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SOPW > SEC Filings for SOPW > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for SOLAR POWER, INC.

Form 10-Q for SOLAR POWER, INC.


19-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors That May Affect Future Results

This Quarterly Report on Form 10-Q 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 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 for the three and nine months ended September 30, 2012 and 2011. 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, as defined in Note 1-Description of Business and Basis of Presentation to the Condensed Consolidated Financial Statements.

Overview

Solar Power, Inc. and its subsidiaries (collectively the "Company") consist of the combination of the legacy reporting entity Solar Power, Inc. and Solar Green Technology S.p.A. ("SGT") and their respective subsidiaries. The Company is a global solar energy facility ("SEF") developer offering our own brand of high-quality, low-cost distributed generation and utility-scale SEF development services. Primarily, we work directly with and for developers around the world who hold large portfolios of SEF projects for whom we serve as an engineering, procurement and construction ("EPC") contractor. We also perform as an independent, turnkey SEF developer for one-off distributed generation and utility-scale SEFs. The Company builds three basic types of SEFs: rooftop systems, ground mounted systems, and parking shade structure systems. Our proprietary SkyMount® commercial rooftop racking system and our custom parking shade structures are procured through contract manufacturers and built to our design specifications.

In addition to designing, engineering and constructing large-scale SEFs, we also provide long-term operations and maintenance ("O&M") services through our proprietary O&M program SPIGuardianTM. This service program provides a comprehensive suite of services that engage upon a facility's commissioning to provide performance monitoring, system reporting, preventative maintenance and full warranty support over the anticipated life of the SEF.

On March 31, 2011, LDK Solar Co., Ltd. ("LDK") obtained a controlling interest in Solar Power, Inc. by making a significant investment in our business that provided working capital and broader relationships that allowed us to more aggressively pursue commercial and utility projects globally. With LDK's investment in Solar Power, Inc., we expanded and aggressively engaged in business development activities that have allowed us to grow our global pipeline while accelerating our construction of multiple projects simultaneously. LDK's modules are used in the majority of the systems we produce; however, we maintain relationships with other module manufacturers when circumstances call for an alternative to LDK's line of modules. See Note 1-Description of Business and Basis of Presentation of the Notes of the Condensed Consolidated Financial Statements for further discussion related to the accounts payables with LDK.

In June 2012, we acquired Solar Green Technology S.p.A. ("SGT"), a SEF developer headquartered in Milan, Italy, from LDK Solar Europe Holding S.A ("LDK Europe") and the two founders of SGT. Because LDK Europe is a wholly-owned subsidiary of our parent, LDK, the acquisition was treated as a transaction between entities under common control. In accordance with ASC Topic 805, Business Combinations, these financial statements reflect the combination of Solar Power, Inc., and SGT's financial statements for all periods presented under which both entities were under the common control of LDK. LDK obtained a controlling interest in SGT on July 20, 2009. LDK obtained a controlling interest in Solar Power, Inc. on March 31, 2011. As such, the Company recognized the assets and liabilities of SGT (the accounting receiving entity) at their historical carrying values in accordance with U.S. GAAP and has recast the assets and liabilities of the legacy Solar Power, Inc. entity (the transferring entity) to reflect carrying value of the parent, LDK, which were stepped up to fair value on March 31, 2011 upon LDK obtaining a controlling interested in Solar Power, Inc. The period from January 1, 2011 through March 31, 2011 represents SGT's financial results only, given that it was the predecessor entity in the transaction. Upon LDK acquiring its controlling interest in Solar Power, Inc. on March 31, 2011, the equity of the new reporting entity for the combined financial statements of Solar Power, Inc. and SGT reflects the Preferred and Common Stock of Solar Power, Inc. and associated additional paid-in capital and SGT's retained earnings (accumulated deficit) and foreign currency translation at March 31, 2011. Adjustments to eliminate the capital share accounts of SGT were recorded to additional paid-in capital. The acquisition of SGT complemented the Company's global growth strategy.

