SPI Energy Co., Ltd. - Annual Report: 2010 (Form 10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: to .

Commission File Number 000-50142

SOLAR POWER, INC.

(Exact name of registrant as specified in its charter)


California (State or Other Jurisdiction of Incorporation or Organization)		20-4956638 (I.R.S. Employer Identification Number)


1115 Orlando Avenue Roseville, California (Address of Principal Executive Offices)		95661-5247 (Zip Code)

(916) 745-0900
(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:
None.

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $0.0001
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has 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 issuer 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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(Do not check if a smaller reporting company)		Smaller reporting company þ

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

The aggregate market value of voting stock held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2009, was $26,490,378. For purposes of this computation, it has been assumed that the shares beneficially held by directors and officers of registrant were “held by affiliates” this assumption is not to be deemed to be an admission by such persons that they are affiliates of registrant.

The number of shares of registrant’s common stock outstanding as of February 28, 2011 was 98,128,523.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement for its Annual Meeting of Stockholders, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year-ended December 31, 2010, are incorporated by reference into Part III of this Form 10-K; provided, however, that the Compensation Committee Report, the Audit Committee Report and any other information in such proxy statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein by reference or filed as a part of this Annual Report on Form 10-K

TABLE OF CONTENTS


PART I
ITEM 1 BUSINESS			3
ITEM 1A RISK FACTORS			6
ITEM 1 B UNRESOLVED STAFF COMMENTS			14
ITEM 2 PROPERTIES			14
ITEM 3 LEGAL PROCEEDINGS			14
ITEM 4 RESERVED			15
PART II
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			16
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			17
ITEM 8 FINANCIAL STATEMENTS			29
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			29
ITEM 9A CONTROLS AND PROCEDURES			30
ITEM 9B OTHER INFORMATION			31
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.			32
ITEM 11 EXECUTIVE COMPENSATION			32
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			32
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			32
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES			32
PART IV
ITEM 15 EXHIBITS			33
SIGNATURES			35
EX-23.1
EX-23.2
EX-31.1
EX-31.2
EX-32

PART I

As used in this Annual Report on Form 10-K, unless otherwise indicated, the terms “we,” “us,” “our” and “the Company” refer to Solar Power, Inc., a California corporation and its wholly-owned subsidiaries.

Our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and information we provide in our press releases, telephonic reports and other investor communications, including those on our website, may contain forward-looking statements with respect to anticipated future events and our projected financial performance, operations and competitive position that are subject to risks and uncertainties that could cause our actual results to differ materially from those forward-looking statements and our expectations.

Forward-looking statements can be identified by the use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and other words of similar meaning. These statements constitute forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements reflect our then current beliefs, projections and estimates with respect to future events and our projected financial performance, operations and competitive position.

Such risks and uncertainties include, without limitation, our ability to raise capital to finance our operations, the effectiveness, profitability and the marketability of our services, our ability to protect our proprietary information, general economic and business conditions, the impact of new or disruptive technological developments and competition, adverse results of any legal proceedings, the impact of current, pending or future legislation and regulation of the solar power industry, our ability to enter into acceptable relationships with one or more of our suppliers for panel components and the ability of such suppliers to manufacture products or components of an acceptable quality on a cost-effective basis, our ability to attract or retain qualified senior management personnel, including sales and marketing and technical personnel and other risks detailed from time to time in our filings with the SEC, including those described in Item 1A below. We do not undertake any obligation to update any forward-looking statements.

ITEM 1 — BUSINESS

Overview

We previously manufactured photovoltaic panels or modules and balance of system components in our Shenzhen, China manufacturing facility, which operations were effectively closed in December 2010. We continue to manufacture balance of system components, including our proprietary racking systems such as SkyMount and Peaq on an OEM basis. We sold these products through three distinct sales channels: 1) direct product sales to international and domestic markets, 2) our own use in building commercial and residential solar projects in the U.S., and 3) our authorized dealer network who sell our Yes! branded products in the U.S. and European residential markets. In 2010 we discontinued our Yes! Authorized dealer network and Yes! branded products and our residential installation business, as our strategy and focus shifted solely to solar commercial and utility projects. In addition to our solar revenue, we generate revenue from our cable, wire and mechanical assembly business. Our cable, wire and mechanical assemblies products were also manufactured in our China facility and sold in the transportation and telecommunications markets and we will continue this business in China. We shut down our manufacturing operations because we could not achieve scale with other solar manufacturing operations in China and we were able to source modules at a price lower than our manufacturing costs from Chinese manufacturers with larger scale operations. As part of this change in our strategy we sought and obtained a strategic partner in China with large scale manufacturing operations. The strategic partner made a significant investment in our business that provided significant working capital and broader relationships that will allow us to more aggressively pursue commercial and utility projects in our pipeline. This strategic partner strengthens our position in the solar industry. We maintain a strategic office in Shenzhen China that is principally responsible for our ongoing procurement, logistics and design support for our products, and data systems for monitoring and managing solar energy facilities which we either own or maintain under operations and maintenance agreements.

Subsequent to year end, the investment by our strategic partner strengthened our balance sheet, which will enable the acceleration of the development of our project pipeline, which primarily consists of utility and commercial distributed generation systems. We now intend to aggressively grow our pipeline in both the U.S. and European markets and accelerate our construction of multiple projects simultaneously.

Business Development

Our Subsidiaries

Our business was conducted through our wholly-owned subsidiaries, SPIC, Inc. (“SPIC”), Yes! Solar, Inc. (“YES”), Yes! Construction Services, Inc. (“YCS”), International Assembly Solutions, Limited (“IAS HK”) and IAS Electronics (Shenzhen) Co., Ltd. (“IAS Shenzhen”). Beginning in 2010 and continuing we are eliminating subsidiaries as we consolidate our business operations in the Company to focus more strategically on commercial and utility construction projects.

Previously, SPIC and YCS were engaged in the business of design, sales and installation of photovoltaic (“PV”) solar systems for commercial, industrial and residential markets. SPIC’s commercial construction operations were combined with ours on January 1, 2010. We discontinued the residential installation of YCS in October, 2010. The Company determined that discontinued operations treatment was not required due to the fact that the revenue generated from residential installations was included in its photovoltaic installation, integration and sales segment and was not material to that segment or total revenue.

IAS HK was engaged in sales of our cable, wire and mechanical assemblies business and the holding company of IAS Shenzhen. During 2010, the cable, wire and mechanical assemblies’ customers were transitioned to Solar Power, Inc.

IAS Shenzhen was engaged in manufacturing our solar modules, our balance of solar system products and cable, wire and mechanical assemblies through fiscal 2010 and currently facilitates the manufacture of balance of systems products and cable, wire and mechanical assemblies’ products.

Industry Overview

We believe 2011 will show continued growth in the Photovoltaic (“PV”) solar market. We anticipate demand to be in the range of approximately 18GW. The German market demand is expected to decline with the growth projected in the U.S., Italian and Japanese markets offsetting the projected drop in Germany. We expect additional potential upside growth from China, Canada and United Kingdom markets. Government policies, in the form of both regulation and incentives, have accelerated the adoption of solar technologies by businesses and consumers and have provided opportunities for developers to construct PV systems as an alternative to more traditional forms of power generation. The PV market is a global one. The global market has grown from 6.1GW in 2008 to an estimated 15.38GW in 2010. Germany has been the major driver of this growth from 1.8GW in 2008 to 8.1GW in 2010.*

In the U.S. market, solar is growing as well. The U.S. market is anticipated to reach 2.3GW in 2011, up from 900MW in 2010. Incentives have been extended that will support this growth and a pipeline of projects is in place that substantiate the 2.3GW forecast.*

* Source, Roth Capital Partners Cleantech Industry Report dated January 5, 2011

Our Strategy

Our current business strategy is to develop Solar Energy Facilities (“SEF”), while controlling our supply chain including engineering, procurement, construction, and manufacturing, to ensure top-quality products, systems and margin optimization. We presently are focused on the following steps to implement our business strategy:

•

Engineering, procurement, and construction excellence. As an experienced designer and builder of small and large scale solar systems, we are in a position to identify potential efficiencies at a system level. Our experience in design and construction has lead to innovative products and construction techniques that result in lower cost per watt installations than our competitors.

	•		High quality, low cost product design and manufacturing. Our management team has extensive experience in designing and manufacturing products in China. The recent investment of our strategic partner has given us access to a strong material supply source for solar modules and the ability to provide bankable modules to our projects. We will be working closely with our partner to maintain the high standards of quality we have produced internally in the past.

	•		Asset Management Services. Through our unique system monitoring products and capabilities, we are able to offer our customers superior system reporting capabilities, system uptime, and operation and maintenance services.

Products and Services

We are a designer, integrator and installer of photovoltaic power systems to a variety of customers. In addition to building solar systems using our products, we may sell solar modules and our balance of system components to other integrators in the U.S., Asian, and European markets. For the fiscal year ended December 31, 2010 we recorded net sales of approximately $30,719,000 from the sale of solar panels, balance of system products and sales and installation of our photovoltaic power systems, representing 90.3% of our total sales. Nine (9) customers in this group represented 68.7% of our total net sales. We anticipate that our revenue will shift to a higher percentage of SEF sales.

Additionally, for the fiscal year ended December 31, 2010, net sales in our cable, wire and mechanical assemblies segment was $3,317,000 or 9.7% of our total net sales.

Intellectual Property

We rely and will continue to rely on trade secrets, know-how and other unpatented proprietary information in our business. We have the following trademarks: Yes! Solar Solutions, Yes!, and SkyMount^®. We have filed applications to register the following trademarks: ClickRack and Peaq for use with our solar product brands. In addition, we have four PCT applications, four provisional patents pending, one patent application and one design application for certain proprietary technologies.

Competition

The solar power market is intensely competitive and rapidly evolving and we compete with major international and domestic companies. Our major competitors in the development of SEFs include totally vertically integrated companies such as Sun Power Corporation and First Solar, and companies such as Sun Edison (a wholly owned subsidiary of MEMC Electronic Materials, Inc.) plus numerous regional developers. We compete in the sale of our balance of system products with other manufacturers of racking systems for solar modules. The entire solar industry also faces competition from other power generation sources, both conventional sources as well as other emerging technologies. Solar power has certain advantages and disadvantages when compared to other power generating technologies. The advantages include the ability to deploy products in many sizes and configurations, to install products almost anywhere in the world, to provide reliable power for many applications, to serve as both a power generator and the skin of a building and to eliminate air, water and noise emissions.

