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| OEGY.OB > SEC Filings for OEGY.OB > Form 10-Q on 15-Oct-2008 | All Recent SEC Filings |
15-Oct-2008
Quarterly Report
Some of the statements in this Quarterly Report on Form 10-Q, including, but not limited to this Management's Discussion and Analysis or Plan of Operation, contain forward-looking statements regarding the Company's business, financial condition, and results of operations and prospects that are based on the Company's current expectations, estimates and projections. In addition, other written or oral statements which constitute forward-looking statements may be made by the Company or on the Company's behalf. Words such as "expects," "anticipates," "intends," "believes," "estimates," "may," "would," or variations of such words and similar expressions are intended to identify such forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions. These statements are not guarantees of future performance, and are inherently subject to risks and uncertainties that are difficult to predict. As a result, actual outcomes and results may differ materially from the outcomes and results discussed in or anticipated by the forward-looking statements. All such statements are therefore qualified in their entirety by reference to the factors specifically addressed in the sections entitled "Risk Factors" in the Company's Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. New risks can arise and it is not possible for management to predict all such risks, nor can management assess the impact of all such risks to the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to revise or update publicly any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q, other than as required by law.
Overview
Business
We are a renewable energy company focused on the development and commercialization of a portfolio of solar electric technologies for residential, commercial and industrial applications. We currently design, manufacture and distribute building-integrated photovoltaic roofing tiles, roofing membranes and architectural photovoltaic glass products under the SolarSaveŽ trade name. We maintain two facilities: a corporate office in Solana Beach, California for senior management, marketing, sales, customer service, legal and finance, and an engineering facility in Grass Valley, California for product design, project engineering, prototyping and materials management.
The following three strategic initiatives distinguish our approach from others in an industry that is increasingly becoming commoditized and price-driven:
1. We utilize the roofing products industry as our primary channel partner, co-designing, co-marketing and distributing our solar products through this well established industry.
We believe that the lowest cost per installed watt for rooftop solar applications can best be achieved by partnering with those already engaged in the production, distribution, installation and servicing of traditional roofing products. The channel begins with our established relationships with companies such as Eagle Roofing Products and Petersen-Dean and ends with trained roofers who seamlessly install our building-integrated products onto rooftops simultaneous with the installation of standard tile, membrane and shingle products. This approach avoids the problems created when multiple trades are engaged in the installation process, which can actually void existing roof warranties, as well as create construction and service issues.
Our focus on customer needs includes co-designing products with our channel partners to drive innovation, reduce installation costs, and provide bundled services. Channel support services include system engineering and design, installation training, pre-sales and point-of-sales training, post-sales support, on-line real-time monitoring and display, warranty registration, and rebate processing. We have participated with our channel partners in the training of over 350 roofers and sales personnel to sell and install our products, which offers significant sales leverage at a relatively low cost to our company.
2. We outsource production in order to lower our costs, increase our capacity and better balance demand and supply of our proprietary best-in-class building integrated PV products.
We strive to be a leading edge designer of innovative photovoltaic, or "PV" products. We offer a suite of building-integrated photovoltaic products designed to blend seamlessly into and form a part of building materials already in use. While we will continue to develop innovative products, we will also evaluate licensing and purchasing options to acquire technologies developed by others. As thin film, nano-materials, vapor deposition and other innovations become commercially viable, we intend to use them to develop commercial products and bring them to market. We do not spend extensively on research, or carry expensive overhead that typically accompanies such efforts.
We outsource most of the steps in our manufacturing process in order to deliver high quality products in very large volumes to meet the demands of our customers. Our outsourced supply chain strategy matches supply and demand, while providing the lowest total installed cost to our customers. We utilize our Grass Valley, California facility to perform design, product development and specialty manufacturing and assembly functions.
3. We intend to offer financed solutions to the residential market through long-term power purchase agreements that will contribute to increased product sales and generate recurring revenues from the sale of energy.
In general, homeowners, commercial tenants and industrial operations do not buy power generating systems. They pay for power through their monthly utility bills. Although state rebates, federal tax incentives and other programs have reduced the costs of solar generation systems, they remain expensive to purchase.
We have developed a plan we believe will provide a financial solution that monetizes the full array of tax incentives for the ultimate benefit of the residential energy consumer. Together with a tax equity partner, we intend install solar generation systems in "solar communities." We expect to coordinate the engineering, equipment procurement and construction of each project. We would then contract with third parties to maintain the rooftop systems, to read the meters, and to bill the customers. The tax equity partner would receive a secure internal rate of return and the benefits of the 30% investment tax credit and five-year accelerated depreciation under the 2005 U.S. Energy Bill. The builders would reduce their construction costs and, hopefully, sell their homes more quickly. The residential consumer would be guaranteed a reduced monthly utility bill and receive the benefits of incremental home value at no additional expense or tax impact. We believe that through this solution we will sell more products and participate in the long term revenue streams associated with the sale of energy.
Recent Developments
September 2008 Financing
On September 12, 2008, after the period covered by this report, we entered into a securities purchase agreement with The Quercus Trust which we refer to as the "September 2008 SPA," providing for the purchase by The Quercus Trust of warrants to acquire up to 235,000,000 shares of our common stock for total cash proceeds of $4,200,000, net of payment by the Company of $300,000 owed for accrued interest on the Series B Convertible Notes held by The Quercus Trust and a $200,000 restructuring fee for the amendment of certain terms of the $3,500,000 secured loan previously extended to us by The Quercus Trust. We refer to this financing transaction as our "September 2008 Financing" in this report. The initial closing occurred on September 18, 2008, at which time we issued warrants to acquire up to 75,000,000 shares of our common stock to The Quercus Trust in exchange for $1,500,000 in gross proceeds. The second and final closing occurred on October 3, 2008, at which time we issued the remainder of the warrants to acquire up to 160,000,000 shares of our common stock to The Quercus Trust in exchange for $2,700,000 million in gross proceeds. The warrants we issued are exercisable for a period of seven years from the date of issuance and have an exercise price of $0.067 per share, subject to anti-dilution protection. Under the terms of the September 2008 SPA, The Quercus Trust has the right to fund the next $5,100,000 in financing by purchasing, for $0.02 per warrant, additional warrants to purchase our common stock.