In addition to our corporate headquarters in Roseville, California, we also maintain offices in San Francisco, California, Bedminster, New Jersey, Milan, Italy, and Shenzhen, China.


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Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue recognition, allowances for doubtful accounts, assets held for sale, warranty reserves, inventory reserves, stock-based compensation expense, goodwill, definite-lived intangible asset and long-lived asset valuations, accounting for income taxes and deferred income tax asset valuation allowances, and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer to the "Critical Accounting Policies and Estimates" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011. Except as noted below, there have been no material changes in any of our critical accounting policies and estimates during the three and nine months ended September 30, 2012.

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, or more frequently if certain indicators are present, using a fair-value-based approach. The Company evaluated the carrying value of its goodwill at December 31, 2011, and determined that no impairment of goodwill was identified during any of the periods presented. At September 30, 2012, due primarily to the recent reduction in the Company's market capitalization, the Company's market value was significantly below its book value, thus triggering an impairment analysis. As a result of this analysis, the Company recorded a goodwill impairment charge of $5.2 million, the amount of which was measured using a discounted cash flow analysis using level 3 unobservable inputs. Refer to Note 7-Goodwill and Other Intangible Assets to the Condensed Consolidated Financial Statements for further details.

Long-lived assets other than goodwill-Long-lived assets include property, plant and equipment and intangible assets. The Company's intangible assets consist of patents and customer relationships and are amortized on a straight-line basis over their useful lives consistent with the estimated useful life considerations used in the determination of their fair values. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. Long-lived assets are reviewed for impairment when there is evidence that 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 comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the estimated fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the estimated fair value less costs to sell and are not depreciated.

Results of Operations

Three and nine months ended September 30, 2012, as compared to three and nine months ended September 30, 2011

Acquisition of an entity under common control

Impacting the results of operations for all periods presented is the accounting treatment prescribed for an acquisition of an entity under common control, as noted above in the Overview and in Note 4-Acquisition of Solar Green Technology to the Condensed Consolidated Financial Statements. Due to this accounting treatment, the three months ended March 31, 2011 now reflect the results of SGT only and not those of the legacy Solar Power, Inc. entity. As such the nine months ended September 30, 2011, reflect the results of legacy Solar Power, Inc. for the six month period ended September 30, 2011 combined with those of SGT for the nine month period ended September 30, 2012. The three months ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 reflect the combined results of legacy Solar Power, Inc. and SGT.

Excluded from the results of operations, below, are the results of legacy Solar Power, Inc. for the three months ended March 31, 2011, as follows: net sales of $5.8 million, cost of goods sold of $5.1 million, general and administrative expenses of $1.6 million, sales, marketing and customer service expenses of $0.5 million, engineering, design and product management expenses of $0.1 million, interest expense of $0.4 million, interest income of $2,000, other expense of $6,000, and income tax expense of $7,000.

Net sales

Net sales were $36.2 million and $34.4 million for the three months ended September 30, 2012 and 2011, respectively, an increase of $1.9 million, or 5.5%. Net sales were $87.0 million and $78.4 million for the nine months ended September 30, 2012 and 2011, respectively, an increase of $8.5 million, or 10.8%. Included in net sales for the three and nine months ended September 30, 2012 were related party sales to LDK, NPSLLC and Terrasol of $12.5 million and $33.5 million, respectively, primarily consisting of solar development project costs. Included in net sales for the three and nine months ended September 30, 2011 were related party sales to LDK and NPSLLC of $5.9 million and $29.3 million, respectively, primarily consisting of solar development project costs and the sale of an Italian SEF to LDK. The increase in net sales for the three and nine months ended September 30, 2012 over the comparative period was primarily due to new solar development projects under construction in Italy and the U.S. as well as the accounting treatment for an acquisition of an entity under common control due to the acquisition of SGT specific to the nine months ended September 30, 2012, offset by revenue from the sale of an Italian SEF to LDK. We expect that net sales will increase moderately from current levels as we expand our development of large system turn-key SEF projects in the U.S. and world-wide.

