expects that sales, marketing and customer service expense will remain at current quarter levels in future periods as a percentage of sales.

Engineering, design and product management

Engineering, design and product management expense was $209,000 (1.4% of net sales) and $379,000 (3.5% of net sales) for the three months ended June 30, 2011 and 2010, respectively. The decrease in engineering, design and product management costs primarily related to decreases in employee-related, product certification and professional fee costs. Significant elements of product development expense for the three months ended June 30, 2011 were employee-related expense of $133,000, product certification costs of $44,000 and professional fees of $30,000. Significant elements of product development expense for the three months ended June 30, 2010 were employee related expense of $182,000, product certification costs of $156,000 and stock-based compensation costs of $25,000. The Company expects that product development costs will continue at their current dollar value run rate in fiscal 2011.

 

34


Table of Contents

Engineering, design and product management expense was $341,000 (1.7% of net sales) and $583,000 (3.5% of net sales) for the six months ended June 30, 2011 and 2010, respectively. The decrease in engineering, design and product management costs primarily related to decreases in employee and professional fee costs. Significant elements of product development expense for the six months ended June 30, 2011 were employee-related expense of $271,000, product certification costs of $30,000 and professional fees of $30,000. Significant elements of product development expense for the six months ended June 30, 2010 were employee related expense of $362,000, product certification costs of $132,000 and stock-based compensation costs of $48,000. The Company expects that product development costs will continue at their current dollar value run rate in fiscal 2011.

Impairment charge

During the quarter ended June 30, 2011, the Company recorded an impairment charge of $400,000 to reduce the carrying amount of its asset held for sale to the estimate of fair value less cost to sell. The fair value was estimated based on a discounted cash flow analysis using level 3 unobservable inputs. There was no impairment charges in the comparable period ended June 30, 2010.

Interest income / expense

Interest expense, net, was $502,000 and $286,000 for the three months ended June 30, 2011 and 2010, respectively. Interest expense for the three months ended June 30, 2011, consisted of interest expense of $498,000 on the Company’s capital leases and loans payable, $101,000 to suppliers on accounts payable financing and $170,000 on the loan financing for the Company’s power generation facility recorded as an asset held for sale, offset by earnings on the Company’s bank deposits of $21,000. Interest expense for the three months ended June 30, 2010, consisted of interest expense of $259,000 on the Company’s capital leases and loans payable and $27,000 on the loan financing for the Company’s power generation facility recorded as an asset held for sale. The Company expects that this expense will vary during 2011 depending on the utilization of debt financing in its operations.

Interest expense, net, was $877,000 and $542,000 for the six months ended June 30, 2011 and 2010, respectively. Interest expense for the six months ended June 30, 2011, consisted of interest expense of $499,000 on the Company’s capital leases and loans payable, $154,000 to suppliers on accounts payable financing and $247,000 on the loan financing for the Company’s power generation facility recorded as an asset held for sale, offset by earnings on the Company’s bank deposits of $23,000. Interest expense for the six months ended June 30, 2010, consisted of interest expense of $17,000 on the Company’s capital leases and loans payable and $26,000 on the loan financing for the Company’s power generation facility recorded as an asset held for sale. The Company expects that this expense will vary during 2011 depending on the utilization of debt financing in its operations.

Other income / expense, net

Other expense (income), net was $(37,000) and $650,000 for the three months ended June 30, 2011 and 2010, respectively. Other income, net for the three months ended June 30, 2011 consisted of $60,000 of currency exchange gain, and $23,000 of other expense. Other expense, net of $650,000 for the three months ended June 30, 2010 was attributable to currency losses due to the decline in the value of the Euro. In 2009, the Company entered into fixed price sales agreements in the Euro currency which were delivered and collected during 2010 during which time the Euro declined in value resulting in the large currency loss in 2010. The Company expects that it will continue to be exposed to currency gains and losses in the future.

Other expense (income), net was $(32,000) and $1,185,000 for the six months ended June 30, 2011 and 2010, respectively. Other income, net for the six months ended June 30, 2011 consisted of $62,000 of currency exchange gain, and $32,000 of other expense. Other expense, net of $1,185,000 for the six months ended June 30, 2010 was attributable to currency losses due to the decline in the value of the Euro. In 2009, the Company entered into fixed price sales agreements in the Euro currency which were delivered and collected during 2010 during which time the Euro declined in value resulting in the large currency loss in 2010. The Company expects that it will continue to be exposed to currency gains and losses in the future.

Income Tax Expense

The Company provided income tax expense of $3,000 and zero for the three months ended June 30, 2011 and 2010, respectively. The Company provided income tax expense of $10,000 and $3,000 for the six months ended June 30, 2011 and 2010, respectively. The Company is currently in a net cumulative loss position and has significant new operating loss carry forwards, and has only provided for statutory minimum taxes.

 

35


Table of Contents

Liquidity and Capital Resources

A summary of the sources and uses of cash and cash equivalents is as follows:

 

(in thousands)

   Six Months
Ended June  30,
2011
    Six Months
Ended June  30,
2010
 
      (as restated,
see Note 3)
    (as restated,
see Note 3)
 

Net cash used in operating activities

   $ (16,900   $ (4,386

Net cash used in investing activities

     (41     (25

Net cash provided by financing activities

     33,954        3,345   

Effect of exchange rate changes on cash

     25        6   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 17,038      $ (1,060
  

 

 

   

 

 

 

As of June 30, 2011 and December 31, 2010, we had $18,479,000 and $1,441,000 in cash and cash equivalents, respectively.