Manufacturing and Assembly Capabilities

Through 2010 we manufactured solar modules and balance of system products in our manufacturing facility in Shenzhen, China. As described previously we no longer manufacture solar modules but continue to manufacture balance of system products. Our knowledge and experience in manufacturing and assembly operations in China gives us a competitive advantage in the production of solar module and balance of system products. Our senior management has broad experience in the manufacturing of liquid crystal displays and electronic module assemblies. The manufacturing and assembly process of these products is not unlike the manufacturing and assembly of solar modules and balance of system products. It is our goal to continue to strive to reduce costs in the overall solar system cost to the end customer with the ultimate goal to make the actual installed cost of solar equivalent to the comparable cost of grid based energy without rebate. These overall reductions in cost will be delivered by reducing labor installation costs through better system design and kit packaging and reductions in module and balance of system costs by focusing on driving prices down on these commodity types of products.

Suppliers

There are numerous suppliers of solar modules in the industry and we have sourced modules from several of them through 2010. There does not appear to be a shortage of modules or raw materials used in the manufacture of solar modules required for our

SEFs. We anticipate that our primary source of modules will be through our strategic partner, LDK Solar Ltd., although we are not contractually obligated to purchase solely from LDK Solar Ltd.

Sales and Marketing

Our products and services are largely represented through our company’s sales force located in California. To ensure adequate coverage of the markets we are targeting, we rely on a series of outside sales representatives to cultivate opportunities. These representatives currently cover Europe, Asia, and sections of the United States.

Employees

As of December 31, 2010, we had approximately 217 full-time employees comprised of 39 employees in the U.S, and the balance working in our Shenzhen, China engineering and manufacturing operation. None of our employees is represented by a labor union nor are we organized under a collective bargaining agreement. We have never experienced a work stoppage and believe that our relations with our employees are good.


Item 1A — RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information contained in our public filings before making an investment decision about our common stock. While the risks described below are the ones we believe are most important for you to consider, these risks are not the only ones that we face. If any of the following risks actually occurs, our business, operating results or financial condition could suffer, the trading price of our common stock could decline and you could lose all or part of your investment.

Factors, Risks and Uncertainties That May Affect our Business

With the exception of historical facts herein, the matters discussed herein are “forward looking” statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. Such “forward looking” statements include, but are not necessarily limited to statements regarding anticipated levels of future revenues and earnings from the operations of Solar Power, Inc. and its subsidiaries, projected costs and expenses related to our operations, liquidity, capital resources, and availability of future equity capital on commercially reasonable terms. Factors that could cause actual results to differ materially are discussed below. We disclaim any intent or obligation to publicly update these “forward looking” statements, whether as a result of new information, future events or otherwise. Unless the context indicates or suggest otherwise reference to “we”, “our”, “us”, and the “Company” in this section refers to the consolidated operations of Solar Power, Inc., a California corporation, DRCI and Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.), on a post-Merger and post Reincorporation basis, and references to “SPI Nevada” refers to Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) prior to the Merger and Reincorporation.

Risks Related to Our Business

We have limited experience constructing solar systems on a commercial basis and have a limited operating history on which to base our prospects and anticipated results of operations.

We commenced solar power-related operations in June 2006 and began manufacturing solar modules in April 2007. Our IAS (Shenzhen) Electronics Co., Ltd. subsidiary completed its first mechanical assembly manufacturing line in May 2005 and began commercial shipment of its cable, wire and mechanical products in June 2005. Our operating focus has shifted principally to the construction of Solar Energy Facilities (“SEFs”). A SEF is a complete solar array that is designed and constructed to produce electricity from the sun (DC power) and then convert it, as necessary to AC power through an inverter to produce power for the end user. We have constructed SEFs mounted on rooftops, parking lot structures and on the ground. Moreover, due to strategic change in our focus and revenue generating efforts, our prior operating history, and our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. We have incurred net losses since our inception and, as of December 31, 2010, had an accumulated deficit of $34 million. We may be unable to achieve or maintain profitability in the future.

Our business strategy depends on the widespread adoption of solar power technology and economics for the construction of Solar Energy Facilities (“SEFs”), and if demand for such facilities fails to develop sufficiently, our revenues and ability to achieve or maintain profitability could be harmed.

While the demand for SEFs is emerging and rapidly evolving, its future success is uncertain. If solar power technology proves unsuitable for widespread commercial deployment or if demand for SEFs fails to develop sufficiently, we may not be able to generate enough revenues to achieve and sustain profitability. The factors influencing the widespread adoption of solar power technology through the construction of SEFs include but are not limited to:

	•		cost-effectiveness, performance, and reliability of solar power technologies as compared with conventional and non-solar alternative energy technologies;

	•		success of other alternative distributed generation technologies such as fuel cells, wind power and micro turbines;

	•		fluctuations in economic and market conditions which impact the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil and other fossil fuels; and

	•		availability of government subsidies and incentives.

The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our customers.

For many of our projects, our customers have entered into agreements to pay for solar energy over an extended period of time based on energy savings generated by our solar power systems, rather than paying us to construct a solar power system for them. For these types of projects, most of our customers choose to purchase solar electricity under a power purchase agreement with a financing company that contracts with us for the construction of the SEF. These structured finance arrangements are complex and rely heavily on the creditworthiness of the customer as well as required returns of the financing companies. Today the Company does not have an ownership interest in either the financing company or its customers. Depending on the status of financial markets, companies may be unwilling or unable to finance the cost of construction of the SEF. Lack of credit for our customers or restrictions on financial institutions extending such credit will severely limit our ability to grow our revenues.

Our operating results may fluctuate significantly from period to period; if we fail to meet the expectations of securities analysts or investors, our stock price may decline significantly.

Several factors can contribute to significant quarterly and other periodic fluctuations in our results of operations. These factors may include but are not limited to the following:

	•		Timing of orders and the volume of orders relative to our capacity;

	•		Availability of financing for our customers;

	•		Availability and pricing of raw materials, such as solar cells and wafers and potential delays in delivery of components or raw materials by our suppliers. Solar cells represent over 50% of our direct material cost and fluctuations in pricing or availability of cells will have material impact to our costs and therefore, margins.

	•		Delays in our product sales, design and qualification processes, which vary widely in length based upon customer requirements, and market acceptance of new products or new generations of products;

	•		Pricing and availability of competitive products and services;

	•		Changes in government regulations, tax-based incentive programs, and changes in global economic conditions;

	•		Delays in installation of specific projects due to inclement weather;

	•		Changes in currency translation rates affecting margins and pricing levels;

We base our planned operating expenses in part on our expectations of future revenue, and we believe a significant portion of our expenses will be fixed in the short-term. If revenue for a particular quarter is lower than we expect, we likely will be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter. This may cause us to miss analysts’ guidance or any guidance announced by us. If we fail to meet or exceed analyst or investor expectations or our own future guidance, even by a small amount, our stock price could fluctuate, perhaps substantially.

We act as the general contractor for our customers in connection with the installations of our solar power systems and are subject to risks associated with construction, bonding, cost overruns, delays and other contingencies, which could have a material adverse effect on our business and results of operations.

We act as the general contractor for our customers in connection with the installation of our solar power systems. All essential costs are estimated at the time of entering into the sales contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the other project developers, subcontractors, suppliers and other parties to the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in planning a project or defective or late execution occur, we may not achieve our expected margins or cover our costs. Additionally, many systems customers require performance bonds issued by a bonding agency. Due to the general performance risk inherent in construction activities, it is sometimes difficult to secure suitable bonding agencies willing to provide performance bonding. In the event we are unable to obtain bonding, we will be unable to bid on, or enter into, sales contracts requiring such bonding.

Delays in solar panel or other supply shipments, other construction delays, unexpected performance problems in electricity generation or other events could cause us to fail to meet these performance criteria, resulting in unanticipated and severe revenue and earnings losses and financial penalties. Construction delays are often caused by inclement weather, failure to timely receive necessary approvals and permits, or delays in obtaining necessary solar panels, inverters or other materials. The occurrence of any of these events could have a material adverse effect on our business and results of operations.

If there is an increase in the price of polysilicon, the corresponding increase in the cost of constructing SEFs may reduce the demand for SEFs, resulting in lower revenues and earnings.

Increases in polysilicon pricing could result in substantial downward pressure on the demand for SEFs due to the overall increase in the cost of production for such projects. Lessening demand for new SEFs may have a negative impact on our revenue and earnings, and adversely affect our business and financial condition.

We may not be able to efficiently integrate the operations of our acquisitions, products or technologies.

From time to time, we may acquire new and complementary technology, assets and companies. We do not know if we will be able to complete any acquisitions or if we will be able to successfully integrate any acquired businesses, operate them profitably or retain key employees. Integrating any other newly acquired business, product or technology could be expensive and time-consuming, disrupt our ongoing business and distract our management. We may face competition for acquisition targets from larger and more established companies with greater financial resources. In addition, in order to finance any acquisitions, we might be forced to obtain equity or debt financing on terms that are not favorable to us and, in the case of equity financing our stockholders interests may be diluted. If we are unable to integrate effectively any newly acquired company, product or technology, our business, financial condition and operating results could suffer.

The reduction or elimination of government and economic incentives domestically, and changes in foreign incentives, could cause our revenue to decline.

We believe that the growth of the market for “on-grid” applications, where solar power is used to supplement a customer’s electricity purchased from the utility network, depends in large part on the availability and size of government-generated economic incentives. At present, the cost of producing solar energy generally exceeds the price of electricity in the U.S. from traditional sources. To encourage the adoption of solar technologies, the U.S. government and numerous state governments have provided subsidies in the form of cost

reductions, tax write-offs and other incentives to end users, distributors, systems integrators and manufacturers of solar power products. Reduction, elimination and/or periodic interruption of these government subsidies and economic incentives because of policy changes, fiscal tightening or other reasons may result in the diminished competitiveness of solar energy, and materially and adversely affect the growth of these markets and our revenues. Electric utility companies that have significant political lobbying powers may push for a change in the relevant legislation in our markets. The reduction or elimination of government subsidies and economic incentives for on-grid solar energy applications, especially those in our target markets, could cause our revenues to decline and adversely affect our business, financial condition and results of operations. The existing Federal Investment Tax Credit was renewed with passage of the 2008 economic stimulus package by the U.S. government. The current Federal Investment Tax Credit allows for a 30% tax credit for both commercial and residential solar installations with no cap and allows the commercial credits to be monetized if it cannot be absorbed by a tax liability.