Cost of goods sold

Cost of goods sold was $31.0 million (85.6% of net sales) and $32.2 million (93.6% of net sales) for the three months ended September 30, 2012 and 2011, respectively, a decrease of $1.2 million, or 3.7%. Cost of goods sold was $75.3 million (86.6% of net sales) and $70.6 million (90.1% of net sales) for the nine months ended September 30, 2012 and 2011, respectively, an increase of $4.7 million, or 6.7%. Cost of goods sold for the three and nine months ended September 30, 2012 includes related party costs of goods sold to LDK, NPSLLC and Terrasol of $11.4 million and $31.0 million, respectively. Cost of goods sold for the three and nine months ended September 30, 2011 includes related party costs of goods sold to LDK and NPSLLC of $6.6 million and $26.0 million, respectively. Cost of goods sold as a percentage of sales decreased for the three and nine months ended September 30, 2012 over the comparative period due to EPC arrangements with greater margins executed in 2012. We expect that cost of goods sold will remain consistent with current period, as a percentage of sales, as we execute our operations in the U.S. and world-wide.

Gross margins were 14.4% and 6.3% for the three months ended September 30, 2012 and 2011, respectively. Gross margins attributable to non-related parties were 17.5% and 10.1% for the three months ended September 30, 2012 and 2011, respectively. The increase in gross margin from non-related parties for the three months ended September 30, 2012 over that of the comparative period was due to higher margin solar development projects in 2012. Gross margins are expected to be consistent with current quarter margins in the future. Gross margins attributable to related parties were 8.5% and (12.4%) for the three months ended September 30, 2012 and 2011, respectively. The increase in gross margin for the three months ended September 30, 2012 over that of the comparative period was primarily due to the negative gross margin for the three months ended September 30, 2011 related to a single solar development project that incurred costs during that quarter with no associated revenue due to non-recurring circumstances. Gross margins from related parties are expected to be consistent with current quarter margins in the future.

Gross margins were 13.4% and 10.0% for the nine months ended September 30, 2012 and 2011, respectively. Gross margins attributable to non-related parties were 17.2% and 9.2% for the nine months ended September 30, 2012 and 2011, respectively. The increase in gross margin from non-related parties for the nine months ended September 30, 2012 over that of the comparative period was due to higher margin solar development projects in 2012. Gross margins are expected to be consistent with current quarter margins in the future. Gross margins attributable to related parties were 7.4% and 11.3% for the nine months ended September 30, 2012 and 2011, respectively. The decrease in gross margin from related parties for the nine months ended September 30, 2012 from that of the comparative period was primarily due to a single project that incurred cost overruns in the nine months ended September 30, 2012 that are not expected to recur. Gross margins from related parties are expected to be consistent with current quarter margins in the future.


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General and administrative expenses

General and administrative expenses were $3.2 million (8.8% of net sales) and $1.6 million (4.7% of net sales) for the three months ended September 30, 2012 and 2011, respectively, an increase of $1.6 million, or 100.0%. General and administrative expenses were $8.7 million (10.0% of net sales) and $4.5 million (5.7% of net sales) for the nine months ended September 30, 2012 and 2011, respectively, an increase of $4.2 million, or 93.3%. The increase in general and administrative expenses for the three months ended September 30, 2012 over the comparative period was primarily due to increases in professional services of $0.9 million, personnel-related costs of $0.5 million and rent expense of $0.1 million. The increase in general and administrative expenses for the nine months ended September 30, 2012 over the comparative period was primarily due to increases in personnel-related costs of $1.6 million, professional services of $1.7 million, rent expense of $0.4 million and amortization of intangible assets, all of which were primarily attributable to the accounting treatment for the acquisition of SGT. We expect that general and administrative expenses will scale downward moderately from the current period, as a percentage of sales, as we anticipate revenue growth from our operations in the U.S. and world-wide and undertake additional measures to control increasing costs.

