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SOPW > SEC Filings for SOPW > Form 10-K on 19-Apr-2013All Recent SEC Filings

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Form 10-K for SOLAR POWER, INC.


19-Apr-2013

Annual Report


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights what we believe are the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains "forward-looking statements," which can be identified by the use of words such as "expects," "plans," "will," "may," "anticipates," "believes," "should," "intends," "estimates" and other words of similar meaning. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these forward-looking statements. Such risks and uncertainties include, without limitation, the risks described in Part I on page 4 of this Annual Report, and the risks described in Item 1A, Page 7 above.

The following discussion is presented on a consolidated basis, and analyzes our financial condition and results of operations for the years ended December 31, 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.

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. We are a global solar energy facility ("SEF") developer offering high-quality, low-cost distributed generation and utility-scale SEF development services. Primarily, we partner with developers around the world who hold large portfolios of SEF projects for whom we serve as co-developer and engineering, procurement and construction ("EPC") contractor. In addition to building SEFs using products manufactured by LDK Solar Co., Ltd. ("LDK"), our parent company, we also sell solar modules and balance of system components manufactured by third party vendors to other integrators in the U.S., Asian, and European markets. 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 SPIGuardian TM. 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. While SPI still considers O&M services to be within its core competencies, we are currently exploring third party outsourcing for these services on a going forward basis to assist in the reduction of operating expenses

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. At December 31, 2012, LDK owns approximately 71% of the Company's outstanding Common Stock. The transaction complemented LDK's vertical integration, effectively providing us with strategic capital by making us its downstream SEF development platform and a member of the global LDK family. With LDK's investment in Solar Power, Inc., we expanded in 2011 and 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 have been 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 2- Going Concern Considerations and Management's Plan of the Notes of the 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. See Note 5- Acquisition of Solar Green Technology of the Notes of the Consolidated Financial Statements for further discussion related to the accounts payables with LDK. As a result of the transaction, in July 2012, we issued 9,771,223 shares of its Common Stock to LDK Europe, a wholly owned subsidiary of LDK, wherein LDK retained ownership of approximately 71% of our outstanding Common Stock as of December 31, 2012.


Critical Accounting Policies and Estimates

Revenue recognition

Product sales - 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. We make determination of our customer's credit worthiness at the time we accept their initial order. For cable, wire and mechanical assembly sales, 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.

Construction Contracts - Revenue on photovoltaic system construction contracts is generally recognized using the percentage of completion method of accounting, unless we cannot make reasonably dependable estimates of the costs to complete the contract or the contact value is not fixed, in which case we would use the completed contract method. At the end of each period, the Company measures the cost incurred on each project and compares the result against its estimated total costs at completion. The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as costs and estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines its customer's credit worthiness at the time the order is accepted. Sudden and unexpected changes in customer's financial condition could put recoverability at risk.

The percentage-of-completion method requires the use of various estimates including among others, the extent of progress towards completion, contract revenues and contract completion costs. Contract revenues and contract costs to be recognized are dependent on the accuracy of estimates, including direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. We have a history of making reasonable estimates of the extent of progress towards completion, contract revenues and contract completion costs. However, due to uncertainties inherent in the estimation process, it is possible that actual contract revenues and completion costs may vary from estimates. Under the completed-contract method, contract costs are recorded to a construction in progress account and cash received is recorded to a liability account during the periods of construction. All revenues, costs, and profits are recognized in operations upon completion of the contract. A contract is considered complete and revenue recognized when all costs except insignificant items have been incurred and final acceptance has been received from the customer and receivables are deemed to be collectible. Provisions for estimated losses on uncompleted contracts, if any, are recognized in the period in which the loss first becomes probable and reasonably estimable.

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.

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 investment and the nature and the extent of the Company's continuing involvement. Generally, revenue is recognized at the time of title transfer if the buyer's 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.

For any arrangements containing multiple deliverables not covered under the revenue guidance for real estate or for long-term construction contracts, we analyze each activity within the sales arrangement to ensure that we adhere to the separation guidelines for multiple-element arrangements. We allocate revenue for any transactions involving multiple elements to each unit of accounting based on our best estimate of the selling price, and recognize revenue for each unit of accounting when the revenue recognition criteria have been met.

Construction in Progress - During 2012, we entered into EPC arrangements to develop utility-scale SEF's across Greece and Italy. We applied the completed contract method to these arrangements and have capitalized all costs related to these projects. During the three months ended December 31, 2012, we recorded a $2.7 million provision for losses on contracts to costs incurred on the Greek projects that exceeded the discounted present value of the contract, reducing the balance of construction in progress for the Greek projects to $14.7 million as of December 31, 2012. The Greek project was substantially complete at December 31, 2012; however, final acceptance had not yet been received. The project in Italy was still in progress at December 31, 2012 and had a construction in progress balance of $1.4 million. No revenue has been recognized on any of these arrangements as of December 31, 2012.

