SPI Energy Co., Ltd. - Quarter Report: 2009 June (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

o		Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

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.)

1115 Orlando Avenue
Roseville, CA 95661-5247

(916) 745-0900

(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 þ No o

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). o Yes o 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 o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 37,943,826 shares of $0.0001 par value common stock outstanding as of August 6, 2009.

 

 

TABLE OF CONTENTS

		Page
PART I — Financial Information			3
Item 1 — Financial Statements			3
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 4T — Controls and Procedures			30
Part II — Other Information
Item 1 — Legal Proceedings			30
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3 — Defaults Upon Senior Securities			30
Item 4 — Submission of Matters to a Vote of Security Holders			30
Item 5 — Other Information			30
Item 6 — Exhibits			31
Signatures			32
Exhibit Index			33
EX-31.1
EX-31.2
EX-32

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOLAR POWER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except for share data)

		As of				As of
		June 30, 2009				December 31, 2008
		(unaudited)				(audited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,356			$	5,915
Accounts receivable, net of allowance for doubtful accounts of $275 and $49 at June 30, 2009 and December 31, 2008, respectively			7,041				3,010
Costs and estimated earnings in excess of billings on uncompleted contracts			430				294
Inventories, net			6,583				4,665
Asset held for sale			138				—
Prepaid expenses and other current assets			751				771
Restricted cash			527				527
Total current assets			18,826				15,182
Goodwill			435				435
Restricted cash			273				—
Property, plant and equipment at cost, net			1,769				2,178
Total assets		$	21,303			$	17,795
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	11,754			$	3,916
Accrued liabilities			2,968				3,058
Income taxes payable			249				248
Deferred revenue			184				—
Billings in excess of costs and estimated earnings on uncompleted contracts			21				160
Loans payable and capital lease obligations			337				342
Total current liabilities			15,513				7,724
Loans payable and capital lease obligations, net of current portion			142				311
Deferred revenue			—				125
Total liabilities			15,655				8,160
Commitments and contingencies			—				—
Stockholders’ equity
Preferred stock, par $0.0001, 20,000,000 shares authorized, none issued and outstanding at June 30, 2009 and December 31, 2008			—				—
Common stock, par $0.0001, 100,000,000 shares authorized 37,943,826 and 37,771,325 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively			4				4
Additional paid in capital			28,362				28,029
Accumulated other comprehensive loss			(222	)			(222	)
Accumulated deficit			(22,496	)			(18,176	)
Total stockholders’ equity			5,648				9,635
Total liabilities and stockholders’ equity		$	21,303			$	17,795

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

SOLAR POWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for share data)

		For the Three Months Ended								For the Six Months Ended
		June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Net sales		$	10,414			$	10,046			$	16,195			$	15,879
Cost of goods sold			8,859				8,663				14,007				14,464
Gross profit			1,555				1,383				2,188				1,415
Operating expenses:
General and administrative			2,134				2,545				4,436				4,675
Sales, marketing and customer service			837				633				1,635				1,191
Engineering, design and product management			193				135				399				268
Total operating expenses			3,164				3,313				6,470				6,134
Operating loss			(1,609	)			(1,930	)			(4,282	)			(4,719	)
Other income (expense):
Interest expense			(16	)			(48	)			(28	)			(74	)
Interest income			1				66				5				105
Other income (expense), net			(6	)			5				(12	)			6
Total other income (expense)			(21	)			23				(35	)			37
Loss before income taxes			(1,630	)			(1,907	)			(4,317	)			(4,682	)
Income tax expense			—				—				3				3
Net loss		$	(1,630	)		$	(1,907	)		$	(4,320	)		$	(4,685	)
Net loss per common share:
Basic and diluted		$	(0.04	)		$	(0.05	)		$	(0.11	)		$	(0.12	)
Weighted average number of common shares used in computing per share amounts			37,940,529				37,679,721				37,927,320				37,637,129

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

SOLAR POWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		June 30, 2009				June 30, 2008
		(unaudited)				(unaudited)
Cash flows from operating activities:
Net loss		$	(4,320	)		$	(4,685	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			426				329
Stock issued for services			7				15
Stock-based compensation expense			326				239
Bad debt expense			279				203
Income tax expense			—				3
Loss on disposal of fixed assets			—				4
Changes in operating assets and liabilities:
Accounts receivable			(4,310	)			(1,317	)
Costs and estimated earnings in excess of billings on uncompleted contracts			(135	)			1,185
Inventories			(1,918	)			877
Asset held for sale			(138	)			—
Prepaid expenses and other current assets			21				41
Accounts payable			7,836				(1,061	)
Income taxes payable			—				(5	)
Billings in excess of costs and estimated earnings on uncompleted contracts			(139	)			809
Deferred revenue			59				—
Accrued liabilities			(90	)			298
Net cash used in operating activities			(2,096	)			(3,065	)
Cash flows from investing activities:
Acquisitions of property, plant and equipment			(17	)			(269	)
Net cash used in investing activities			(17	)			(269	)
Cash flows from financing activities:
Proceeds from issuance of common stock			—				69
Costs related to share registration			—				(14	)
Restricted cash collateralizing letters of credit and ACH transactions			(273	)			1,510
Principal payments on notes and capital leases payable			(175	)			(169	)
Net proceeds from line of credit			—				(931	)
Net cash (used in) provided by financing activities			(448	)			465
Decrease in cash and cash equivalents			(2,561	)			(2,869	)
Cash and cash equivalents at beginning of period			5,915				6,840
Effect of exchange rate changes on cash			2				(4	)
Cash and cash equivalents at end of period		$	3,356			$	3,967

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

SOLAR POWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		June 30, 2009				June 30, 2008
		(unaudited)				(unaudited)
Supplemental disclosure of cash flow information:
Cash paid for interest		$	28			$	74
Cash paid for income taxes		$	3			$	5
Supplemental disclosure of non-cash investing and financing activities:
Stock issued for services		$	7			$	15
		$	7			$	15

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

SOLAR POWER, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Basis of Presentation

Description of Business

     Solar Power, Inc. and its subsidiaries, (collectively the “Company”) engage in sales, installation and integration of photovoltaic systems, markets its franchise operations and manufactures and sells solar panels and related hardware and cable, wire and mechanical assemblies.

     Our revenue was derived from the sale, installation and integration of photovoltaic systems, sales from our manufactured solar panels and related hardware 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 Solar Power, Inc. for the years ended December 31, 2008 and 2007 appearing in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 24, 2009. The June 30, 2009 and 2008 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 (“SEC”) for smaller reporting companies. Certain information and note disclosures normally included in the annual financial statements on Form 10-K 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 accruals, 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 on consolidation.

2. Summary of Significant Accounting Policies

     Cash and cash equivalents — Cash and cash equivalents include cash on hand, cash accounts and interest bearing savings accounts. At times, cash balances may be in excess of FDIC insurance limits. The Company has not experienced any losses with respect to bank balances in excess of government provided insurance. At June 30, 2009 and December 31, 2008, the Company held approximately $3,647,000 and $5,213,000 in bank balances in excess of the insurance limits.

     Inventories — Beginning on January 1, 2009, inventories are stated at the lower of cost or market, determined by the first in first out cost method. Prior to January 1, 2009, inventories were determined using the weighted average cost method. The conversion to first in first out cost method had no material effect on the financial statements for the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008. 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 — SFAS No. 128, “Earnings Per Share,” provides for the calculation of basic and diluted earnings per share. Basic earnings per share is computed by dividing income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock 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, 2009 and 2008, 0 and 288,801 shares of common stock equivalents, respectively were excluded from the computation of diluted earnings per share, since their effect would be anti-dilutive.

     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 initial lease term

     Goodwill — Goodwill is the excess of purchase price over the fair value of net assets acquired. The Company applies Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, which requires the carrying value of goodwill to be evaluated for impairment on an annual basis, using a fair-value-based approach. No impairment of goodwill has been identified during any of the periods presented.

     Revenue recognition — The Company’s three primary business segments include photovoltaic installation, integration and sales, distribution operations and cable, wire and mechanical assemblies.