Sales, marketing and customer service expenses

Sales, marketing and customer service expenses were $1.6 million (4.4% of net sales) and $1.0 million (2.9% of net sales) for the three months ended September 30, 2012 and 2011, respectively, an increase of $0.6 million, or 60.0%. Sales, marketing and customer service expenses were $4.6 million (5.3% of net sales) and $2.7 million (3.4% of net sales) for the nine months ended September 30, 2012 and 2011, respectively, an increase of $1.9 million, or 70.4%. The increase in sales, marketing and customer service expense for the three months ended September 30, 2012 over the comparative period was primarily due to an increase in commission expense of $0.7 million, offset by decreases in rent expense of $0.1 million. The increase in sales, marketing and customer service expense for the nine months ended September 30, 2012 over the comparative period was primarily due to increases in commission expense of $0.9 million, personnel-related costs of $0.6 million and a $0.6 million non-refundable land deposit for a terminated California solar project, offset by decreases in consulting expense of $0.2 million. We expect these expenses to increase in future periods, in correlation with increases in sales, but as a percentage of sales these expenses are expected to remain at a similar level as that of the most recent three month period.

Engineering, design and product management expenses

Engineering, design and product management expenses were $0.4 million (1.1% of net sales) and $0.7 million (2.0% of net sales) for the three months ended September 30, 2012 and 2011, respectively, a decrease of $0.2 million, or 28.6%. Engineering, design and product management expenses were $1.7 million (2.0% of net sales) and $1.4 million (1.8% of net sales) for the nine months ended September 30, 2012 and 2011, respectively, an increase of $0.3 million, or 21.4%. The decrease in engineering, design and product management costs for the three months ended September 30, 2012 from the comparative period was primarily due to a decrease in consulting and personnel-related costs of $0.2 million. The increase in engineering, design and product management costs for the nine months ended September 30, 2012 over the comparative period was primarily due to an increase in consulting and personnel-related costs of $0.3 million. We expect these expenses to decline in future periods, as a percentage of sales, due to recent cost reduction actions.

Impairment charge

At September 30, 2012, due primarily to the recent reduction in the Company's market capitalization, the Company's market value was significantly below its book value, thus triggering an impairment analysis. As a result of this analysis, the Company recorded a goodwill impairment charge of $5.2 million, the amount of which was measured using a discounted cash flow analysis using level 3 unobservable inputs. As such, the balance of goodwill as of September 30, 2012 was zero. For the three and nine months ended September 30, 2011, no impairment of goodwill was recorded.

During the second quarter of 2011, we recorded an impairment charge of $0.4 million to reduce the carrying amount of the asset held for sale to the revised estimate of fair value less cost to sell. During the second quarter of 2012, we recorded an impairment charge of $0.7 million to reduce the carrying amount of the asset held for sale to the revised estimate of fair value less cost to sell. During the second quarter of 2012, subsequent to the impairment, this asset was sold to a related party. The fair value was estimated based on a discounted cash flow analysis using level 3 unobservable inputs.

Interest expense

Interest expense was $1.3 million and $0.4 million, respectively, for the three months ended September 30, 2012 and 2011. Interest expense was $3.1 million and $1.1 million, respectively, for the nine months ended September 30, 2012 and 2011. The increase in interest expense of $0.9 million, or 225.0%, for the three months ended September 30, 2012 over the comparative period was due to an increase in the balance of short and long-term borrowings. The increase in interest expense of $2.0 million, or 181.8%, for the nine months ended September 30, 2012 over the comparative period was due to an increase in the balance of short and long-term borrowings as well as the effect of the accounting treatment for the SGT acquisition. We expect that interest expense will fluctuate in future periods depending on the utilization of debt financing in our operations.