A significant portion of our prior direct module and balance of system sales occured outside of the U.S. Changes in the feed-in tariffs in markets like Germany, Spain and Italy, will have material impact on the financial viability of solar systems in those markets. Consequentially, our ability to sell products into those markets will be impacted accordingly. Changes to international programs are not easily forecasted and may happen rapidly, causing significant changes in demand for solar products.

We face intense competition, and many of our competitors have substantially greater resources than we do.

We compete with major international and domestic companies. Some of our current and potential competitors have greater market recognition and customer bases, longer operating histories and substantially greater financial, technical, marketing, distribution, purchasing, manufacturing, personnel and other resources than we do. In addition, many of our competitors are developing and are currently producing products based on new solar power technologies that may ultimately have costs similar to, or lower than, our projected costs.

Some of our competitors own, partner with, have longer term or stronger relationships with solar cell providers which could result in them being able to obtain solar cells on a more favorable basis than us. It is possible that new competitors or alliances among existing competitors could emerge and rapidly acquire significant market share, which would harm our business. If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share.

Existing regulations and policies of the electric utility industry and changes to these regulations and policies may present technical, regulatory and economic barriers to the purchase and use of our products, which may significantly reduce demand for our products.

The market for electricity generating products is strongly influenced by federal, state and local government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the U.S., these regulations and policies are being modified and may continue to be modified. Customer purchases of alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the demand for our solar power products. For example, without a regulatory-mandated exception for solar power systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. These fees could increase the cost to our customers and make our solar power products less desirable.

The failure to increase or restructure the net metering caps could adversely affect our business. In the U.S., all grid-tied photovoltaic systems are installed with cooperation by the local utility providers under guidelines created through statewide net metering policies. These policies require local utilities to purchase from end users excess solar electricity for a credit against their utility bills. The amount of solar electricity that the utility is required to purchase is referred to as a net metering cap. If these net metering caps are reached and local utilities are not required to purchase solar power, or if the net metering caps do not increase in the locations where we install our solar product, demand for our products could decrease. The solar industry is currently lobbying to extend these arbitrary net metering caps, and replace them with either notably higher numbers, or with a revised method of calculation that will allow the industry to continue our expansion in a manner consistent with both the industry and state and federal desires.

Moreover, we anticipate that our solar power installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety, environmental protection, utility interconnection and metering and related matters.

It is difficult to track the requirements of individual states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our solar power products may result in significant additional expenses to us, our resellers, and our customers and, as a result, could cause a significant reduction in demand for our solar power products.

Compliance with environmental regulations can be expensive, and noncompliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.

We are required to comply with all national and local regulations regarding protection of the environment. If we fail to comply with present or future environmental regulations, we may be required to pay substantial fines, suspend production or cease operations. In addition, our cost to comply with future regulations may increase, which could adversely impact the price of our products and our profitability.

We generally recognize revenue on system installations on a “percentage of completion” basis and payments are due upon the achievement of contractual milestones and any delay or cancellation of a project could adversely affect our business.

We recognize revenue on our system installations on a “percentage of completion” basis and, as a result, our revenue from these installations is driven by the performance of our contractual obligations, which is generally driven by timelines for the installation of our solar power systems at customer sites. This could result in unpredictability of revenue and, in the near term, a revenue decrease. As with any project-related business, there is the potential for delays within any particular customer project. Variation of project timelines and estimates may impact our ability to recognize revenue in a particular period. In addition, certain customer contracts may include payment milestones due at specified points during a project. Because we must invest substantial time and incur significant expense in advance of achieving milestones and the receipt of payment, failure to achieve milestones could adversely affect our business and results of operations.

We are subject to particularly lengthy sales cycles in some markets.

Our focus on developing a customer base that requires installation of a solar power system means that it may take longer to develop strong customer relationships or partnerships. Moreover, factors specific to certain industries also have an impact on our sales cycles. Some of our customers may have longer sales cycles that could occur due to the timing of various state and federal subsidies. These lengthy and challenging sales cycles may mean that it could take longer before our sales and marketing efforts result in revenue, if at all, and may have adverse effects on our operating results, financial condition, cash flows and stock price.

Our competitive position depends in part on maintaining intellectual property protection.

Our ability to compete and to achieve and maintain profitability depends in part on our ability to protect our proprietary discoveries and technologies. We currently rely on a combination of copyrights, trademarks, trade secret laws and confidentiality agreements, to protect our intellectual property rights. We also rely upon unpatented know-how and continuing technological innovation to develop and maintain our competitive position.

From time to time, the United States Supreme Court, other federal courts, the U.S. Congress or the U.S. Patent and Trademark Office may change the standards of patentability and any such changes could have a negative impact on our business.

We may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in our loss of significant rights and the assessment of damages.

If we receive notice of claims of infringement, misappropriation or misuse of other parties’ proprietary rights, some of these claims could lead to litigation. We cannot provide assurance that we will prevail in these actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or the validity of our patents, will not be asserted or prosecuted against us. We may also initiate claims to defend our intellectual property rights. Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could divert management’s attention from our business and have a material negative effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, we may be required to pay substantial damages (including treble damages if we were to be found to have willfully infringed a third party’s patent) to the party claiming infringement, develop non-infringing technology, stop selling our

products or using technology that contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Parties making infringement claims on future issued patents may be able to obtain an injunction that would prevent us from selling our products or using technology that contains the allegedly infringing intellectual property, which could harm our business.

We are exposed to risks associated with product liability claims in the event that installation of our solar power systems results in injury or damage, and we have limited insurance coverage to protect against such claims and additionally those losses resulting from business interruptions or natural disasters.

Since our solar power systems are electricity-producing devices, it is possible that users could be injured or killed by our systems, whether by improper installation or other causes. As an installer of products that are used by consumers, we face an inherent risk of exposure to product liability claims or class action suits in the event that the installation of the solar power systems results in injury or damage. Moreover, to the extent that a claim is brought against us we may not have adequate resources in the event of a successful claim against us. We rely on our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. The successful assertion of product liability claims against us could result in potentially significant monetary damages and, if our insurance protection is inadequate, could require us to make significant payments which could have a materially adverse effect on our financial results. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

Since we cannot test our solar panels for the duration of our standard 20-year warranty period, we may be subject to unexpected warranty expense; if we are subject to warranty and product liability claims, such claims could adversely affect our business and results of operations.

The possibility of future product failures could cause us to incur substantial expense to repair or replace defective products. We have agreed to indemnify our customers and our distributors in some circumstances against liability from defects in our solar modules. A successful indemnification claim against us could require us to make significant damage payments, which would negatively affect our financial results.

Our current standard product warranty for our solar panel systems includes a 10-year warranty period for defects in materials and workmanship and a 20-year warranty period for declines in power performance. We believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenue. Although we conduct accelerated testing of our solar panels, our solar panels have not and cannot be tested in an environment simulating the 20-year warranty period. As a result of the foregoing, we may be subject to unexpected warranty expense, which in turn would harm our financial results.

Like other retailers, distributors and manufacturers of products that are used by consumers, we face an inherent risk of exposure to product liability claims in the event that the use of the solar power products into which our solar panels are incorporated results in injury. We may be subject to warranty and product liability claims in the event that our solar power systems fail to perform as expected or if a failure of our solar power systems results, or is alleged to result, in bodily injury, property damage or other damages.

Warranty and product liability claims may result from defects or quality issues in certain third-party technology and components that we incorporate into our solar power systems, particularly solar cells and panels, over which we have no control. While our agreements with our suppliers generally include warranties, those provisions may not fully compensate us for any loss associated with third-party claims caused by defects or quality issues in these products. In the event we seek recourse through warranties, we will also be dependent on the creditworthiness and continued existence of these suppliers.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations and construction of SEFs could reduce our ability to compete and could harm our business growth.

We expect that our existing cash and cash equivalents, together with collections of our accounts receivable and other cash flows from operations in 2011, will be sufficient to meet our anticipated cash needs for at least the next twelve months. However, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors. The growth of our business depends on our ability to finance multiple services and projects simultaneously. In many cases we will need to fund development costs for large projects that we are going to build short term, pending finalization of project financing. These

additional costs may result in greater fixed costs and operating expenses well in advance of the revenues to be gained. Without access to working capital from profitable operations, equity, or debt, our business cannot continue to grow.

We must effectively manage our growth.

Failure to manage our growth effectively could adversely affect our operations. Our ability to manage our planned growth will depend substantially on our ability to sell and manage our construction of SEFs in the market, maintain adequate capital resources for working capital, successfully hire, train and motivate additional employees, including the technical personnel necessary to staff our installation teams.

We may be unable to achieve our goal of reducing the cost of installed solar systems, which may negatively impact our ability to sell our products in a competitive environment, resulting in lower revenues, gross margins and earnings.

To reduce the cost of installed solar systems, as compared against the current cost, we will have to achieve cost savings across the entire value chain from designing to manufacturing to distributing to selling and ultimately to installing solar systems. We have identified specific areas of potential savings and are pursuing targeted goals. However, such cost savings are especially dependent upon factors outside of our direct control including the cost of raw materials, the cost of both manufacturing and installation labor, and the cost of financing systems. If we are unsuccessful in our efforts to lower the cost of installed solar systems, our revenues, gross margins and earnings may be negatively impacted.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting. Testing and maintaining internal control can divert our management’s attention from other matters that are important to our business. We expect to incur increased expense and to devote additional management resources to Section 404 compliance. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations since there is presently no precedent available by which to measure compliance adequacy. If we are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

Risks Related to Our International Operations

We may not be able to retain, recruit and train adequetly management personnel.

Our continued operations are dependent upon our ability to identify, recruit and retain adequate management personnel in China to perform certain jobs such as engineering of solar systems, developing and maintaining internet based platforms for monitoring of SEFs and producing and facilitating the shipment of materials necessary for the installation of SEFs. We require trained graduates of varying levels and experience and a flexible work force of semi-skilled operators. Many of our current employees come from the more remote regions of China as they are attracted by the wage differential and prospects afforded by our operations. With the growth currently being experienced in China and competing opportunities for our personnel, there can be no guarantee that a favorable employment climate will continue and that wage rates in China, where our products are manufactured, will continue to be internationally competitive.