Cable, wire and mechanical assemblies - In January 2012, the Company reassessed its business strategy and decided to no longer accept new orders. In our cable, wire and mechanical assemblies business the Company recognizes the sales of goods when there is evidence of an arrangement, title and risk of ownership have passed, the price to the buyer is fixed or determinable and collectability is reasonably assured. There are no formal customer acceptance requirements or further obligations related to our assembly services once we ship our products. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. We make determination of our customer's credit worthiness at the time we accept their order.

Product and Performance 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 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, such as labor, material and transportation costs to replace panels and balance of system components provided by third-party manufacturers. To the extent our estimate of warranty cost is inaccurate we may incur additional costs to satisfy our contractual obligations, and those costs may be material to our financial condition, results of operations and cash flows.

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 impairment 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 impairments 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 impaired 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. Inventory impairment charges establish a new cost basis for inventory and charges are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable.

Stock based compensation - The Company measures the stock-based compensation expense 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.

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.

Allowance for doubtful accounts - The Company regularly monitors and assesses the risk of not collecting amounts owed to the Company by customers. This evaluation is based upon a variety of factors including an analysis of amounts current and past due along with relevant history and facts particular to the customer. It requires the Company to make significant estimates and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts.

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 the weight of available evidence, including expected future earnings. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. Should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination is made.

Profit from non-U.S. activities is subject to local country taxes but not subject to U.S. tax until repatriated to the U.S. It is our intention to permanently reinvest these earnings outside the U.S. The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will more likely than not be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities may result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate tax assessment, a further charge to expense may result.

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.

Segment Information

In January 2012, the Company reassessed its reportable segments and determined that the former cable, wire and mechanical assemblies operating segment no longer meets the qualitative and quantitative characteristics that require separate reporting. The basis for the change from reporting two reportable segments to a single segment is the decline in revenues related to this former segment due to the changes in business strategy. As such, effective January 2012, the Company operates in one reportable segment. The prior periods have been restated to conform to the current period presentation.

Recent Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 adoption of this update did not impact the Consolidated Financial Statements.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends current fair value measurement and disclosure guidance to provide increased transparency around valuation inputs and investment categorization. This update became effective prospectively for the Company in the first quarter of fiscal 2012. Other than additional disclosure requirements (refer to Note 19 -Fair Value of Financial Instruments), the adoption of this update did not impact the Consolidated Financial Statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. ASU 2011-05, as amended by ASU 2011-12, increases the prominence of other comprehensive income in financial statements. Under this update, an entity has the option to present the components of net income and comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company has selected to report two separate statements. The update eliminates the option to present other comprehensive income in the statement of changes in stockholders' equity. This update was effective on a retrospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2011. Other than the change in presentation, the adoption of this update did not impact the Consolidated Financial Statements.


In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity can support the conclusion that it is more likely than not that the fair value of a reporting unit is more than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. Goodwill must be tested for impairment at least annually, and prior to the ASU, a two-step test was required to assess goodwill for impairment. In Step 1, the fair value of a reporting unit is compared to the reporting unit's carrying amount. If the fair value is less than the carrying amount, Step 2 is used to measure the amount of goodwill impairment, if any. The update was effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. The adoption of this update did not impact the Consolidated Financial Statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other:
Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. An organization is now allowed to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. These changes become effective for the Company on January 1, 2013. Adoption of this update will have no impact on the Consolidated Financial Statements.

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income-Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. These changes become effective for the Company on January 1, 2013. Management has determined that the adoption of these changes will not have an impact on the Consolidated Financial Statements.

Results of Operations

Comparison of the year ended December 31, 2012 to the year ended December 31, 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 5 -Acquisition of Solar Green Technology to the 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 year ended December 31, 2011, reflect the results of legacy Solar Power, Inc. for the nine month period ended December 31, 2011 combined with those of SGT for the twelve month period ended December 31, 2011.

As a result, excluded from the results of operations, below, are the results of legacy Solar Power, Inc. ("SPI") 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 $100.0 million and $139.8 million for the year ended December 31, 2012 and 2011, respectively, a decrease of $39.8 million, or 28.5%. Included in net sales for the year ended December 31, 2012 were related party sales to LDK, North Palm Springs Investments, LLC ("NPSLLC"), a wholly owned subsidiary of LDK Solar USA, Inc., and Terrasol of $35.5 million, primarily consisting of solar development project costs. Included in net sales for the year ended December 31, 2011 were related party sales to LDK and NPSLLC of $31.5 million, primarily consisting of solar development project costs and the sale of . . .

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