     Photovoltaic installation, integration and sales — In our photovoltaic systems installation, integration and product sales segment, revenue on product sales is recognized when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. During the six months ended June 30, 2009 and 2008, the Company did recognize one product sale on a bill and hold arrangement in each period. In the 2009 instance, the customer requested that we store product to combine with a subsequent order in order to reduce their transportation costs. In the 2008 instance the customer did not have sufficient facilities to store the product and asked that we store the product for them. Since all criteria for revenue recognition had been met the Company recognized revenue on these sales.

Revenue on photovoltaic system construction contracts is recognized using the percentage of completion method of accounting. At the end of each period, the Company measures the cost incurred on each project and compares the result against its estimated total costs at completion. The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as costs and estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines its 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.

In our solar photovoltaic business, contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling and general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

     Franchise Operations — The Company began selling franchise territories in fiscal 2008. The Company did not recognize any franchise revenue in its fiscal 2008 financial statements. For the three and six months ended June 30, 2009, the Company recognized approximately $47,000 in franchise revenue consisting of approximately $40,000 in product sales, $6,000 in royalty revenue and $1,000 in franchise fee revenue. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 45 (as amended) “Accounting for Franchise Fee Revenue” (“SFAS 45”) which requires that revenue shall be recognized when all the material services or conditions relating to the sale have been substantially met. The Company has determined that when the franchisee places its first order for a solar installation all the material services or conditions will be deemed to have been met. At June 30, 2009 the Company had $184,000 of deferred revenue and $131,000 in inventory deposits included in its financial statements from franchisees. Deferred revenue and deposits as of December 31, 2008 were reclassified to conform to the current period presentation. Subsequent to June 30, 2009, the Company terminated all existing franchise agreements and will no longer seek new franchisees. The Company expects to enter into arrangements with our former franchisees in which they will distribute our branded Yes! products. In addition the Company expects to seek potential distributors for this product line. The Company does not expect that this will have a material effect on operating income. The Company will continue its significant involvement in the operations. Therefore, no discontinued operation treatment is required. The deferred revenue consists of deferred franchise fee revenue. These fees will either be refunded or used by existing franchisees as a credit against future product purchases.

     Cable, wire and mechanical assemblies — In our cable, wire and mechanical assemblies business the Company recognizes the sales of goods when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Generally 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.

     Allowance for doubtful accounts — The Company regularly monitors and assesses the risk of not collecting amounts owed to the Company by customers. This evaluation is based upon a variety of factors including: an analysis of amounts current and past due along with relevant history and facts particular to the customer. It requires the Company to make significant estimates, and changes in facts and circumstances could result in material changes in the allowance for doubtful accounts. At June 30, 2009 and December 31, 2008 the Company has recorded an allowance of approximately $275,000 and $49,000, respectively.

     Stock-based compensation — The Company accounts for stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” (SFAS No. 123(R)”) which requires the Company to measure the stock-based compensation costs of share-based compensation arrangements based on the grant-date fair value and generally recognizes the costs in the financial statements over the employee requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

     Shipping and handling cost — 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, 2009 and 2008, shipping and handling costs expensed to cost of goods sold were approximately $187,000 and $109,000, respectively. During the six months ended June 30, 2009 and 2008, shipping and handling costs expensed to cost of goods sold were approximately $270,000 and $248,000, respectively.

     Advertising costs — Costs for newspaper, television, radio, and other media and design are expensed as incurred. The Company expenses the production costs of advertising the first time the advertising takes place. The costs for this type of advertising were approximately $66,000 and $52,000 during the three months ended June 30, 2009 and 2008, respectively. The costs for this type of advertising were approximately $115,000 and $152,000 during the six months ended June 30, 2009 and 2008, respectively.

     Product warranties — We offer the industry standard of 20 years for our solar modules and industry standard five (5) years on inverter and balance of system components. Due to the warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. In our cable, wire and mechanical assemblies business, historically our warranty claims have not been material. In our solar photovoltaic business our greatest warranty exposure is in the form of product replacement. Until the third quarter of fiscal 2007, the Company purchased its solar panels from third-party suppliers and since the third-party warranties are consistent with industry standards we considered our financial exposure to warranty claims immaterial. 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, the Company began installing 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 historical data reported by other solar system installers and manufacturers. In our cable, wire and mechanical assemblies business our current standard product warranty for our mechanical assembly product ranges from one to five years. The Company has recorded a warranty provision of approximately $143,000 and $101,000 for the three months ended June 30, 2009 and 2008, respectively. The Company has recorded a warranty provision of approximately $226,000 and $186,000 for the six months ended June 30, 2009 and 2008, respectively.

     Income taxes — We account for income taxes under the 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.

In June, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48), which is intended to create a single model to address uncertainty in income tax positions. FIN 48 clarifies the accounting for uncertainty in income tax positions by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. In addition, FIN 48 clearly scopes out income taxes from Financial Accounting Standards Board Statement No. 5, “Accounting for Contingencies” (“SFAS 5”).

FIN 48 outlines a two step approach in accounting for uncertain tax positions. First is recognition, which occurs when the Company concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for de-recognition of tax positions. Second is measurement. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. This is determined on a cumulative probability basis. The phrase “more likely than not” has the same meaning under FIN 48 as it does under Financial Accounting Standards Board Statement No 109 “Accounting for Income Taxes” (“FAS 109”) (i.e. a likelihood of occurrence greater than 50 percent).

     Foreign currency translation — The consolidated financial statements of the Company are presented in U.S. dollars and the Company conducts substantially all of their business in U.S. dollars.

     All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than U.S. dollars are translated at period-end exchange rates. All income and expenditure items in the income statements of foreign subsidiaries whose functional currency is other than U.S. dollars 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 translation of transactions denominated in foreign currencies are included in income.

     Aggregate net foreign currency transaction losses included in the income statement was approximately $1,600 for the three months ended June 30, 2009 and net foreign currency transaction gain included in the income statement was approximately $82,000 for the three months ended June 30, 2008. Aggregate net foreign currency transaction losses included in the income statement was approximately $3,000 for the six months ended June 30, 2009 and net foreign currency transaction gain included in the income statement was approximately $219,000 for the six months ended June 30, 2008.

     Comprehensive income (loss) — Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements.

     Comprehensive income, as defined, includes all changes in equity during the period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain (loss) of available-for-sale securities. For the three months ended June 30, 2009 and 2008, comprehensive loss was $1,631,000 (composed of a net loss of approximately $1,630,000 and a foreign currency translation loss of $1,000) and $1,974,000 (composed of a net loss of approximately $1,907,000 and a foreign currency translation loss of $67,000). For the six months ended June 30, 2009, and 2008, comprehensive loss was $4,320,000 (composed of a net loss of approximately $4,320,000) and approximately $4,774,000 (composed of a net loss of approximately $4,685,000 and a foreign currency translation adjustment of approximately $89,000), respectively.

     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 its employees. The Company recorded approximately $16,000 and $11,000 for expense related to its pension contribution for the three months ended June 30, 2009 and 2008, respectively. The Company recorded approximately $20,000 and $13,000 in expense related to its pension contributions for the six months ended June 30, 2009 and 2008, respectively. Neither the Company nor its subsidiaries provide any other post-retirement or post-employment benefits.

     Use of estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Recently Issued Accounting Pronouncements

     In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, “Disclosures about Derivatives Instruments and Hedging Activities, an Amendment of FASB Statement No. 133 (“SFAS No. 161”)”. SFAS No. 161 requires enhanced disclosures about a company’s derivative and hedging activities. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 did not have a material impact on results of operations, cash flows or financial position.

     In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (FSP) FAS No. 142-3, “Determination of the Useful Life of Intangible Assets.” The FSP amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” The FSP must be applied prospectively to intangible assets acquired after the effective date. The Company will apply the guidance of the FSP to intangible assets acquired after January 1, 2009. For the six months ended June 30, 2009, there were no intangible assets acquired. The Company does not expect adoption to have a material impact on its financial position, results of operations, or cash flows.

     In June 2008, the FASB ratified EITF Issue 07-5 (EITF 07-5), “Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock.” EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. It also clarifies on the impact of foreign currency denominated strike prices and market-based employee stock option valuation instruments. EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of EITF 07-5 did not have a material effect on our consolidated financial statements.