We face risks associated with international trade and currency exchange.

We transact business in a variety of currencies including the U.S. dollar, the Chinese Yuan Renminbi, and Euros. We make all sales in both U.S. dollars and the Euro and we incurred approximately 13% of our operating expenses, such as payroll, land rent, electrical power and other costs associated with running our facilities in China, in RMB. Changes in exchange rates would affect the value of deposits of currencies we hold. In July 2005 the Chinese government announced that the RMB would be pegged to a basket of currencies, making it possible for the RMB to rise and fall relative to the U.S. dollar. We do not currently hedge against exposure to currencies. We cannot predict with certainty future exchange rates and thus their impact on our operating results. We do not have any long-term debt valued in RMB. Movements between the U.S. dollar, the Euro, and the RMB could have a material impact on our profitability.

Changes to Chinese tax incentives and heightened efforts by the Chinese tax authorities to increase revenues could subject us to greater taxes.

Under applicable Chinese law, we have been afforded profits tax concessions by Chinese tax authorities on our operations in China for specific periods of time, which has lowered our cost of operations in China. However, the Chinese tax system is subject to substantial uncertainties with respect to interpretation and enforcement. Recently, the Chinese government has attempted to augment its revenues through heightened tax collection efforts. Continued efforts by the Chinese government to increase tax revenues could result in revisions to or changes to tax incentives or new interpretations by the Chinese government of the tax benefits we should be receiving currently, which could increase our future tax liabilities or deny us expected concessions or refunds.

Risks Related to our Common Stock

LDK Solar Co., Ltd. (“LDK”) controls us and may have conflicts of interest with other shareholders in the future.

On January 5, 2011, the Company entered into a stock purchase agreement which, on an as-converted, fully-diluted basis, LDK will own approximately 70% of our common stock. As a result, LDK will have significant control of the election of our directors and may influence our corporate and management policies. LDK also has sufficient voting power to amend our organizational documents. The interests of LDK may not coincide with the interests of other holders of our common stock. LDK may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as LDK continues to own a significant amount of the outstanding shares of our common stock, it will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Although we will operate separately, there are no assurances that conflicts will not arise in the future.

We have not paid and are unlikely to pay cash dividends in the foreseeable future.

We have not paid any cash dividends on our common stock and may not pay cash dividends in the future. Instead, we intend to apply earnings, if any, to the expansion and development of the business. Thus, the liquidity of your investment is dependent upon active trading of our stock in the market.

Any future financings and subsequent registration of common stock for resale will result in a significant number of shares of our common stock available for sale, and such sales could depress our common stock price. Further, no assurances can be given that we will not issue additional shares which will have the effect of diluting the equity interest of current investors. Moreover, sales of a substantial number of shares of common stock in any future public market could adversely affect the market price of our common stock and make it more difficult to sell shares of common stock at times and prices that either you or we determine to be appropriate.

We have significant “equity overhang” which could adversely affect the market price of our common stock and impair our ability to raise additional capital through the sale of equity securities.

As of February 28, 2011, we had 98,128,523 shares of common stock outstanding. LDK Solar Co., Ltd. (“LDK”) holds 42,835,947 shares of common stock and, after the second closing occurs, will own 20,000,000 shares of Series A Preferred Stock which may be converted into shares of our common stock. The possibility that substantial amounts of our outstanding common stock may be sold by LDK or the perception that such sales could occur, often called “equity overhang,” could adversely affect the market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future.

Our shareholders may experience future dilution.

Our charter permits our board of directors, without shareholder approval, to authorize shares of preferred stock. The board of directors may classify or reclassify any preferred stock to set the preferences, rights and other terms of the classified or reclassified shares,

including the issuance of shares of preferred stock that have preference rights over the common stock with respect to dividends, liquidation, voting and other matters or shares of common stock having special voting rights. Further, substantially all shares of common stock for which our outstanding stock options are exercisable are, once they have been purchased, eligible for immediate sale in the public market.

The issuance of additional shares of our capital stock or the exercise of stock options or warrants could be substantially dilutive to your shares and may negatively affect the market price of our common stock.

ITEM 1B — UNRESOLVED STAFF COMMENTS

None.

ITEM 2 — PROPERTIES

Our prior manufacturing facilities consisted of 123,784 square feet, including 101,104 square feet of factories and 23,680 square feet of dorms, situated in an industrial suburb of Shenzhen, Southern China known as Long Gang. Only the state may own land in China. Therefore, we lease the land under our facilities, and our lease agreement gave us the right to use the land until December 31, 2010 at an annual rent of $229,134.

On December 1, 2010 we leased approximately 3,900 square feet of office space to accommodate our support services operations in Shenzhen, China. The tem of the lease is three years and expires on November 30, 2013 at an annual rent of approximately $38,334.

Our corporate headquarters are located in Roseville, California in a space of approximately 19,000 square feet. The five year lease commenced on August 1, 2007 and expires in July 2012. The rent was $342,972 per year for the first year, $351,540 for the second year, $360,336 for the third year, is $369,336 for the fourth year and $378,576 for the remainder of the lease. The Company has an option to renew for an additional five years.

Our retail outlet was located in Roseville, California in a space of approximately 2,000 square feet. The five year lease commenced in October 2007 and expires in December 2012. The rent is currently $79,426 per year and increases to $84,252 in the fifth year. The Company has an option to renew for an additional five years. In October 2010, in conjunction with the discontinuance of our residential installation business, we closed our retail outlet. The premises are currently subleased at monthly rent equal to our leasing costs of the premises.

The Company is obligated under operating leases requiring minimum rentals as follows (in thousands):


Years ending December 31,
2011	$	499
2012		316
2013		—

Total minimum payments	$	815

ITEM 3 — LEGAL PROCEEDINGS

Rogers v. Kircher, et al.

Subsequent to fiscal year end, on January 25, 2011, a putative class action was filed by William Rogers against the Company, the Company’s directors Stephen C. Kircher, Francis Chen, Timothy B. Nyman, Ronald A. Cohan, D. Paul Regan, and LDK Solar Co., Ltd. (“LDK”), in the Superior Court of California, County of Placer. The complaint alleges violations of fiduciary duty by the individual director defendants concerning a proposed transaction announced on January 5, 2011, pursuant to which defendant LDK agreed to acquire 70% interest in the Company. Plaintiff contends that the independence of the individual director defendants was compromised because they are allegedly beholden to defendant LDK for continuation of their positions as directors and possible future employment. Plaintiff further contends that the proposed transaction is unfair because it allegedly contains onerous and preclusive deal protection devices, such as no shop, standstill and no solicitation provisions and a termination fee that operates to

effectively prevent any competing offers. The complaint alleges that the Company aided and abetted the breaches of fiduciary duty by the individual director defendants by providing aid and assistance. Plaintiff asks for class certification, the enjoining of the sale, or if the sale is completed prior to judgment, rescission of the sale and damages.

The case is in its early stages and the Company is gathering facts and information to refute the applicant’s claims. The Company intends to vigorously defend this action. Because the complaint was recently filed, it is difficult at this time to fully evaluate the claims and determine the likelihood of an unfavorable outcome or provide an estimate of the amount of any potential loss. The Company does have insurance coverage for this type of action.

ITEM 4 — RESERVED

PART II

ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock began trading on the Over the Counter Bulletin Board (OTCBB) under the symbol “SOPW.OB” on September 25, 2007. The quarterly high and low bid information in U.S. dollars on the OTCBB of our common shares during the periods indicated are as follows:


	High Bid		Low Bid
Fiscal Year Ended December 31, 2010
Fourth Quarter to December 31, 2010	$	0.33	$	0.29
Third Quarter to September 30, 2010	$	0.39	$	0.33
Second Quarter to June 30, 2010	$	0.84	$	0.77
First Quarter to March 31, 2010	$	1.08	$	1.00
Fiscal Year Ended December 31, 2009
Fourth Quarter to December 31, 2009	$	1.53	$	0.94
Third Quarter to September 30, 2009	$	1.90	$	0.75
Second Quarter to June 30, 2009	$	1.29	$	0.55
First Quarter to March 31, 2009	$	1.02	$	0.42
Fiscal Year Ended December 31, 2008
Fourth Quarter to December 31, 2008	$	1.43	$	0.41
Third Quarter to September 30, 2008	$	1.72	$	1.04
Second Quarter to June 30, 2008	$	1.80	$	1.05
First Quarter to March 31, 2008	$	1.44	$	0.95

These Over-the-Counter Bulletin Board bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. On December 31, 2010, 2009 and 2008, the last reported sale price for our common stock was $0.29, $1.23 and $0.47 per share, respectively.

Stockholders

As of March 10, 2011 we had approximately 212 holders of record of our common stock.

Dividends

We have paid no dividends on our common stock since our inception and may not do so in the future.

Recent Sales of Unregistered Securities

Subsequent to year end, on January 5, 2011, we entered into a Stock Purchase Agreement (‘SPA”) with LDK Solar Co., Ltd. (“LDK”) in connection with the sale and issuance by the Company of convertible Series A Preferred Stock and Common Stock. At the first closing on January 10, 2011, we issued 42,835,947 shares of our common stock at $0.25 per share, receiving proceeds, net of expenses of approximately $10,505,000. At the second closing, expected to occur before the end of the second quarter of fiscal 2011, we will issue 20,000,000 shares of our Series A Preferred Stock receiving proceeds of approximately $22,227,669.

On September 23, 2009 and October 2, 2009, we completed a private placement of 14,077,000 shares of restricted common stock at a purchase price of $1.00 per share to 31 accredited investors. The shares were offered and sold by us in reliance on Section 506 of Regulation D of the Securities Act, and comparable exemptions for sales under state securities laws.

On May 15, 2009, the Company issued 10,000 shares of its common stock pursuant to a resolution of the Company’s Board of Directors, on February 27, 2009, as compensation for services. The shares were fair-valued at $0.75, the closing price of the Company’s common stock on May 15, 2009 and the Company recorded approximately $7,400 in expense related to this transaction.

The above offerings were offered and sold by us in reliance on Section 506 of Regulation D of the Securities Act, and comparable exemptions for sales under state securities laws.