Interest income

Interest income was $0.7 million and $47,000 for the three months ended September 30, 2012 and 2011, respectively. Interest income was $2.0 million and $0.1 million for the nine months ended September 30, 2012 and 2011, respectively. The increase in interest income of approximately $0.7 million and $2.0 million, respectively, over the comparative period was due to the outstanding notes receivable with two customers for their predevelopment and site acquisition costs related to EPC contracts between the customers and the Company. We expect that we will continue to earn interest income at similar levels in the future until the notes are repaid by the customers which are due in 2013. We do not expect to lend to new customers in the future, as such interest income will fluctuate in future periods depending on the balance of the currently outstanding notes receivable.


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Other income / expense, net

Other income (expense), net was income of $0.2 million and an expense of $0.8 million for the three months ended September 30, 2012 and 2011, respectively. Other income, net was $0.3 million and $0.1 million for the nine months ended September 30, 2012 and 2011, respectively. Other income (expense), net for the three month period increased by $0.9 million due to changes in currency gains and losses and decreases in other miscellaneous expenses. Other income (expense), net for the nine months ended September 30, 2012 remained relatively flat with a slight decrease of approximately $0.2 million from the comparative periods. We expect that we will continue to be exposed to currency gains and losses in the future.

Provision for (benefit from) income taxes

The Company had a provision for income taxes of $1.6 million and $0.4 million for the three and nine months ended September 30, 2012, respectively, and $0.5 million for the nine months ended September 30, 2011. The Company had a benefit from income taxes of $0.2 million for the three months ended September 30, 2011. The effective income tax rate of the Company for the three months ended September 30, 2012 was (425.9)%. The effective income tax rate of the Company for the three months ended September 30, 2011 was 7.5%. The effective income tax rate of the Company for the nine months ended September 30, 2012 was (8.7)%. The effective income tax rate of Solar Power, Inc. for the three months ended September 30, 2011 combined with the effective income tax rate of SGT for the nine months ended September 30, 2011 was (23.5)%. In 2011, the Company generated taxable income in certain jurisdiction while incurring an overall worldwide loss. In 2012, the Company is also expecting to generate taxable income in certain jurisdictions while still experiencing an overall worldwide loss. The negative rate for the nine-month period is a result of tax liability due in certain profitable jurisdictions while loss generating jurisdictions are not able to benefit from current net operating losses due to lack of taxable income. The rate for the three-month period was primarily due to shifts in forecasted income as result of change in market conditions amongst profitable jurisdictions having differing tax rates and a determination during the three month period ended September 30, 2012 that it is no longer more likely than not that the benefit of current year tax losses will be realized, therefore, the deferred tax assets were reversed.

Liquidity and Capital Resources

A summary of the sources and uses of cash and cash equivalents is as follows (in
thousands):



                                                       2012              2011 As Recast (1)
Net cash used in operating activities                $ (14,819 )        $            (18,776 )
Net cash used in investing activities                   (6,254 )                     (10,496 )
Net cash provided by financing activities               17,067                        31,807
Effect of exchange rate changes on cash                   (142 )                        (136 )

Net (decrease) increase in cash and cash
equivalents                                          $  (4,148 )        $              2,399

(1) As adjusted to reflect the activity of SGT beginning January 1, 2011 combined with the balances of Solar Power, Inc. beginning March 31, 2011, as required under the accounting guidelines for a transfer of an entity under common control (refer to Note 4-Acquisition of Solar Green Technology to the Condensed Consolidated Financial Statements).

As of September 30, 2012 and December 31, 2011, we had $20.4 million and $24.5 million in cash and cash equivalents, respectively.

Net cash used in operating activities of $14.8 million for the nine months ended September 30, 2012 included a net loss of $10.4 million offset in part by non-cash items included in net loss, consisting of depreciation and amortization of $1.4 million related to property and equipment, impairment of goodwill and of an asset held for sale of $5.9 million, stock-based compensation expense of $0.4 . . .

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