     In May 2009, the FASB Staff Position No. APB 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” FASB Staff Position No. APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”. Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of APB 14-1 did not have a material effect on our consolidated financial statements.

     In April 2009, FASB issued FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (collectively “FSP/APB”) which increase the frequency of fair value disclosures to a quarterly instead of annual basis. The guidance relates to fair value disclosures for any financial instruments that are not currently reflected on an entity’s balance sheet at fair value. FSP/APB is effective for interim and annual periods ending after June 15, 2009. The adoption of this FSP/APB did not have a material impact on results of operations, cash flows or financial position

     In May 2009, FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”) which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth (a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial reporting periods ending after June 15, 2009. The adoption of FAS 165 did not have a material impact on results of operations, cash flows or financial position.

     In June 2009, FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS 168”). The objective of SFAS 168 is to establish the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”).SFAS 168 is effective for interim and annual financial reporting periods ending after September 15, 2009. The Company does not anticipate the adoption of SFAS 168 to have a material impact on results of operations, cash flows or financial position.

4. Inventories

     Inventories consisted of the following (in thousands):

		June 30, 2009				December 31,
		(unaudited)				2008 (audited)
Raw material		$	3,783			$	2,184
Finished goods			2,619				2,538
Work in process			238				—
Provision for obsolete stock			(57	)			(57	)
		$	6,583			$	4,665

5. Asset Held for Sale

     Asset held for sale consists of accumulated costs at June 30, 2009 of a 3.5 megawatt solar photovoltaic system under construction by the Company for sale.

6. Prepaid Expenses and Other Current Assets

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

		June 30, 2009				December 31,
		(unaudited)				2008 (audited)
Rental, equipment and utility deposits		$	154			$	274
Supplier deposits			246				158
Insurance			27				127
Advertising			111				124
Other			213				88
		$	751			$	771

7. Property, Plant and Equipment

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

		June 30,				December 31,
		2009				2008
		(unaudited)				(audited)
Plant and machinery		$	668				661
Furniture, fixtures and equipment			343				260
Computers and software			681				754
Equipment acquired under capital leases			709				709
Trucks			246				246
Leasehold improvements			610				610
Total cost			3,257				3,240
Less: accumulated depreciation			(1,488	)			(1,062	)
		$	1,769			$	2,178

     Depreciation expense for the three months ended June 30, 2009 and 2008 was approximately $212,000 and $175,000, respectively. Depreciation expense for the six months ended June 30, 2009 and 2008 was approximately $425,000 and $329,000, respectively.

8. Accrued Liabilities

     Accrued liabilities consisted of the following (in thousands):

		June 30,				December 31,
		2009				2008
		(unaudited)				(audited)
Accrued payroll and related costs		$	504			$	782
Sales tax payable			202				258
Warranty reserve			969				743
Customer deposits			1,096				943
Insurance premium financing			7				101
Accrued construction costs			—				162
Other			190				69
		$	2,968			$	3,058

9. Stockholders’ Equity

     On May 18, 2009, the Company issued 10,000 shares of its common stock as compensation for services. The shares were fair valued at $0.74 per share, the closing price of the Company’s common stock on May 18, 2009.

     On January 12, 2009, the Company issued 162,501 shares of its common stock to its independent directors, under the Company’s 2006 Equity Incentive plan, for fiscal 2009. The shares were fair valued at $0.60 per share, the closing price of the Company’s common stock on January 2, 2009, the date of grant.

10. Income Taxes

     Pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for 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.

11. Stock-based Compensation

     The Company accounts for stock compensation expense under the provisions of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” (“FAS 123(R)”) which requires the Company to measure 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. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R).

     The following table summarizes the consolidated stock-based compensation expense, by type of awards for the three and six months ended June 30, 2009 and 2008 (in thousands):

		Three				Three				Six				Six
		Months				Months				Months				Months
		Ended June				Ended June				Ended June				Ended June
		30, 2009				30, 2008				30, 2009				30, 2008
Employee stock options		$	118			$	85			$	232			$	179
Stock grants			45				54				94				60
Total stock-based compensation expense		$	163			$	139			$	326			$	239

     The following table summarizes the consolidated stock-based compensation by line item for the three and six months ended June 30, 2009 and 2008 (in thousands):

		Three				Three				Six				Six
		Months				Months				Months				Months
		Ended June				Ended June				Ended June				Ended June
		30, 2009				30, 2008				30, 2009				30, 2008
General and administrative		$	119			$	135			$	239			$	224
Sales, marketing and customer service			35				3				69				14
Engineering, design and product management			9				1				18				1
Total stock-based compensation expense			163				139				326				239
Tax effect on stock-based compensation expense			—				—				—				—
Total stock-based compensation expense after taxes		$	163			$	139			$	326			$	239
Effect on net loss per share: Basic and diluted		$	0.00			$	0.00			$	0.01			$	0.01

     As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, FAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimated its forfeiture rate at 7.8% and 6.0% for the three and six months ended June 30, 2009 and 2008, respectively.

Valuation Assumptions

Determining Fair Value

     Valuation and Amortization Method — The Company estimates the fair value of service-based and performance-based stock options granted using the Black-Scholes-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.

     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 under the provisions of Staff Accounting Bulletin No. 107 (“SAB 107”) 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 life to be 5 years based on contractual life, the seniority of the recipient and absence of historical data on the exercise of such options.

     Expected Volatility — The Company 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 six months ended June 30, 2009, the Company granted 414,500 service-based options fair-valued between $0.37 and $0.46 using the Black-Scholes-Merton model and 162,501 restricted stock grants fair-valued at $0.60 using the closing price of the Company’s common stock at the date of grant. The vesting of the service-based option will occur over a four-year period beginning one year from the date of grant. During the six months ended June 30, 2008, the Company granted 553,000 service-based options fair-valued between $0.69 and $1.50 using the Black-Scholes-Merton model and 63,367 restricted stock grants fair-valued between $1.30 and $3.45 using the closing price of the Company’s common stock at the date of grant. The Company recorded approximately $326,000 and $239,000 in stock-based compensation expense related to these grants during the six months ended June 30, 2009 and 2008, respectively.

     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 six months ended June 30, 2009 and 2008 were as follows:

		2009				2008
		Service-based				Service-based
Expected term			3.75				3.25-3.75
Risk-free interest rate			1.72	%			2.65 - 2.74	%
Volatility			88	%			75	%
Dividend yield			0	%			0	%

Equity Incentive Plan

     On November 15, 2006, subject to approval of the stockholders, the Company adopted the 2006 Equity Incentive Plan (the “Plan”) which permits the Company to grant stock options to directors, officers or employees of the Company or others to purchase shares of common stock of the Company through awards of incentive and nonqualified stock options (“Options”), stock (“Restricted Stock” or “Unrestricted Stock”) and stock appreciation rights (“SARs”). The Plan was approved by the stockholders on February 7, 2007.

     The Company currently has service-based and performance-based options and restricted stock grants outstanding. The service-based options vest in 25% increments and expire five years from the date of grant. Performance-based options vest upon satisfaction of the performance criteria as determined by the Compensation Committee of the Board of Directors and expire five years from the date of grant. The restriction period on restricted shares shall expire per the terms of the grant agreement.

     Total number of shares reserved and available for grant and issuance pursuant to this Plan is equal to nine percent (9%) of the number of outstanding shares of the Company. Not more than two million (2,000,000) shares of stock shall be granted in the form of incentive stock options.

     Shares issued under the Plan will be drawn from authorized and un-issued shares or shares now held or subsequently acquired by the Company.

     Outstanding shares of the Company shall, for purposes of such calculation, include the number of shares of stock into which other securities or instruments issued by the Company are currently convertible (e.g. convertible preferred stock, convertible debentures, or warrants for common stock), but not outstanding options to acquire stock.

     At June 30, 2009 there were approximately 3,627,912 shares available to be issued under the plan (9% of the outstanding shares of 37,943,826 plus outstanding warrants of 2,366,302). There were 3,231,268 options and restricted shares issued under the Plan, 87,445 options have been exercised and 309,199 shares are available to be issued.