Securities Authorized for Issuance under Equity Compensation Plans

On November 15, 2006, subject to approval of the Stockholders, the Company adopted the 2006 Equity Incentive Plan reserving nine percent of the outstanding shares of common stock of the Company (“2006 Plan”). On February 7, 2007, our stockholders approved the 2006 Plan reserving nine percent of the outstanding shares of common stock of the Company pursuant to the Definitive Proxy on Schedule 14A filed with the Commission on January 22, 2007.

As of December 31, 2010, we have outstanding 2,305,175 service-based and 200,000 performance-based stock options to purchase shares of our common stock issued under the 2006 Plan. The service-based and performance-based options have an exercise price from $0.23 to $3.45 and are subject to vesting schedules and terms. As of December 31, 2009, we had 2,494,400 service-based and 200,000 performance-based options. The following table provides aggregate information as of December 31, 2010 with respect to all compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance.

(a) Number of

Number of securities

securities to be

remaining available for

issued upon

future issuance under

exercise of

Weighted-average

equity compensation

of outstanding

exercise price of

plans (excluding

options, warrants

outstanding options,

securities reflected

Plan Category

and rights

warrants and rights

in column (a))

Equity Compensation Plans approved by security holders

2,505,175

0.92

1,744,061

(1)

Equity Compensation Plans not approved by security holders

—

Total

2,505,175

0.92

1,744,061

(1)


(1)		Includes number of shares of common stock reserved under the 2006 Equity Incentive Plan (the “Equity Plan”) as of December 31, 2010, which reserves 9% of the outstanding shares of common stock of the Company, plus outstanding warrants.

Issuer Purchase of Equity Securities

None

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion highlights what we believe are the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains “forward-looking statements,” which can be identified by the use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and other words of similar meaning. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by these forward-looking statements. Such risks and uncertainties include, without limitation, the risks described in Part I on page 3 of this Annual Report, and the risks described in Item 1A, Page 6 above.

The following discussion is presented on a consolidated basis, and analyzes our financial condition and results of operations for the years ended December 31, 2010 and 2009.

Unless the context indicates or suggests otherwise reference to “we”, “our”, “us” and the “Company” in this section refers to the consolidated operations of Solar Power, Inc.

Overview

components, including our proprietary racking systems such as SkyMount and Peaq on an OEM basis. We sold these products through three distinct sales channels: 1) direct product sales to international and domestic markets, 2) our own use in building commercial and residential solar projects in the U.S., and 3) our authorized dealer network who sell our Yes! branded products in the U.S. and European residential markets. In 2010 we discontinued our Yes! Authorized dealer network and Yes! branded products and our residential installation business, as our strategy and focus shifted solely to commercial solar and utility projects. In addition to our solar revenue, we generate revenue from our cable wire and mechanical assembly business. Our cable, wire and mechanical assemblies products were also manufactured in our China facility and sold in the transportation and telecommunications markets and we will continue this business in China. We shut down our manufacturing operations because we could not achieve scale with other solar manufacturing operations in China and we were able to source modules at a price lower than our manufacturing costs from Chinese manufacturers with larger scale operations. As part of this change in our strategy we sought and obtained a strategic partner in China with large scale manufacturing operations. The strategic partner made a significant investment in our business that provided significant working capital and broader relationships that will allow us to more aggressively pursue commercial and utility projects in our pipeline. This strategic partner strengthens our position in the solar industry. We maintain a strategic office in Shenzhen China that is principally responsible for our ongoing procurement, logistics and design support for our products, and data systems for monitoring and managing solar energy facilities which we either own or maintain under operations and maintenance agreements.

Business Development

Our Subsidiaries

Our business was conducted through our wholly-owned subsidiaries, SPIC, Inc. (“SPIC”), Yes! Solar, Inc. (“YES”), Yes! Construction Services, Inc. (“YCS”), International Assembly Solutions, Limited (“IAS HK”) and IAS Electronics (Shenzhen) Co., Ltd. (“IAS Shenzhen”). Beginning in 2010 and continuing we are eliminating subsidiaries as we consolidate our business operations in the Company as we focus more strategically commercial and utility construction projects.

Previously, YES was engaged in the administration of our domestic dealer network and was engaged in the sales and administration of franchise operations. In August 2009, due to general economic conditions, YES discontinued the sale of franchises and converted its franchisees to authorized Yes! branded product dealers. In August 2010, due to general economic conditions, YES stopped its solicitation of new authorized dealers, and subsequently terminated all existing dealer agreements. The Company determined that discontinued operations treatment was not required due to the fact that revenue generated from residential installations was included in its photovoltaic installation, integration and sales segment and was not material to that segment or total revenue.

IAS HK was engaged in sales of our cable, wire and mechanical assemblies business and the holding company of IAS Shenzhen. During 2010, the cable, wire and mechanical assemblies customers were transitioned to Solar Power, Inc.

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 for the fiscal year ended December 31, 2009 as or on prior fiscal years. 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.

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 two primary business segments include photovoltaic installation, integration and sales, and cable, wire and mechanical assemblies.

Photovoltaic Installation, integration and sales — In our photovoltaic systems installation, integration and sales segment, 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 year ended December 31, 2009, the Company did recognize one product sale on a bill and hold arrangement. In the 2009 instance, the customer requested that we store product to combine with a subsequent order in order to reduce their transportation costs. Since all criteria for revenue recognition had been met the Company recognized revenue on this sale. There were no bill and hold sales outstanding at December 31, 2010 or 2009.

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

For the year ended December 31, 2009, the Company recognized revenue for one photovoltaic system construction contract using the zero margin method of revenue recognition. In the third quarter of 2009, the Company recognized revenue of approximately $13,061,000 and gross profit of approximately $3,209,000 related to this contract using the percentage-of-completion method of revenue recognition. However, in the fourth quarter of 2009 the Company modified its revenue recognition method on this contract to the zero margin method since the financing structure the customer had in place to pay the outstanding balance on the contract did not fund as expected. The contract was for approximately $19,557,000. As of December 31, 2009 the Company had recognized revenue on the contract up to the incurred contract cost of approximately $14,852,000, deferring revenue of approximately $4,563,000. In December 2009 the Company made certain guarantees to assist its customer in obtaining financing for the contract. The Company recorded a liability at the estimated fair value of approximately $142,000 related to these guarantees. At December 31, 2010 the fair value of the guarantee, net of amortization was approximately $127,000. As of December 31, 2009, the deferred revenue of $4,563,000 had been netted on our balance sheet against the note and accounts receivable related to this contract. On December 22, 2010, the Company entered into a Note Purchase and Sale Agreement discounting the note receivable and receiving a cash payment of $1,000,000. The purchase price of the note was determined based on the present value of the obligation over the likely repayment period, the risk involved with the payment of such term, and the unsecured nature of the obligation, and the release of any claims against the Company by the issuer of the note related to the finance structure and assumptions. As a result of the transaction, the Company recognized approximately $464,000 of the revenue that had been previously deferred and that as a result of the transaction there is no additional revenue to be recognized and the note has been settled.

Additionally in 2009, for a separate construction contract the Company determined the use of the completed contract method of revenue recognition was appropriate. At December 31, 2009 we have recorded on our balance sheet approximately $5,557,000 of cost related to this contract in the caption cost and estimated earnings in excess of billings on uncompleted contracts. In our second fiscal quarter ended

June 30, 2010 it was determined that the customer was unable to perform on its payment obligations under the contract. The Company took possession of the facility and its related Power Purchase Agreement (“PPA”) in lieu of payment. The Company reclassified the amount recorded in costs and estimated earnings in excess of billings on uncompleted contracts (approximately $5,557,000) and the remaining costs to complete the contract (approximately $4,459,000) to assets held for sale on its balance sheet. At December 31, 2010, value of the asset held for sale on our balance sheet is approximately $6,669,000, the cost of the project (approximately $10,016,000) less the Section 1603 grant-in-lieu of tax credits of approximately $3,347,000.

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.

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, the price to the buyer is fixed or determinable and collectability is reasonably assured. There are no formal customer acceptance requirements or further obligations related to our assembly services once we ship our products. Customers do not have a general right of return on products shipped therefore we make no provisions for returns. We make determination of our customer’s credit worthiness at the time we accept their order.

Product 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. 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 provided a warranty provision of approximately $296,000 and $503,000 for the years ended December 31, 2010 and 2009, respectively.

Performance Guarantee

On December 18, 2009, the Company entered into a 10-year energy output guaranty related to the photovoltaic system installed for Solar Tax Partners 1, LLC (“STP”) at the Aerojet facility in Rancho Cordova, CA. The guaranty provided for compensation to STP’s system lessee for shortfalls in production related to the design and operation of the system, but excluding shortfalls outside the Company’s control such as government regulation. The Company believes that the probability of shortfalls are unlikely and if they should occur be covered under the provisions of its current panel and equipment warranty provisions.

The accrual for warranty claims consisted of the following at December 31, 2010 and 2009 (in thousands):


	2010		2009

Beginning balance	$	1,246		$	743
Provision charged to warranty expense		296			503
Less: warranty claims		—			—

Ending balance	$	1,542		$	1,246

Stock based compensation — The Company accounts for stock-based compensation under the provisions of FASB ASC 718 (Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment.”) 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 FASB ASC 718. 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 December 31, 2010 and 2009 the Company has an allowance of approximately $28,000 and $395,000, respectively.

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

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 expense included in the income statement was approximately $1,025,000 and $91,000 for the years ended December 31, 2010 and 2009, respectively.

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.

Segment Information

The Company’s two primary business segments include: (1) photovoltaic installation, integration, and sales and (2) cable, wire and mechanical assemblies. Prior to the quarter ended March 31, 2010, the Company operated in a third segment, franchise/product distribution operations. During that quarter, the Company reorganized its internal reporting and management structure, combining the operations of the franchise/product distribution segment with its photovoltaic installation, integration and sales segment. Segment information for the twelve months ended December 31, 2009 has been restated to give effect to this change. 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.