Net cash used in operating activities of $16,900,000 for the six months ended June 30, 2011 included a net loss of $4,196,000, offset in part by non-cash items included in net loss, consisting of depreciation and amortization of $505,000, an impairment change of $400,000 to reduce the carrying value of our asset held for sale to its estimated fair value, stock-based compensation expense of $150,000 and bad debt expense of $168,000 primarily due to the uncertain collectability of a receivable from one customer. Also contributing to cash used in operating activities were an increase in our accounts receivable of $3,850,000 as a result of increased sales and extended terms given to one solar photovoltaic business customer, an increase in related party accounts receivable of $2,034,000 related to sales to our parent, LDK Solar Co., Ltd. (“LDK”), an increase in costs and estimated earnings in excess of billing on uncompleted contracts of $5,464,000 on large construction projects of which $5,033,000 is related to a project owned by LDK, an increase in inventories of $10,167,000 due to procurement of material not yet installed on construction projects, a decrease in prepaid expenses and other current assets of $3,000, a decrease in accounts payable of $2,130,000, an increase in related party accounts payable of $9,380,000 related to purchase of solar panels from LDK, an increase in billings in excess of costs and estimated earnings on uncompleted contracts of $1,474,000 and a decrease in accrued and other liabilities of $835,000.

Net cash used in investing activities of $41,000 for the six months ended June 30, 2011 relates to acquisition of property, plant and equipment.

Net cash provided by financing activities was $33,954,000 for the six months ended June 30, 2011 and resulted from net proceeds received from the issuance of common and preferred stock under a Stock Purchase Agreement dated January 5, 2011 to LDK of $32,719,000, and $639,000 reduction of restricted cash relating to the reserve account for the guarantee of financing for our customer Solar Tax Partners 1, LLC and the reduction of the reserve account for our subsidiary, Solar Tax Partners 2, LLC as a result of refinancing its note payable, net proceeds of $723,000 from refinancing the note payable of our subsidiary, Solar Tax Partners 2, LLC, offset by $127,000 of payments on loans payable and capital lease obligations, and $21,000 due to PV solar system financing obligation.

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 June 30, 2011, we had $18,479,000 in cash and cash equivalents, $705,000 of restricted cash held in our name in interest bearing accounts, accounts receivable of $11,704,000 and costs and estimated earnings in excess of billings on uncompleted contracts of $7,689,000. Our focus will be to continue development and manufacturing of our balance of system products and racking systems through contract manufacturing sources.

On January 5, 2011, we entered into a Stock Purchase Agreement (“SPA”) with 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 $10,493,000. At the second closing, on March 30, 2011, we issued 20,000,000 shares of our Series A Preferred Stock receiving proceeds of $22,228,000. On June 22, 2011, following approval of our shareholders, the Company increased its authorized shares to 250,000,000 and converted the 20,000,000 shares of Series A Preferred Stock to 88,910,400 shares of our Common Stock pursuant to the SPA.

 

36


Table of Contents

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 are working on sources of project financing as well as asset backed credit facilities.

We believe the funds generated by the investment by LDK, the collection of our accounts 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.

Off-Balance Sheet Arrangements

None.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

At the time that our Quarterly Report on Form 10-Q for the three months ended June 30, 2011 was filed on August 15, 2011, our Chief Executive Officer and then Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2011. Subsequent to that evaluation, in connection with the restatement and filing of this Quarterly Report on Form 10-Q/A, our management, including our Chief Executive Officer and current Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of June 30, 2011 because of a material weakness in internal control over the selection and application of accounting policies for complex and non-routine transaction related to the solar development project initiated in 2009. Refer to Note 3 to the Condensed Consolidated Financial Statements for further discussion.

Changes in Internal Control Over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities and migrating processes.

There were no changes in our internal control over financial reporting that occurred during our latest fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

37


Table of Contents

PART II

OTHER INFORMATION

 

38


Table of Contents

Item 6. Exhibits

 

    3.1    Amended and Restated Articles of Incorporation(1)
    3.2    Amendment of Amended and Restated Articles of Solar Power, Inc. (2)
    3.3    Bylaws (3)
  10.1    Term Loan Agreement with East West Bank, dated June 1, 2011 (4)
  10.2    Standard Form Office Lease with Lum Yip Kee, Limited, doing business as Twin Trees Land Company (5)
  31.1    Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32    Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Calculation Presentation Document

 

(1) Incorporated by reference to Form 8-K filed with the SEC on February 20, 2007.
(2) Incorporated by reference to Form 8-K filed with the SEC on June 23, 2011.
(3) Incorporated by reference to Form 8-K filed with the SEC on February 20, 2007.
(4) Incorporated by reference to Form 8-K filed with the SEC on June 6, 2011.
(5) Incorporated by reference to Form 8-K filed with the SEC on June 7, 2011.
* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

39


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the report on Form 10-Q/A to be signed on its behalf by the undersigned, thereunto duly authorized.

 

            SOLAR POWER, INC.
Date: April 16, 2012      

/s/ James R. Pekarsky

      James R. Pekarsky,
      Chief Financial Officer
      (Principal Accounting Officer and Principal Financial Officer)

 

40