     The exercise price of any option will be determined by the Company when the option is granted and may not be less than 100% of the fair market value of the shares on the date of grant, and the exercise price of any incentive stock option granted to a stockholder with a 10% or greater shareholding will not be less than 110% of the fair market value of the shares on the date of grant. The exercise price per share of a SAR will be determined by the Company at the time of grant, but will in no event be less than the fair market value of a share of Company’s stock on the date of grant.

     The following table summarizes the Company’s stock option activities for the year ended December 31, 2008 and the three and six month periods ended March 31, 2009 and June 30, 2009:

						Weighted-				Weighted-
						Average				Average				Aggregate
						Exercise				Remaining				Intrinsic
						Price Per				Contractual				Value
		Shares				Share				Term				($000)
Outstanding January 1, 2008			1,967,233			$	1.03				3.88			$	—
Granted			618,000				1.96				4.20				—
Exercised			(68,695	)			1.00				—				—
Forfeited			(159,638	)			1.01				—				—
Outstanding December 31, 2008			2,356,900				1.28				3.61				—
Granted			414,500				0.74				5.00				103,625
Exercised			—				—				—				—
Forfeited			(7,500	)			1.00				—				—
Outstanding March 31, 2009			2,763,900				1.20				3.48				103,625
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited			(8,500	)			0.88				—				—
Outstanding June 30, 2009			2,755,400			$	1.19				3.23			$	103,625
Exercisable June 30, 2009			1,358,066			$	1.21				2.99			$	—

     The weighted-average grant-date fair value of options granted during the three months ended June 30, 2009 and 2008 was $0 and $0.70, respectively. The weighted-average grant-date fair value of options granted during the six months ended June 30, 2009 and 2008 was $0.42 and $1.10, respectively.

     The following table summarizes the Company’s restricted stock activities:

		Shares
Outstanding as of January 1, 2008			200,000
Granted			113,367
Exercised			—
Forfeited			—
Outstanding as of December 31, 2008			313,367
Granted			162,501
Exercised			—
Forfeited			—
Outstanding as of June 30, 2009			475,868
Vested as of June 30, 2009			400,868

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

		Service-based Options								Performance-based Options								Restricted Stock
						Weighted-																Weighted-
						Average Grant								Weighted-								Average
						Date Fair								Average Grant								Grant Date
						Value Per								Date Fair Value								Fair Value
		Shares				Share				Shares				Per Share				Shares				Per Share
Non-vested as of January 1, 2008			1,076,292			$	0.67				100,000			$	0.73				50,000			$	1.00
Granted			618,000				1.07				—				—				113,367				1.55
Vested			(411,320	)			0.66				(50,000	)			—				(88,367	)			1.54
Forfeited			(158,638	)			0.70				—				—				—				—
Non-vested as of December 31, 2008			1,124,334				0.84				50,000				0.73				75,000				1.20
Granted			414,500				0.42				—								162,501				0.60
Vested			(75,000	)			1.44				—								(162,501	)			0.60
Forfeited			(7,500	)			1.00				—								—				—
Non-vested as of March 31, 2009			1,456,334				1.03				50,000				0.73				75,000				1.20
Granted			—				—				—				—				—				—
Vested			(100,500	)			0.69				—				—				—				—
Forfeited			(8,500	)			1.00				—				—				—				—
Non-vested as of June 30, 2009			1,347,334			$	0.76				50,000			$	0.73				75,000			$	1.20

     As of June 30, 2009, there was approximately $754,000, $16,000 and $94,000 of unrecognized compensation cost related to non-vested service-based options, performance-based options and restricted stock grants, respectively. The cost is expected to be recognized over a weighted-average of 3.5 years for service-based options and restricted stock grants and 1.0 years for performance-based options. During the three and six months ended June 30, 2009 there were no changes to the contractual life of any fully vested options.

12. Commitments and Contingencies

     Letters of Credit — At June 30, 2009, the Company had outstanding standby letters of credit of approximately $501,000 as collateral for its capital lease and a retailer program agreement. The standby letters of credit are issued for a term of one year, maturing in September and November 2009. Our bank has restricted approximately $527,000 of our cash as collateral for these letters of credit.

     Guarantee of Performance — The Company has entered into a guarantee of the financial performance for its wholly owned subsidiary, Yes! Solar, Inc. (“Yes”) in conjunction with the submission of Yes! Solar, Inc’s. Uniform Franchise Disclosure Document (UFDD) to the California Department of Corporations.

     Financing Agreement — On December 13, 2007, the Company and its wholly-owned subsidiary, Yes entered into a Retailer Program Agreement (the “Agreement”) with GE Money Bank to provide to Yes retail customers a vehicle to finance solar systems purchased from YES. The agreement provides that the Company will provide a standby letter of credit equal to the greater of $50,000 or one percent of sales under the Agreement. A standby letter of credit in the amount of $50,000 was issued on November 14, 2008 as a condition to the execution of the Agreement. The term of the letter of credit is for one year. As of June 30, 2009 there have been no sales under this Agreement.

     Operating leases — The Company leases premises under various operating leases. Rental expense under operating leases included in the statement of operations was approximately $191,000 and $229,000 for the three months ended June 30, 2009 and 2008, respectively. Rental expense under operating leases included in the statement of operations was approximately $386,000 and $440,000 for the six months ended June 30, 2009 and 2008, respectively.

     On July 24, 2008, the Company and Solyndra Inc., a Delaware corporation (“Solyndra”) signed a First Amendment to Agreement for Sale of Photovoltaic Panels (“Modified Agreement”) which amends an Agreement for Sale of Photovoltaic Panels, dated February 19, 2007. The first agreement did not obligate the Company to any specific terms or conditions only reserved its right to panel production once Solyndra began manufacturing its product.

     The Modified Agreement between the Company and Solyndra, Inc. is a contract for the sale of photovoltaic panels intended for large flat rooftops, optimized for high energy density production produced by Solyndra for Solar Power. The Modified Agreement as amended obligated the Company to purchase a specific quantity of solar panels over the four year term of the Modified Agreement or pay a cancellation penalty of as much as $6.5 Million. On June 8, 2009, the Company signed a Second Amendment to Agreement for Sale of Photovoltaic Panels (“Second Modification”) which amends the agreement to remove the minimum purchase requirements from the agreement.

     Restricted Cash — On March 25, 2009, our bank restricted an additional $273,000 as collateral for Automatic Clearing House transactions related to our franchise operations.

13. 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 are typically sold on an open account basis. Details of customers accounting for 10% or more of total net sales for the six months ended June 30, 2009 and 2008, respectively is as follows (in thousands):

Customer		2009				2008
Conergy / Sun Technics		$	6,090			$	3,816
IX Energy			—				4,502
ENE Energy			—				4,150
Costco			2,204				—
Siemens Transportation			1,778				—

     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, 2009 and 2008, respectively are (in thousands):

Customer		2009				2008
Conergy / Sun Technics		$	3,705			$	3,816
Beyond Building			791				—
Siemens Transportation			744				—

     Product Warranties — We offer the industry standard of 20 years for our solar modules and industry standard five (5) years on inverter and balance of system components. Due to the warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. In our cable, wire and mechanical assemblies business, historically our warranty claims have not been material. In our solar photovoltaic business our greatest warranty exposure is in the form of product replacement. Until the third quarter of fiscal 2007, the Company purchased its solar panels from third-party suppliers and since the third-party warranties are consistent with industry standards we considered our financial exposure to warranty claims immaterial. 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, the Company began installing 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 historical data reported by other solar system installers and manufacturers. In our cable, wire and mechanical assemblies business our current standard product warranty for our mechanical assembly product ranges from one to five years. The Company has recorded a warranty provision of approximately $143,000 and $101,000 for the three months ended June 30, 2009 and 2008, respectively. The Company has recorded a warranty provision of approximately $226,000 and $186,000 for the six months ended June 30, 2009 and 2008, respectively.

14. Fair Value of Financial Instruments

     The fair value of financial instruments is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. In accordance with SAS No. 157 “Fair Value Measurements”, the Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued. The following disclosure are made in accordance with FASB Staff Position (FSP) FAS 107-1, “Interim Disclosures about Fair Value of Financial Instruments.”

     The carrying amounts of cash and cash equivalents and accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate their respective fair values at each balance sheet date due to their liquid and short term nature.