Recent Accounting Pronouncements

In January 2010, FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820). ASU 2010-06 amends Subtopic 820-10 requiring new disclosures for transfers in and out of Levels 1 and 2, activity in Level 3 fair value measurements, level of disaggregation and disclosures about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward activity of Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of ASU 2010-06 had no impact on results of operations, cash flows or financial position.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition — Milestone Method (Topic 605). ASU 2010-17 provides guidance on the criteria that should be met for determining whether the milestones method of revenue recognition is appropriate. ASU 2010-17 is effective on a prospective basis for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The Company expects that the adoption of ASU 2010-17 will have no impact on results of operations, cash flows or financial position.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805). ASU 2010-29 specify that a public entity as defined by Topic 805, who presents comparative financial statements, must disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company expects that the adoption of ASU 2010-29 will have no impact on the results of operations, cash flows or financial position.

In June 2009, FASB issued ASU 2009-16. ASU 2009-16 applies to all entities and is effective for annual financial periods beginning after November 15, 2009 and for interim periods within those years. Earlier application is prohibited. A calendar year-end company must adopt this statement as of January 1, 2010. This statement retains many of the criteria of FASB ASC 860 (FASB 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”) to determine whether a transfer of financial assets qualifies for sale accounting, but there are some significant changes as discussed in the statement. Its disclosure and measurement requirements apply to all transfers of financial assets occurring on or after the effective date. Its disclosure requirements, however, apply to transfers that occurred both before and after the effective date. In addition, because ASU 2009-16 eliminates the consolidation exemption for Qualifying Special Purpose Entities, a company will have to analyze all existing QSPEs to determine whether they must be consolidated under FASB ASC 810. The adoption of ASU 2009-16 had no impact on results of operations, cash flows or financial position.

In August 2009, the FASB issued ASU 2009-05, “Measuring Liabilities at Fair Value”. ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of FASB ASC 820, “Fair Value Measurements and Disclosures”. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance, October 1, 2009 for the Company. The adoption of ASU 2009-05 had no impact on results of operations, cash flows or financial position.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. ASU 2010-20 applies to all entities with financing receivables, excluding short-term trade accounts receivable or receivables measured at fair value or lower of cost or fair value. ASU 2010-20 is effective for interim and annual reporting periods ending after December 15, 2010. The adoption of ASU 2010-20 did not have a material impact on results of operations, cash flows or financial position.

In October 2009, the FASB ratified FASB ASU 2009-13 (the EITF’s final consensus on Issue 08-1, “Revenue Arrangements with Multiple Deliverables”). ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. Earlier adoption is permitted on a prospective or retrospective basis. The Company does not anticipate the adoption of FASB ASC 605-25 to have an impact on results of operations, cash flows or financial position.

In December 2010, the FASB issued ASU 2010-28, Intangibles — Goodwill and Other (Topic 350). ASU 2010-28 modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects that the adoption of ASU 2010-28 will have no material impact on results of operations, cash flows or financial position.

Results of Operations

Comparison of the year ended December 31, 2010 to the year ended December 31, 2009

Net sales — Net sales for the year ended December 31, 2010 decreased 35.2% to approximately $34,036,000 from approximately $52,551,000 for the year ended December 31, 2009.

Net sales in the photovoltaic installation, integration and sales segment decreased 35.5% to approximately $30,719,000 from approximately $47,623,000 for the year earlier comparative period. The decrease in revenue was attributable to a decrease in product sales into the European market as a result of the unfavorable effect of the decline in the Euro to the U.S. dollar and the inability of the Company to sell its Aerojet 2 project resulting in the facility being held as an asset held for sale on its balance sheet. The Company expects that its continued focus on distributed generation and utility scale projects will result in increased revenues in fiscal 2011.

Net sales in the cable, wire and mechanical assemblies segment decreased 32.7% to approximately $3,317,000 from approximately $4,928,000 for the year earlier comparative period. 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 concentrate on its solar segment, but is not actively seeking new customers. The decrease in revenue is attributed to a decrease in demand from existing customers and is expected to continue to fluctuate in fiscal 2011.

Cost of goods sold — Cost of goods sold were approximately $29,282,000 (86.0% of net sales) and approximately $45,788,000 (87.1% of net sales) for the years ended December 31, 2010 and 2009, respectively.

Cost of goods sold in the photovoltaic installation, integration and sales segment was approximately $27,020,000 (88.0% of sales) for the year ended December 31, 2010 compared to approximately $42,660,000 (89.6% of net sales) for the year ended December 31, 2009. The decrease in costs of goods sold was a direct result in decreased net sales in this segment. The Company expects that costs will remain stable at current levels in fiscal 2011, with gross margins remaining stable.

Cost of goods sold in the cable, wire and mechanical assembly segment were approximately $2,262,000 (68.2% of net sales) for the year ended December 31, 2010 compared to approximately $3,129,000 (63.5% of net sales) for the year ended December 31, 2009. The increase as a percentage of net sales is attributable to product mix and increase in the copper wire component of our material costs, a key component in the cable wire segment. The Company expects margins to remain stable in this segment.

General and administrative expenses — General and administrative expenses were approximately $7,578,000 for the year ended December 31, 2010 and approximately $8,849,000 for the year ended December 31, 2009 a decrease of 14.4%. As a percentage of net sales, general and administrative expenses were 22.3% and 16.8%, for the years ended December 31, 2010 and 2009, respectively. The Company initiated significant cost reduction efforts in the third and fourth quarters of fiscal 2010 and expects to maintain those levels in fiscal 2011. Significant elements of general and administrative expenses for the year ended December 31, 2010 include employee related expense of approximately $3,342,000, information technology costs of approximately $194,000, insurance costs of approximately $261,000, professional and consulting fees of approximately $1,473,000, rent of approximately $310,000, travel and lodging costs of $131,000, stock compensation expense of $162,000 and bad debt expense of $523,000. The bad debt expense pertains primarily to one uncollectable product sale.

Significant elements of general and administrative expenses for the year ended December 31, 2009 include employee related expense of approximately $4,600,000, information technology costs of approximately $177,000, insurance costs of approximately $195,000, professional and consulting fees of approximately $1,106,000, rent of approximately $528,000, travel and lodging costs of $171,000, stock compensation expense of $536,000 and bad debt expense of $418,000. The bad debt expense pertains primarily to one commercial installation project on which the owner was unable to complete financing on the project and uncollectable product sales.

Sales, marketing and customer service expense — Sales, marketing and customer service expenses were approximately $3,652,000 for the year ended December 31, 2010 and $3,841,000 for the year ended December 31, 2009. As a percentage of net sales, sales, marketing and customer service expenses were 10.7% and 7.3% for the years ended December 31, 2010 and 2009, respectively. The decrease in cost is primarily due to decreases in advertising and trade show costs. Significant elements of sales, marketing and customer service expense for the year ended December 31, 2010 were payroll related expenses of approximately $1,773,000, advertising and trade show expenses of approximately $185,000, commission expense of approximately $809,000 stock-based compensation costs of approximately $84,000, business development costs of approximately $119,000 and travel and lodging costs of approximately $109,000.

Significant elements of sales, marketing and customer service expense for the year ended December 31, 2009 were payroll related expenses of approximately $1,695,000, advertising and trade show expenses of approximately $311,000, commission expense of approximately $461,000 stock-based compensation costs of approximately $136,000, franchise conversion costs of approximately $309,000 and travel and lodging costs of approximately $135,000.

Engineering, design and product management expense — Engineering, design and product management expenses were approximately $947,000 and $939,000 for the year ended December 31, 2010 and 2009, respectively. As a percentage of net sales, product development expenses were 2.8% and 1.8% for the years ended December 31, 2010 and 2009, respectively. Significant elements of engineering, design and product management expense for the year ended December 31, 2010 were payroll and related expenses of approximately $599,000, product certification and testing of approximately $159,000 and stock-based compensation expense of $60,000. The Company expects these expenses to continue in 2011.

Significant elements of engineering, design and product management expense for the year ended December 31, 2009 were payroll and related expenses of approximately $478,000, product certification and testing of approximately $377,000 and stock-based compensation expense of $37,000.

Interest income / expense — Interest expense, net was approximately $450,000 and $37,000 for the years ended December 31, 2010 and 2009, respectively. Interest expense, net consisted primarily of approximately $188,000 paid on the loan securing our power generating facility at Aerojet, approximately $29,000 paid on our installment loans and capital leases and approximately $233,000 of finance charges on the Company’s accounts payable to cell vendors.

Interest expense, net consisted of interest income of approximately $6,000 from earnings on the Company’s idle cash, approximately $6,000 from earnings on a note receivable, offset by interest expense of approximately $49,000 on the Company’s short term borrowings in fiscal year 2009.

Other income / expense — Other expense, net was approximately $1,138,000 and approximately $21,000 for the years ended December 31, 2010 and 2009, respectively. In 2010, other income, net consisted primarily of income related to a government stimulus of approximately $70,000 from the Chinese government, other income of approximately $6,000 and expenses of $1,000 related to the sub-lease of the Company’s retail outlet, approximately $142,000 of costs related to the preliminary design of a new factory facility and currency exchange losses of approximately $1,071,000.

In 2009, other expense, net consisted primarily of income related to a government stimulus of approximately $87,000 from the Chinese government and expenses of $16,000 related to the sub-lease of the Company’s former corporate headquarters and currency exchange losses of approximately $92,000 in fiscal 2009.

Net loss — Net loss was approximately $8,870,000 and $6,970,000 for the years ended December 31, 2010 and 2009, respectively. The decreased revenue from our photovoltaic installation, integration and sales segment was the driver of the increased operating loss in 2010. The Company expects that it will be profitable in fiscal 2011.

Liquidity

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


	Year ended December 31,
(in thousands)	2010			2009
\| \|
Net cash used in operating activities	$	(3,947	)	$	(15,572	)
Net cash used in by investing activities		(63	)		(53	)
Net cash provided by financing activities		2,333			12,849

Net decrease in cash and cash equivalents	$	(1,677	)	$	(2,776	)

From our inception until the closing of our private placement on October 4, 2006, we financed our operations primarily through short-term borrowings. We received net proceeds of approximately $14,500,000 from the private placement made by Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) when we completed our reverse merger with them in December 2006.

In December 2007, we completed a private placement of 4,513,911 shares of our common stock with proceeds of approximately $10,185,000, net of expenses of approximately $1,551,000.

In October 2009, we completed a private placement of 14,077,000 shares of our common with proceeds of approximately $12,867,000, net of expenses of approximately $1,211,000

As of December 31, 2010, we had approximately $1,441,000 in cash and cash equivalents and as of December 31, 2009, we had approximately $3,136,000 in cash and cash equivalents. This change in cash and cash equivalents is primarily attributable to cash used in operating activities offset by cash generated from financing activities.