The amendments that were made to the $3,500,000 secured loan in connection with the September 2008 Financing were as follows: (i) the maturity date was extended from October 2008 to March 2009, (ii) the borrowing base collateral requirement was reduced to 100% of the outstanding loan amount, and (iii) the requirement that we make prepayments on the loan with the California state solar rebate proceeds we receive was eliminated.
Additionally, the September 2008 SPA provides for the amendment of the terms of our convertible promissory notes issued on September 19, 2007 and December 7, 2007 (which, collectively, we may refer to as the "Series B Convertible Notes" in this report) to: (i) grant voting rights to the holders of the Series B Convertible Notes on an as converted basis; (ii) include certain protective provisions in the Series B Convertible Notes, including limitations on our ability to effect stock redemptions, incur indebtedness in excess of $500,000, engage in certain merger, acquisition or
similar transactions, effecting material changes to our business, or entering
into compensation arrangements with our officers and directors; and
(iii) provide that future interest payments under the Series B Convertible Notes
shall be made in warrants with substantially the same terms as the warrants we
issued in the September 2008 Financing.
The conversion price of our Series B Convertible Notes and the exercise price of the related warrants were reduced to $0.087 per share as a result of the issuance of the warrants we issued in our September 2008 Financing.
We are required to seek stockholder approval to amend our articles of incorporation to grant the holders of the Series B Convertible Notes voting rights and to the increase the number of our authorized shares of stock. The failure to amend our articles of incorporation within six months of the closing under September 2008 Financing would be deemed a trigger event under the Series B Convertible Notes, which, among other things, would give the holders thereof the right to require us to redeem all or any portion of such notes.
Board of Directors
In connection with the September 2008 Financing, we agreed to appoint three designees of The Quercus Trust to our board of directors. We appointed David Anthony, Joseph Bartlett and Gary Cheek, the three designees of The Quercus Trust, to our board of directors on October 3, 2008. Each of Steven J. Kemper, David P. Saltman and Edward Douglas Ward resigned from our board of directors. Mr. Cheek resigned on October 8, 2008 to pursue other personal matters.
Management
On September 18, 2008, we entered into a letter agreement with Mr. Saltman, our chief executive officer, pursuant to which we and Mr. Saltman agreed to terminate his employment agreement effective September 18, 2008, and as a result, all rights and obligations of the parties under that agreement were terminated. For the period from September 18, 2008 to October 31, 2008, Mr. Saltman will continue to serve as our chief executive officer pursuant to the terms of the letter agreement and will be paid a base salary of $250,000 per annum. Mr. Saltman's employment under the letter agreement may be terminated at any time. If his employment is terminated without cause by us or for good reason by him, we agreed to pay him an amount equal to his base salary for the remainder of the term of his employment under the letter agreement.
Effective November 1, 2008, David Field, our current president and chief operating officer, will be appointed as our chief executive officer.
Completed Solar Electric Installation for the New California Academy of Sciences
In September 2008, we completed our largest solar electric installation to date. We installed 720 4 x 6 foot glass panels embedded with photovoltaic cells that were arranged in a solar canopy around the new California Academy of Sciences in Golden Gate Park, San Francisco, California. The solar canopy is one of the largest photovoltaic glass canopies in the United States.
September 2008 Forbearance Agreement
On September 12, 2008, we entered into a forbearance and repayment agreement with our largest supplier. The forbearance agreement provides for a payment plan for the approximately $3,000,000 of payables currently due from us with interest at 12% per annum. Pursuant to the forbearance agreement, we agreed to pay $1,000,000 on or prior to September 19, 2008, $500,000 on or prior to January 15, 2009, and six payments of $297,558 on a monthly basis beginning on March 15, 2009 until the entire amount is paid in full.
License of Intellectual Property
We are currently evaluating the possibility of licensing the intellectual property associated with our tile and membrane products. A license of one or both of these products to one or more parties on either a geographically limited or worldwide basis could have the effect of driving greater sales volumes at reduced costs. We believe that a license strategy would exchange revenue growth for greater operational profitability. We anticipate that our channel distribution strategy would remain intact in a licensing scenario, and we would continue to provide pre- and post-sale services to our channel partners and end users.
Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles, or "GAAP," requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. Please see "Note 3-Basis of Presentation and Significant Accounting Policies" to our financial statements set forth in Item 1 of this report for a discussion regarding the accounting policies we have identified as the most important to an understanding of our current financial condition and results of operations.
Limited Operating History
We have limited historical financial information upon which to base an evaluation of our future performance. We have generated limited revenues from operations. We cannot guarantee that we will be successful in our business. We are subject to risks inherent in a fast growing company, including limited capital resources, possible delays in product development and manufacturing, and possible cost overruns due to price and cost increases. There is no assurance that future financing will be available to our company on acceptable terms. Additional equity financing will likely result in substantial dilution to existing stockholders.
Results of Operations
Three Months Ended August 31, 2008 compared to Three Months Ended August 31, 2007
The following table sets forth our consolidated statement of operations data for the three months ended August 31, 2008 and 2007.
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