     The Company’s long-term borrowings are recorded at historical amounts. The Company has compared interest rates of borrowings with similar terms, conditions and interest rates and determined that the carrying value approximates the estimated fair value.

15. Geographical Information

     The Company has three reportable segments: (1) photovoltaic installation, integration and solar panel sales (“Photovoltaic installation, integration and sales”), (2) franchise operations and (3) cable, wire and mechanical assemblies and processing sales (“Cable, wire and mechanical assemblies”). The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.

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

     Contributions of the major activities, profitability information and asset information of the Company’s reportable segments for the six and three months ended June 30, 2009 and 2008 are as follows:

		For the Six Months Ended June 30, 2009												For the Six Months Ended June 30, 2008
						Inter-
						segment												Inter-segment				Income
Segment (in thousands)		Net sales				sales				Income (loss)				Net sales				sales				(loss)
Photovoltaic installation, integration and sales		$	14,314			$	—			$	(4,434	)		$	14,783			$	—			$	(4,605	)
Franchise operations			47				—				(668	)			—								(347	)
Cable, wire and mechanical assemblies			1,834				—				785				1,096				.				270
Segment total			16,195				—				(4,317	)			15,879				—				(4,682	)
Reconciliation to consolidated totals:
Sales eliminations			—				—				—				—				—				—
Consolidated totals
Net sales		$	16,195			$	—							$	15,879			$	—
Loss before taxes										$	(4,317	)										$	(4,682	)

		For the Three Months Ended June 30, 2009												For the Three Months Ended June 30, 2008
						Inter-												Inter-
						segment												segment				Income
Segment (in thousands)		Net sales				sales				Income (loss)				Net sales				sales				(loss)
Photovoltaic installation, integration and sales		$	9,176			$	—			$	(1.804	)		$	9,409			$	—			$	(1,851	)
Franchise operations			47				—				(306	)			—								(196	)
Cable, wire and mechanical assemblies			1,191				—				480				637				.				140
Segment total			10,414				—				(1,630	)			10,046				—				(1,907	)
Reconciliation to consolidated totals:
Sales eliminations			—				—				—				—				—				—
Consolidated totals
Net sales		$	10,414			$	—							$	10,046			$	—
Income before taxes										$	(1,630	)										$	(1,907	)

		For Six Months Ended June 30, 2009								For Six Months Ended June 30, 2008
Interest income and expense by segment are as follows (in
thousands):		Interest income				Interest expense				Interest income				Interest expense
Photovoltaic installation, integration and sales		$	5			$	28			$	105			$	74
Franchise operations			—				—				—				—
Cable, wire and mechanical assemblies			—				—				—				—
Consolidated total		$	5			$	28			$	105			$	74

		For Three Months Ended June 30,								For Three Months Ended June 30,
Interest income and expense by segment are as		2009								2008
follows (in thousands):		Interest income				Interest expense				Interest income				Interest expense
Photovoltaic installation, integration and sales		$	1			$	16			$	66			$	48
Franchise operations			—				—				—				—
Cable, wire and mechanical assemblies			—				—				—				—
Consolidated total		$	1			$	16			$	66			$	48

		June 30, 2009												December 31, 2008
The Company’s identifiable assets										Depreciation												Depreciation
by segment are as follows (in		Identifiable				Capital				and				Identifiable				Capital				and
thousands):		assets				expenditure				amortization				assets				expenditure				amortization
Photovoltaic installation, integration and sales		$	19,441			$	17			$	417			$	15,988			$	766			$	685
Franchise operations			447				—				—				748				—				—
Cable, wire and mechanical assemblies			1,415				—				9				1,059				—				15
Consolidated total		$	21,303			$	17			$	426			$	17,795			$	766			$	700

Sales by geographic location are as
follows (in thousands):		For Six Months Ended June 30, 2009																For Six Months Ended June 30, 2008
		Photovoltaic								Cable, wire								Photovoltaic								Cable, wire
		installation,								and								installation,								and
		integration				Franchise				mechanical								integration				Franchise				mechanical
		and sales				operations				assemblies				Total				and sales				operations				assemblies				Total
United States		$	4,539			$	47			$	1,658			$	6,244			$	2,316			$	—			$	875			$	3,191
Asia			6,885				—				—				6,885				12,467				—				—				12,467
Europe			2,099				—				—				2,099				—				—				—				—
Australia			791				—				—				791				—				—				—				—
Mexico			—				—				176				176				—				—				221				221
Total		$	14,314			$	47			$	1,834			$	16,195			$	14,783			$	—			$	1,096			$	15,879

Sales by geographic location are as
follows (in thousands):		For the Three Months Ended June 30, 2009																For the Three Months Ended June 30, 2008
		Photovoltaic								Cable, wire								Photovoltaic								Cable, wire
		installation,								and								installation,								and
		integration				Franchise				mechanical								integration				Franchise				mechanical
		and sales				operations				assemblies				Total				and sales				operations				assemblies				Total
United States		$	3,425			$	47			$	1,091			$	4,563			$	1,092			$	—			$	537			$	1,629
Asia			4,106				—				—				4,106				8,317				—				—				8,317
Europe			854				—				—				854				—				—				—				—
Australia			791				—				—				791				—				—				—				—
Mexico			—				—				100				100				—				—				100				100
Total		$	9,176			$	47			$	1,191			$	10,414			$	9,409			$	—			$	637			$	10,046

Location of the Company’s identifiable assets
by geographic location are as follows (in		June 30,				December
thousands):		2009				31, 2008
United States		$	14,900			$	12,072
China (including Hong Kong)			6,403				5,723
Total		$	21,303			$	17,795

		For Six				For Six								For Three
Income tax expense by		Months				Months				For Three Months				Months
geographic location is as		Ended June				Ended June				Ended June				Ended June
follows (in thousands):		30, 2009				30, 2008				30, 2009				30, 2008
United States		$	—			$	—			$	—			$	—
China (including Hong Kong)			3				3				—				—
Total		$	3			$	3			$	—			$	—

16. Subsequent Event

Subsequent to June 30, 2009, the Company terminated all existing franchise agreements and will no longer seek new franchisees. The Company expects to enter into arrangements with our former franchisees in which they will distribute our branded Yes! products. In addition the Company expects to seek potential distributors for this product line. The Company does not expect that this will have a material effect on its balance sheet, but does expect that sales of its Yes! branded products will increase because the distributorship arrangement will require less of an upfront financial commitment. Because of the similarity between the franchise model and the distributorship model, the Company has determined that the termination of the franchise model does not constitute a discontinued operation.

     This Current 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 on Forms 10-K. 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 six months ended June 30, 2009 and 2008.

     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.

     We manufacture photovoltaic panels or modules and balance of system components in our Shenzhen, China manufacturing facility. We sell these products through three distinct sales channels; 1) direct product sales to international markets, 2) our own use in building commercial and residential solar projects in the U.S., and 3) sale of our products to a network of franchisees who will serve the U.S. residential market through our wholly-owned company Yes! Solar, Inc. In addition to our solar revenue, we generate revenue from our legacy cable, wire and mechanical assemblies segment. Our cable wire and mechanical assembly products are also manufactured in our China facility and sold into the transportation and telecommunications markets. Currently, the factory has an annual production capacity of approximately 50 megawatts of photovoltaic solar modules and balance of system products. The un-utilized capacity is being reserved for photovoltaic module and balance of system expansion.

     Our business is conducted through our wholly-owned subsidiaries, SPIC, Inc. (“SPIC”), Yes! Solar, Inc. (“YES”), Yes! Construction Services, Inc. (“YCS”), International Assembly Solutions Limited (a Hong Kong company) (“IASHK”) and IAS Electronics (Shenzhen) Co., Ltd. (“IAS Shenzhen”).

     SPIC and YCS are engaged in the business of design, sales and installation of photovoltaic (“PV”) solar systems for commercial, industrial and residential markets.