Net cash used in operating activities of approximately $3,947,000 for the year ended December 31, 2010 was a result of a net loss of approximately $8,870,000, offset by non-cash items included in net loss, consisting of depreciation of approximately $526,000, amortization of loan fees of approximately $5,000, warranty provision of approximately $296,000, stock-based compensation expense of approximately $306,000, bad debt expense of approximately $523,000, an income tax benefit of approximately $141,000 and loss on disposal of fixed assets of approximately $21,000. Cash used in operations also included a decrease in accounts and related notes receivable of approximately $11,474,000 primarily related to collections from a construction contract for which we used the zero margin method of revenue recognition, decrease in costs and estimated earnings in excess of billings on uncompleted projects of approximately $18,000 related to the construction project we now carry as an asset held for sale, decreases in inventories of approximately $1,126,000 primarily due to decreases in raw material and finished goods inventory, increase in an asset held for sale of approximately $1,112,000 related to our assumption of the contract for the Aerojet 2 project, decreases in prepaid expenses and other current assets of approximately $821,000 due to decreased supplier deposits at our PRC manufacturing facility, increases in deferred revenues of approximately $35,000 from the billings in advance of our asset management services, a decrease in accounts payable of approximately $10,055,000 related to payment on our accounts payable, decreases in accrued liabilities of approximately $420,000 for our solar project development activities, increase in our billings in excess of costs and estimated earnings on uncompleted contracts of approximately $1,613,000 due to prepayment from our development contracts and decreases in income taxes payable of approximately $113,000 due to estimated tax payments required at our Hong Kong subsidiary. As we continue to seek out and undertake larger solar system projects we anticipate that the cash provided by or used in operating activities will continue to be significantly influenced by the payment terms of our projects and the financing terms provided to us by our solar cell vendors.

Net cash used in operating activities of approximately $15,572,000 for the year ended December 31, 2009 was a result of a net loss of approximately $6,970,000, offset by non-cash items included in net loss, consisting of depreciation of approximately $827,000, stock-based compensation expense of approximately $709,000, bad debt expense of approximately $418,000, stock issued for services of approximately $127,000. Cash used in operations also included an increase in accounts and related notes receivable of approximately $15,394,000 primarily related to a construction contract for which we used the zero margin method of revenue recognition, increase in costs and estimated earnings in excess of billings on uncompleted projects of approximately $7,506,000 related to two construction contracts, increases in inventories of approximately $546,000 primarily due to raw material purchases required by one cable, wire and mechanical assemblies customer, increases in prepaid expenses and other current assets of approximately $363,000 due to increased supplier deposits at our PRC manufacturing facility, and decreases in deferred revenues of approximately $125,000 from the conversion of our franchise operations to an authorized dealer network, offset by an increase in accounts payable of approximately $12,194,000 related to extended payment terms from our solar cell vendors, and increases in accrued liabilities of approximately $1,005,000 for our solar project development activities.

Net cash used in investing activities of approximately $63,000 for the year ended December 31, 2010 primarily related to acquisition of property and equipment.

Net cash used in investing activities of approximately $53,000 for the year ended December 31, 2009 primarily relates to acquisition of property and equipment.

Net cash generated from financing activities of approximately $2,333,000 for the year ended December 31, 2010 was a result of approximately $3,899,000 generated from loan proceeds from the financing of our Aerojet 2 solar facility by our subsidiary, Solar Tax Partners 2, LLC, offset by an increase in restricted cash of approximately $1,064,000 primarily related to reserves required by our lender, principal payments on notes and capital leases payable of approximately $400,000 and prepayment of loan fees of approximately $102,000.

Net cash generated from financing activities of approximately $12,849,000 for the year ended December 31, 2009 was a result of approximately $12,943,000 generated from net proceeds of our private placement of 14,077,000 shares of our common stock and exercise of stock options, decrease in restricted cash of approximately $247,000 collateralizing our letters of credit and ACH transactions, offset by approximately $341,000 in principal payments on notes and capital leases payable.

Capital Resources and Material Known Facts on Liquidity

In the short-term we do not expect any material change in the mix or relative cost of our capital resources. As of December 31, 2010, we had approximately $1,441,000 in cash and cash equivalents, approximately $1,344,000 of restricted cash held in our name in interest bearing accounts consisting of approximately $285,000 with the lender financing our power generation facility and approximately $1,004,000 held by the lender of our customer as collateral for such loan, approximately $35,000 held by our bank as collateral for our merchant account transactions and approximately 20,000 as collateral for a credit card issued to the Company, accounts receivable of approximately $5,988,000 and costs and estimated earnings in excess of billings on uncompleted contracts of approximately $2,225,000. Our focus will be to continue development and manufacturing of our solar modules and racking systems.

The current economic conditions of the U.S. market, coupled with reductions of solar incentives in Europe have presented challenges to us in generating the revenues and or margins necessary for us to create positive working capital. While our sales pipeline of solar system construction projects continues to grow such projects encumber associated working capital until project completion or earlier customer payment, and our revenues are highly dependent on third party financing for these projects. As a result, revenues remain difficult to predict and we cannot assure shareholders and potential investors that we will be successful in generating positive cash from operations. Knowing that revenues are unpredictable, our strategy has been to manage spending tightly by reducing to a core group of employees in our China and U.S. offices, and to outsource the majority of our construction workforce.

Over the past three years we have sustained losses from operations and have relied on equity financing to provide working capital. We 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. The issues involved with closing and receiving payment on two major projects (Aerojet 1 and Aerojet 2) have severely hindered the Company’s ability to create and leverage working capital. The Company had an outstanding receivable of approximately $9 million dollars from its customer, Solar Tax Partners 1, LLC (“STP1”) on the Aerojet 1 project for the first eight months or 2010 which it originally expected to collect in December, 2009. The impact of waiting for that working capital required the Company to optimize cash on hand and negotiate extended terms with our suppliers resulting in increased accounts payable. The limits on available working capital caused by these events and inability to obtain additional credit from our suppliers impacted the Company’s ability to start and complete projects per original schedules. The inability of our customer to complete its purchase of the Aerojet 2 project, resulting in the Company taking possession of the project and recording it as an asset held for sale caused further constraints on our working capital. The company received payment for the majority of the outstanding receivable due on Aerojet 1 from STP1 in August 2010, allowing the Company to satisfy obligations to suppliers and enabled more effective management working capital. To mitigate future impact on working capital requirements the Company is planning to finance future projects through construction financing or payment terms from the end customer.

We believe the funds generated by the collection of our accounts receivable, notes receivable and costs and estimated earnings in excess of billings on uncompleted contracts, the anticipated revenues of our operations, the sale of our asset held for sale and reductions in operating expenses, continued management of our supply chain, and potential funds available to us through debt and equity financing, are adequate to fund our anticipated cash needs through the next twelve months. We anticipate that we will retain all earnings, if any, to fund future growth in the business. Although we believe we have effectively implemented cash management controls to meet ongoing obligations, there are no assurances that we will not be required to seek additional working capital through debt or equity offerings. If such additional working capital is required, there are no assurances that such financing will be available on favorable terms to the Company, if at all.

Additionally, subsequent to year end, on January 5, 2011, we entered into a Stock Purchase Agreement (‘SPA”) with LDK Solar Co., Ltd. (“LDK”) in connection with the sale and issuance by the Company of convertible Series A Preferred Stock and Common Stock. At the first closing on January 10, 2011, we issued 42,835,947 shares of our common stock at $0.25 per share and received proceeds net of expenses of approximately $10,505,000. At the second closing, expected to occur before the end of the first quarter of 2011, we will issue 20,000,000 shares of our Series A Preferred Stock receiving proceeds of approximately $22,228,000.

Contractual Obligations

Letters of Credit — At December 31, 2009, the Company had outstanding standby letters of credit of approximately $225,413 as collateral for its capital lease. The standby letter of credit is issued for a term of one year, mature beginning in September 2009 and the Company paid one percent of the face value as an origination fee. These letters of credit are collateralized by $255,000 of the Company’s cash deposits. In July, 2010, the Company made the final payment on the capital lease, the letter of credit was released and the restricted cash deposit collateralizing the lease was released.

Guaranty — On December 22, 2009, in connection with an equity funding of our customer, Solar Tax Partners 1, LLC (“STP1”), of the Aerojet I project, the Company along with the STP1’s other investors entered into a Guaranty (“Guaranty”) to provide the equity investor, Greystone Renewable Energy Equity Fund (“Greystone”), with certain guarantees, in part, to secure investment funds necessary to facilitate STP’s payment to the Company under the Engineering, Procurement and Construction Agreement (“EPC”). Specific guarantees made by the Company include the following in the event of the other investors’ failure to perform under the operating agreement:

	•		Recapture Event — The Company shall be responsible for providing Greystone with payments for losses due to any recapture, reduction, requirement to repay, loss or disallowance of certain tax credits (Energy Credits under Section 48 of Code) or Cash Grant (any payment made by US Dept. of Treasure under Section 1603 of the ARRT of 2009) or if the actual Cash Grant received by Master Tenant is less that the Anticipated Cash Grant (equal to $6,900,000);

	•		Repurchase obligation — If certain criteria occur prior to completion of the Facility, including event of default, if the managing member defaults under the operating agreement or the property or project are foreclosed on, or if the property qualifies for less than 70% of projected credits (computed as an attachment to Master Tenants operating agreement), SPI would be required to fund the purchase of Greystone’s interest in Master Tenant if the managing member failed to fund the repurchase;

	•		Fund Excess Development Costs — The Company would be required to fund costs in excess of certain anticipated development costs;

	•		Operating Deficit Loans — The Company would be required to loan Master Tenant or STP1 monies necessary to fund operations to the extent costs could not be covered by Master Tenant’s or STP1’s cash inflows. The loan would be subordinated to other liabilities of the entity and earn no interest; and

	•		Exercise of Put Options — At the option of Greystone, the Company may be required to fund the purchase by managing member of Greystone’s interest in Master Tenant under an option exercisable for 9 months following a 63 month period commencing with operations of the Facility. The purchase price would be equal to the greater of the fair value of Greystone’s equity interest in Master Tenant or $951,985.