     YES is engaged in the sale and administration of our franchise operations. In March 2008, the Company entered into its first franchise sale agreement. As of June 30, 2009, YES had completed franchise sales of eight franchise territories. Subsequent to June 30, 2009, the Company terminated all existing franchise agreements and will no longer seek new franchisees. The Company expects to inter into arrangements with our former franchisees in which they will distribute our branded Yes! products. In addition the Company expects to seek potential distributors for this product line. The Company does not expect that this will have a material effect on its balance sheet, but does expect that that sales of its Yes! branded products will increase because the distributorship arrangement will require less of an upfront financial commitment. Because of the similarity between the franchise model and the distributorship model, the Company has determined that the termination of the franchise model does not constitute a discontinued operation.

     IASHK is engaged in sales of our cable, wire and mechanical assemblies business.

     IAS Shenzhen is engaged in manufacturing our solar modules, our balance of system products and continues to be engaged in our cable, wire and mechanical assemblies business.

     Management is considering the impact of the following industry trends as they impact the manufacturing of complete photovoltaic systems and planned business model:

•

Solar cell pricing trends around the world: Recently the key material in the production of solar cells (silicon) has been decreasing in price due to the global financial crisis. Solar cells are the major component cost in a photovoltaic module. The Company has responded by seeking longer-term supply agreements for solar cells at current market rates. To date the Company has entered into one long-term supply agreement for solar cells at which the price is fixed, but there is no financial commitment on the part of the Company to take delivery of cells. Our intent is to secure ample solar cell supply to meet our growth needs and to avoid the risk of long-term contract pricings with suppliers whose products are expected to see a decline in the average selling price. Industry experts believe that additional planned expansion of silicon processing factories coming on line will produce enough raw materials to create an oversupply on projected demand. Failure to effectively manage our supply will hinder our expected growth and our component costs may have an adverse affect on the Company’s profitability.

•

Government subsidies: Federal and State subsidies relating directly to solar installations are an important factor in the planned growth of the solar industry. These subsidies are very important to growing the market for photovoltaic systems because they provide a significant economic incentive to all buyers. Without these incentives, industry growth would likely stall. These regulations are constantly being amended and will have a direct effect on our rollout of our distribution network among those states that offer superior incentives to the solar industry.

•

Global economic conditions: While there has been deterioration in the global economic condition of the financial markets, affecting most segments of industry and commerce, the Company is positioned in the renewable energy segment which remains strong. Since our customers may depend on financial markets for financing of solar installations, the Company is responding by seeking financing sources for its customers. Failure to secure these sources may have an adverse affect on the Company’s business opportunities and profitability.

Critical Accounting Policies and Estimates

     Inventories — Certain factors could impact the realizable value of our inventory, so we continually evaluate the recoverability based on assumptions about customer demand and market conditions. The evaluation may take into consideration historic usage, expected demand, anticipated sales price, product obsolescence, customer concentrations, product merchantability and other factors. The reserve or write-down is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, inventory reserves or write-downs may be required that could negatively impact our gross margin and operating results. Beginning on January 1, 2009, inventories are stated at the lower of cost or market, determined by the first in first out cost method. Prior to January 1, 2009, inventories were determined using the weighted average cost method. The conversion to first in first out cost method had no material effect on the financial statements.

     Goodwill — Goodwill resulted from our acquisition of Dale Renewables Consulting, Inc. We perform a goodwill impairment test on an annual basis and will perform an assessment between annual tests in certain circumstances. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of our business, we make estimates and judgments about our future cash flows. Our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we use to manage our business.

     Revenue recognition — The Company’s three primary business segments include photovoltaic installation, integration and sales, distribution operations and cable, wire and mechanical assemblies.

•

Photovoltaic Installation, integration and sales — In our photovoltaic systems installation, integration and product sales segment, revenue on product sales is recognized when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. During the six months ended June 20, 2009 and 2008, the Company did recognize one product sale in each period on a bill and hold arrangement in each period. In the 2009 instance, the customer requested that we store product to combine with a subsequent order in order to reduce their transportation costs. Subsequent to the quarter end the product was delivered. In the 2008 instance the customer did not have sufficient facilities to store the product and asked that we store the product for them. Since all criteria for revenue recognition had been met the Company recognized revenue on this sale.

     Revenue on photovoltaic system construction contracts is recognized using the percentage of completion method of accounting. At the end of each period, the Company measures the cost incurred on each project and compares the result against its estimated total costs at completion. The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as costs and estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines its 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.

     In our solar photovoltaic business, contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling and general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.

     The 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.

	•		Franchise Operations — The Company began selling franchise territories in fiscal 2008. The Company did not recognize any franchise revenue in its fiscal 2008. For the three and six months ended June 30, 2009, the Company recognized approximately $47,000 in franchise revenue consisting of approximately $40,000 in product sales, $6,000 in royalty revenue and $1,000 in franchise fee revenue is its financial statements. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 45 (as amended) “Accounting for Franchise Fee Revenue” (“SFAS 45”) which requires that revenue shall be recognized when all the material services or conditions relating to the sale have been substantially met. The Company has determined that when the franchisee places its first order for a solar installation all the material services or conditions will be deemed to have been met. At June 30, 2009 the Company had approximately $184,000 of deferred revenue and approximately $131,000 in inventory deposits included in its financial statements. Deferred revenue and deposits as of December 31, 2008 were reclassified to conform to current period presentation. Subsequent to June 30, 2009, the Company terminated all existing franchise agreements and will no longer seek new franchisees. The Company expects to enter into arrangements with our former franchisees in which they will distribute our branded Yes! products. In addition the Company expects to seek potential distributors for this product line. The Company does not expect that this will have a material effect on operating income. The Company will continue its significant involvement in the operations. Therefore, no discontinued operation treatment is required. The deferred revenue consists of deferred franchise fee revenue. These fees will either be refunded or used by existing franchisees as a credit against future product purchases.
	•		Cable, wire and mechanical assemblies — In our cable, wire and mechanical assemblies business the Company recognizes the sales of goods when there is evidence of an arrangement, title and risk of ownership have passed (generally upon delivery), the price to the buyer is fixed or determinable and collectability is reasonably assured. Generally 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 Warranties — We offer the industry standard of 20 years for our solar modules and industry standard five (5) years on inverter and balance of system components. Due to the warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. In our wire and mechanical assembly business, historically our warranty claims have not been material. In our solar photovoltaic business our greatest warranty exposure is in the form of product replacement. Until the third quarter of fiscal 2007, the Company purchased its solar panels from third-party suppliers and since the third-party warranties are consistent with industry standards we considered our financial exposure to warranty claims immaterial. 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, the Company began installing its own manufactured solar panels. In our cable, wire and mechanical assembly business our current standard product warranty for our mechanical assembly product ranges from one to five years. The Company records 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 historical data reported by other solar system installers and manufacturers. The accrual for warranty claims consisted of the following at June 30, 2009 (in thousands):

		(in thousands)
Balance at December 31, 2008		$	743
Provision charged to warranty expense			226
Less: warranty claims			—
Balance at June 30, 2009		$	969

     Stock based compensation — The Company accounts for stock based compensation under the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.” (“SFAS No. 123(R)”) which requires the Company to measure 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. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Prior to 2006 the Company had not issued stock options or other forms of stock-based compensation.

Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent 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. At June 30, 2009 and December 31, 2008 the Company has an allowance of approximately $275,000 and $49,000, respectively.

     Income taxes — We account for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon the weight of available evidence, including expected future earnings. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. Should we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination is made.

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

     Foreign currency translation — The consolidated financial statements of the Company are presented in U.S. dollars and the Company conducts substantially all of their business in U.S. dollars.

All transactions in currencies other than functional currencies during the year are translated at the exchange rates prevailing on the transaction dates. Related accounts payable or receivable existing at the balance sheet date denominated in currencies other than the functional currencies are translated at period end rates. Gains and losses resulting from the translation of foreign currency transactions are included in income. Translations adjustments as a result of the process of translating foreign financial statements from functional currency to U.S. dollars are disclosed and accumulated as a separate component of equity.

     Aggregate net foreign currency transaction losses included in the income statement was approximately $1,600 for the three months ended June 30, 2009 and net foreign currency transaction gain included in the income statement was approximately $82,000 for the three months ended June 30, 2008. Aggregate net foreign currency transaction losses included in the income statement was approximately $3,000 for the six months ended June 30, 2009 and net foreign currency transaction gain included in the income statement was approximately $219,000 for the six months ended June 30, 2008.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Results of Operations

Three and Six Months Ended June 30, 2009, as compared to Three and Six Months Ended June 30, 2008

Net Sales

     Net sales for the three months ended June 30, 2009 increased 3.7% to approximately $10,414,000 from approximately $10,046,000 for the three months ended June 30, 2008.

     Net sales for the three months ended June 30, 2009, in the photovoltaic installation, integration and product sales segment, decreased 2.5% to approximately $9,176,000 from approximately $9,409,000. The decrease in sales in this segment was attributable to the decrease in revenue from installation and integration sales due to delay in the renewal of the federal investment tax credit for solar power until the fourth quarter of 2008 and the general economic conditions making financing of these types of projects more difficult. The Company expects that installation and integration revenues will increase during subsequent quarters as the general economic conditions improve.

     Net sales in our franchise operations segment were approximately $47,000 for the three months ended June 30, 2009. There were no sales in our franchise operations segment for the three months ended June 30, 2008. The Company expects that franchise operation revenues will increase in subsequent quarters.

     Net sales for the three months ended June 30, 2009, in the cable, wire and mechanical assemblies segment, increased 87.0% to approximately $1,191,000 from approximately $637,000 for the year earlier comparative period. The increase is attributable to sales to one customer. This is the legacy segment of the Company’s business. The Company expects to continue to service the customers it has in this segment as it continues to develop its solar segment, but is not actively seeking new customers. Sales in this segment are expected to fluctuate from quarter to quarter during fiscal 2009.

     Net sales for the six months ended June 30, 2009 increased 2.0% to approximately $16,195,000 from approximately $15,879,000 for the six months ended June 30, 2008.

     Net sales for the six months ended June 30, 2009, in the photovoltaic installation, integration and product sales segment, decreased 3.2% to approximately $14,314,000 from approximately $14,783,000. The decrease in sales in this segment was attributable to the decrease in revenue from installation and integration sales due to delay in the renewal of the federal investment tax credit for solar power until the fourth quarter of 2008 and the general economic conditions making financing of these types of projects more difficult. The Company expects that installation and integration revenues will increase during subsequent quarters as the general economic conditions improve.

     Net sales in our franchise operations segment were approximately $47,000 for the six months ended June 30, 2009. There were no sales in our franchise operations segment for the six months ended June 30, 2008. The Company expects that franchise operation revenues will increase in subsequent quarters.

     Net sales for the six months ended June 30, 2009, in the cable, wire and mechanical assemblies segment, increased 67.3% to approximately $1,834,000 from approximately $1,096,000 for the year earlier comparative period. The increase is attributable to sales to one customer. This is the legacy segment of the Company’s business. The Company expects to continue to service the customers it has in this segment as it continues to develop its solar segment, but is not actively seeking new customers. Sales in this segment are expected to fluctuate from quarter to quarter during fiscal 2009.

Cost of Goods Sold

     Cost of goods sold were approximately $8,859,000 (85.1% of net sales) and approximately $8,663,000 (86.2% of net sales) for the three months ended June 30, 2009 and 2008, respectively.

     Cost of goods sold in the photovoltaic installation, integration and product sales segment was approximately $8,182,000 (89.2% of sales) for the three months ended June 30, 2009 compared to approximately $8,251,000 (87.7% of net sales) for the three months ended June 30, 2008. The increase in costs of goods sold as a percentage of sales over the comparative period is attributable to unabsorbed fixed costs associated with our construction operations offset by a decrease in solar cell prices. It is expected that our cost of goods sold as a percentage of sales will decrease as construction activities increase in subsequent quarters.

     Cost of goods sold in our franchise operations was approximately $7,000 (14.9% of net sales) for the three months ended June 30, 2009. There were no cost of goods sold in our franchise operations segment for the three months ended June 30, 2009 and 2008.

     Cost of goods sold in the cable, wire and mechanical assembly segment were approximately $670,000 (56.3% of net sales) for the three months ended June 30, 2009 compared to approximately $412,000 (64.8% of net sales) for the three months ended June 30, 2008. The decrease is attributable to a change in product mix during the quarter. The Company expects that margin will continue to vary with product mix in this segment.

     Cost of goods sold were approximately $14,007,000 (86.5% of net sales) and approximately $14,464,000 (91.1% of net sales) for the six months ended June 30, 2009 and 2008, respectively.

     Cost of goods sold in the photovoltaic installation, integration and product sales segment was approximately $13,000,000 (90.8% of sales) for the six months ended June 30, 2009 compared to approximately $13,694,000 (92.6% of net sales) for the six months ended June 30, 2008. The decrease in costs of goods sold as a percentage of sales over the comparative period is attributable to a decrease in solar cell prices. It is expected that this trend will continue in subsequent quarters.

     Cost of goods sold in our franchise operations was approximately $7,000 (14.9% of net sales) for the six months ended June 30, 2009. There were no cost of goods sold in our franchise operations segment for the six months ended June 30, 2009 and 2008.

     Cost of goods sold in the cable, wire and mechanical assembly segment were approximately $1,000,000 (54.5% of net sales) for the six months ended June 30, 2009 compared to approximately $770,000 (70.3% of net sales) for the six months ended June 30, 2008. The decrease is attributable to product mix. The Company expects that margin will continue to vary with product mix in this segment.

General and Administrative Expense

     General and administrative expense was approximately $2,134,000 and $2,545,000 for the three months ended June 30, 2009 and 2008, respectively, a decrease of 16.1.%. As a percentage of sales, general and administrative expense was 20.5% and 25.3% for the three months ended June 30, 2009 and 2008, respectively. The decrease in costs for the three months ended June 30, 2009 over the comparative period is primarily due to the decrease in bad debt expense. Significant elements of general and administrative expense for the three months ended June 30, 2009 were employee related expenses of approximately $1,090,000, professional and consulting fees of approximately $287,000, rent, telephone and utilities of approximately $169,000, travel and lodging of approximately $59,000, depreciation expense of approximately $111,000 and stock-based compensation expense of approximately $119,000. The Company expects that general and administrative expense will continue at the current rates in the future.

     General and administrative expense was approximately $4,436,000 and $4,675,000 for the six months ended June 30, 2009 and 2008, respectively, an decrease of 5.1.%. As a percentage of sales, general and administrative expense was 27.4% and 29.4% for the six months ended June 30, 2009 and 2008, respectively. The decrease in costs for the six months ended June 30, 2009 over the comparative period is primarily due to the decrease in professional fee expense. Significant elements of general and administrative expense for the six months ended June 30, 2009 were employee related expenses of approximately $2,204,000, professional and consulting fees of approximately $553,000, rent, telephone and utilities of approximately $344,000, travel and lodging of approximately $90,000, depreciation expense of approximately $223,000 and stock-based compensation expense of approximately $239,000. The Company expects that general and administrative expense will continue at the current rates in the future.

Sales, Marketing and Customer Service Expense

     Sales, marketing and customer service expense was $837,000 and $633,000 for the three months ended June 30, 2009 and 2008, respectively, an increase of 32.2%. As a percentage of sales, sales, marketing and customer service expense was 8.0% and 6.3%, respectively. The increase in sales, marketing and customer service expense over the comparative period was primarily due to a increase in employee costs due to increased sales staffing and increased customer care costs. Significant elements of sales, marketing and customer service expense for the three months ended June 30, 2009 were employee related expense of approximately $469,000, advertising expense of approximately $66,000, stock-based compensation expense of approximately $35,000, commission expense of approximately $40,000, rent, telephone and utilities of approximately $32,000, business development costs of approximately $47,000, customer care costs of approximately $11,000 and travel expenses of approximately $35,000. The Company expects that these costs will continue a similar rates in future periods.

     Sales, marketing and customer service expense was $1,635,000 and $1,191,000 for the six months ended June 30, 2009 and 2008, respectively, an increase of 37.3%. As a percentage of sales, sales, marketing and customer service expense was 10.1% and 7.5%, respectively. The increase in sales, marketing and customer service expense over the comparative period was primarily due to a increase in employee costs due to increased sales staffing and increased customer care costs. Significant elements of sales, marketing and customer service expense for the six months ended June 30, 2009 were employee related expense of approximately $913,000, advertising expense of approximately $115,000, stock-based compensation expense of approximately $69,000, commission expense of approximately $67,000, rent telephone and utilities of approximately $69,000, business development costs of approximately $70,000, customer care costs of approximately $80,000 and travel expenses of approximately $56,000. The Company expects that these costs will continue a similar rates in future periods.

Engineering, design and product management

     Engineering, design and product management expense was $193,000 and $135,000 for the three months ended June 30, 2009 and 2008, respectively. Significant elements of product development expense for the three months ended June 30, 2009 were employee related expense of approximately $121,000 and product certification and testing costs of approximately $61,000. The Company expects that product development costs will continue at their current rate in fiscal 2009 as it expands this activity.

     Engineering, design and product management expense was $399,000 and $268,000 for the six months ended June 30, 2009 and 2008, respectively. Significant elements of product development expense for the six months ended June 30, 2009 were employee related expense of approximately $234,000 and product certification and testing costs of approximately $143,000. The Company expects that product development costs will continue at their current rate in fiscal 2009 as it expands this activity.

Other Income / Expense

     Other expense, net, was approximately $21,000 for the three months ended June 30, 2009. Other income, net was approximately $23,000 for the three months ended June 30, 2008. Other expense included interest expense, net, for the three months ended June 30, 2009 of approximately $16,000 of interest paid on notes and capital leases offset by interest earned on cash balances of approximately $1,000 and other expense of approximately $6,000.

     Other expense, net, was approximately $35,000 for the six months ended June 30, 2009. Other income, net was approximately $37,000 for the six months ended June 30, 2008. Other expense included interest expense, net, for the three months ended June 30, 2009 of approximately $28,000 of interest paid on notes and capital leases offset by interest earned on cash balances of approximately $5,000 and other expense of approximately $12,000.

Income Tax Expense

     The Company provided income tax expense of approximately $3,000 and $3,000 for the three and six months ended June 30, 2009 and 2008, respectively. The Company is currently in a net loss position and has only provided for statutory minimum taxes.

Liquidity and Capital Resources

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

		Six Months				Six Months
		Ended June 30,				Ended June 30,
(in thousands)		2009				2008
Net cash used in operating activities		$	(2,096	)		$	(3,065	)
Net cash used in investing activities			(17	)			(269	)
Net cash (used in) provided by financing activities			(448	)			465
Net decrease in cash and cash equivalents		$	(2,561	)		$	(2,869	)

     As of June 30, 2009 and December 31, 2008, we had approximately $3,356,000 and $5,915,000 in cash and cash equivalents, respectively.

     Net cash used in operating activities of approximately $2,096,000 for the six months ended June, 2009 was primarily a result of a net loss of approximately $4,320,000, less non-cash items included in net loss, primarily depreciation of approximately $426,000 related to property and equipment, stock-based compensation expense of approximately $326,000 and bad debt expense of approximately $279,000. Also contributing to cash used in operating activities were an increase in our accounts receivable of approximately $4,310,000 as a result of increased sales with terms in our solar photovoltaic business segment, an increase in inventories of approximately $1,918,000 due to advance purchases of solar cells and material in our cable, wire and mechanical assembly segment, an increase in asset held for sale of approximately $138,000, an increase in accounts payable of approximately $7,836,000 resulting from purchase of solar cell on extended credit terms, an increase in deferred revenues of approximately $59,000 and a decrease in accrued liabilities of approximately $90,000 primarily from a decrease in accrued commission costs.

     Net cash used in investing activities of approximately $17,000 for the six months ended June 30, 2009 primarily relates to acquisition of property, plant and equipment.

     Net cash used in financing activities was approximately $448,000 for the six months ended June 30, 2009 and is comprised of approximately $273,000 from the increase in restricted cash held by our bank collateralizing ACH transactions and principal payments on notes and capital leases payable of approximately $175,000.

     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, 2009, we had approximately $3,356,000 in cash and cash equivalents and approximately $800,000 of restricted cash collateralizing standby letters of credit we issued to support our capital lease and a financing obligation and ACH transactions of our subsidiary, Yes! Solar, Inc. Our focus will be to continue development and manufacturing of our solar modules and racking systems. We will continue to sell these products through our commercial, residential and international distribution channels.

     On July 24, 2008, the Company and Solyndra Inc., a Delaware corporation (“Solyndra”) signed a First Amendment to Agreement for Sale of Photovoltaic Panels (“Modified Agreement”) which amends an Agreement for Sale of Photovoltaic Panels, dated February 19, 2007. The first agreement did not obligate the Company to any specific terms or conditions only reserved its right to panel production once Solyndra began manufacturing its product.

     The Modified Agreement between the Company and Solyndra, Inc. is a contract for the sale of photovoltaic panels intended for large flat rooftops, optimized for high energy density production produced by Solyndra for Solar Power. The Modified Agreement as amended obligated the Company to purchase a specific quantity of solar panels over the four year term of the Modified Agreement or pay a cancellation penalty. The final selling price to the Company is dependent upon the price that Solyndra, Inc. sells the same product to other third-party customers and is expected to decline over the term of the agreement. On June 8, 2009, the Company signed a Second Amendment to Agreement for Sale of Photovoltaic Panels removing the requirement to purchase specific quantities of solar panels and removing the cancellation penalties.

     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 generate positive working capital for our business. While our sales pipeline of solar system construction projects continues to grow, our revenues are largely dependent on third party financing for these projects. As a result, our revenues remain difficult to predict and we cannot assure current 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 our spending tightly by maintaining a core group of employees in our China and U.S. offices, and to outsource the majority of our construction workforce. We plan to grow our residential sales channel through a licensed dealership distribution model in an effort to grow product revenue without significant company infrastructure investments. These strategies have allowed us to maintain a relatively constant run rate of spending while growing our revenues year over year.

     Over the past two years we have sustained losses from operations and have relied on equity financing to provide working capital. We have been actively working with additional potential investors to ensure that we have additional equity available to us as needed. In addition, we are working on sources of project financing as well as asset backed credit facilities. One of the largest single uses of working capital is solar cells used in manufacturing our solar modules. Over the last 6 months, positive changes in the market supply and lower pricing of silicon have allowed us to reduce the working capital required to build our product, and fund much of that working capital through extended payment terms with our vendors. This change in the market has allowed us to significantly reduce the amount of working capital required to maintain our inventory, and in some cases, allowed us to collect revenues from customers in advance of paying for direct materials.

     We believe the funds generated by the anticipated revenues of our operations, reductions in the working capital requirements of the business due to silicon pricing and terms, 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 anticipated growth in the business.

Off-Balance Sheet Arrangements

     None

Item 4T.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     Our management, with the participation and under the supervision of our principal executive officer and our principal financial officer, reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures, interim period three and six months ended June 30, 2009 covered by this report, as required by Securities Exchange Act Rule 13a-15, and concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 is accumulated and communicated to management timely, including our principal executive officer and principal financial officer. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the interim period covered by this report, our disclosure controls and procedures are effective to ensure that we record, process, summarize, and report information required to be disclosed in the reports we filed under the Securities Exchange Act of 1934 within the time periods specified by the Securities and Exchange Commission’s rules and regulations.

     During the three and six months ended June 30, 2009, there have been no changes in our internal controls over financial reporting, or to our knowledge, in other factors, that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting. We continue to enhance our internal controls over financial reporting, primarily by evaluating and enhancing our process and control documentation and increasing our systems security, in connection with our ongoing efforts to meet the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We discuss with and disclose these matters to the Audit Committee of our Board of Directors, our Board of Directors and our auditors.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

     We are not a party to any pending legal proceeding. In the normal course of operations, we may have disagreements or disputes with employees, vendors or customers. These disputes are seen by our management as a normal part of business especially in the construction industry, and there are no pending actions currently or no threatened actions that management believes would have a significant material impact on our financial position, results of operations or cash flows.

     -None-

Item 3. Defaults Upon Senior Securities

     -None-

Item 4. Submission of Matters to a Vote of Security Holders

     -None-

Item 5. Other Information

     -None-

Item 6. Exhibits

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

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

		SOLAR POWER, INC.
Date: August 13, 2009		/s/ Jeffrey G. Winzeler   Jeffrey G. Winzeler,
		Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer)

Exhibit Index

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