Guaranty provisions related to the Recapture Event, Repurchase Obligation and Excess Development Costs guarantees have effectively expired or were no longer applicable as of December 31, 2009. This is because the trigger event for the Company’s potential obligation has either lapsed or been negated. The Company determined that the fair value of such guarantees was immaterial.

At December 31, 2009, the Company recorded on its balance sheet, the fair value of the remaining guarantees, at their estimated fair value of $142,000. At December 31, 2010 the amount recorded on the Company’s balance sheet was approximately $127,000, net of amortization.

Operating leases — The Company leases premises under various operating leases which expire through 2012. Rental expenses under operating leases included in the statement of operations were approximately $703,000 and $806,000 for the years ended December 31, 2010 and 2009, respectively.

Our manufacturing facilities consist of 123,784 square feet, including 101,104 square feet of factories and 23,680 square feet of dorms, situated in an industrial suburb of Shenzhen, Southern China known as Long Gang. Only the state may own land in China. Therefore, we lease the land under our facilities, and our lease agreement gives us the right to use the land until December 31, 2010 at an annual rent of $229,134. We have an option to renew this lease for 2 additional years on the same terms. While we continue to operate our manufacturing in the existing facility, we are actively seeking alternatives that will provide lower cost, higher quality or other incentives that may benefit the company. The Company did not exercise its option to renew the lease at December 31, 2010 but continues to occupy the facility on a month-to-month tenancy.

Our corporate headquarters are located in Roseville, California in a space of approximately 19,000 square feet. The five year lease commenced on August 1, 2007 and expires in July 2012. The rent is currently $342,972 per year for the first year, $351,540 for the second year, $360,336 for the third year, $369,336 for the fourth year and $378,576 for the remainder of the lease. The Company has an option to renew for an additional five years.

Our retail outlet is located in Roseville, California in a space of approximately 2,000 square feet. The five year lease commenced in October 2007 and expires in December 2012. The rent is currently $79,426 per year and increase to $84,252 in the fifth year. The Company has an option to renew for an additional five years. In October 2010, in conjunction with the discontinuance of our residential installation business, we closed our retail outlet. The premises are currently subleased at a monthly rent equal to our leasing costs of the premises.

The Company is obligated under operating leases requiring minimum rentals as follows (in thousands):


Years ending December 31,
2011	$	499
2012		316
2013		—

Total minimum payments	$	815

The Company receives rental income from a sublease of its former retail outlet which offsets rental expense.

The Company was obligated under loans payable requiring minimum payments as follows (in thousands):


Years ending December 31,
2011	$	3,804
2012		5
2013		—

		3,809
Less current portion		(3,804	)

Long-term portion	$	5

The loans payable are collateralized by trucks used in the Company’s solar photovoltaic business, bear interest rates between 1.9% and 2.9% and are payable over sixty months and our wholly-owned subsidiary, Solar Tax Partners 2, LLC’s power generating facility, bearing interest at 8% and is payable over 120 months. The primary asset is a power generating facility recorded as an asset held for sale which is discussed in Note 13 above. The note payable of $3,782,000 has been recorded as a current liability in the December 31, 2010 balance sheet since if the facility is sold the Loan could contractually be required to be paid and the facility is expected to be sold in twelve months.

The Company leases equipment under capital leases. The leases expire from 2012 to 2013. The Company was obligated for the following minimum payments under these leases (in thousands):


Years ending December 31,
2011	$	7
2012		6
2013		2
Less amounts representing interest		(3	)

Present value of net minimum lease payments		12
Less current portion		(4	)

Long-term portion	$	8

Restricted Cash — At December 31, 2010, the Company had restricted bank deposits of approximately $1,344,000. The restricted bank deposits consist of approximately $1,004,000 as a reserve pursuant to our guarantees of our customer Solar Tax Partners 1, LLC with the bank providing the debt financing on their solar generating facility (subsequent to year end, our customer STP1 refinanced this project reducing our reserve requirement to $400,000), approximately $285,000 as a reserve pursuant to our loan agreement with the bank providing the debt financing for the solar generating facility owned by our subsidiary, Solar Tax Partners 2, LLC, approximately $20,000 securing our corporate credit card and approximately $35,000 as retention by our bank for our merchant credit card services. At December 31, 2009, the Company’s restricted bank deposits were $280,000 as collateral for the outstanding letter of credits in the amount of $255,000 and the Company bank credit card of $25,000.

Legal Proceeding -Subsequent to fiscal year end, on January 25, 2011, a putative class action was filed by William Rogers against the Company, the Company’s directors Stephen C. Kircher, Francis Chen, Timothy B. Nyman, Ronald A. Cohan, D. Paul Regan, and LDK Solar Co., Ltd. (“LDK”), in the Superior Court of California, County of Placer. The complaint alleges violations of fiduciary duty by the individual director defendants concerning a proposed transaction announced on January 6, 2011, pursuant to which defendant LDK agreed to acquire 70% interest in the Company. Plaintiff contends that the independence of the individual director defendants was compromised because they are allegedly beholden to defendant LDK for continuation of their positions as directors and possible future employment. Plaintiff further contends that the proposed transaction is unfair because it allegedly contains onerous and preclusive deal protection devices, such as no shop, standstill and no solicitation provisions and a termination fee that operates to effectively prevent any competing offers. The complaint alleges that the Company aided and abetted the breaches of fiduciary duty by the individual director defendants by providing aid and assistance. Plaintiff asks for class certification, the enjoining of the sale, or if the sale is completed prior to judgment, rescission of the sale and damages.

Off-Balance Sheet Arrangements

At December 31, 2010 and 2009, we did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

ITEM 8 — FINANCIAL STATEMENTS

The Financial Statements that constitute Item 8 are included at the end of this report beginning on page F-1.

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

Item 9A — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods required by the Securities and Exchange Commission. An evaluation of the effectiveness of the design and operations of the Company’s disclosure controls and procedures at the end of the period covered by this report was carried out under the supervision and with the participation of the management of Solar Power, Inc., including the Chief Executive Officer and the Chief Financial Officer. Based on such an evaluation, the Chief Executive Officer and the Chief Financial Officer concluded the Company’s disclosure controls and procedures were effective as of the end of such period.

Management’s Report on Internal Control over Financial Reporting

Solar Power, Inc. is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management’s best estimates and judgments.

We, as management of Solar Power, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; provide a reasonable assurance that receipts and expenditures of the company are only being made in accordance with authorizations of management and directors of the Company; and provide a reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are noted.

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

Management assessed the Company’s system of internal control over financial reporting as of December 31, 2010, in relation to the criteria for effective control over financial reporting as described in “Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2010, its system of internal control over financial reporting is effective and meets the criteria of the “Internal Control — Integrated Framework.”

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.

No changes were made in Management’s internal control over financial reporting during the three months ended December 31, 2010 that have materially affected, or that are reasonably likely to materially affect, Management’s internal control over financial reporting.

ITEM 9B — OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item will be included in and is hereby incorporated by reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders. We have adopted a Code of Ethics applicable to all employees including our CEO and CFO. A copy of the Code of Ethics is available at www.solarpowerinc.net.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item will be included in and is hereby incorporated by reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item will be included in and is hereby incorporated by reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item will be included in and is hereby incorporated by reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item will be included in and is hereby incorporated by reference from our Proxy Statement for the 2010 Annual Meeting of Stockholders.

PART IV

ITEM 15 — EXHIBITS


Exhibit No.		Description
2.1		Agreement and Plan of Merger dated as of January 25, 2006 between Welund Fund, Inc. (Delaware) and Welund Fund, Inc. (Nevada) (1)

2.2		Agreement and Plan of Merger by and among Solar Power, Inc., a California corporation, Welund Acquisition Corp., a Nevada corporation, and Welund Fund, Inc. a Nevada corporation dated as of August 23, 2006(2)

2.3		First Amendment to Agreement and Plan of Merger dated October 4, 2006(3)

2.4		Second Amendment to Agreement and Plan of Merger dated December 1, 2006(4)

2.5		Third Amendment to Agreement and Plan of Merger dated December 21, 2006(5)

2.6		Agreement of Merger by and between Solar Power, Inc., a California corporation, Solar Power, Inc., a Nevada corporation and Welund Acquisition Corp., a Nevada corporation dated December 29, 2006(7)

2.7		Agreement of Merger by and between Solar Power, Inc., a Nevada corporation and Solar Power, Inc., a California corporation, dated February 14, 2007 (6)

3.1		Amended and Restated Articles of Incorporation(6)

3.2		Bylaws(6)

3.3		Specimen (7)

3.4		Certificate of Determination of Rights, Preferences, Privileges and Restrictions of the Series A Preferred Stock of Solar Power (12)

10.1		Form of Securities Purchase Agreement, by and among Solar Power, Inc. and the purchasers named therein (9)

10.2		Form of Registration Rights Agreement, by and among Solar Power, Inc. and the purchasers named therein (9)

10.3		Loan Agreement with Five Star Bank dated June 1, 2010 (10)

10.4		Deposit Account Pledge Agreement dated June 22, 2010 (11)

10.5		Intercreditor Agreement dated June 22, 2010 (11)

10.6		Acknowledgment, Confirmation and Estoppel dated June 22, 2010 (11)

10.7		Continuing Guaranty by Steven C. Kircher dated June 22, 2010 (11)

10.8		Continuing Guaranty by Kircher Family Irrevocable Trust dated June 22, 2010 (11)

10.9		Stock Pledge Agreement by Kircher Family Irrevocable Trust dated June 22, 2010 (11)

10.10		Stock Purchase Agreement with LDK Solar Co., Ltd. dated January 5, 2010 (12)

10.11		Form of Lock-up Agreements (12)

10.12		Voting Agreement (Steven C. Kircher) dated January 5, 2010 (12)

10.13		2006 Equity Incentive Plan (7)

10.14		Form of Nonqualified Stock Option Agreement(7)

10.15		Form of Restricted Stock Award Agreement(7)



14.1		Code of Ethics (13)

21.1		List of Subsidiaries(14)

23.1		Consent of Independent Registered Public Accounting Firm — Perry-Smith, LLP*

23.2		Consent of Independent Registered Public Accounting Firm — Macias Gini & O’Connell, LLP*

31.1		Rule 13(a) — 14(a)/15(d) — 14(a) Certification (Principal Executive Officer)*

31.2		Rule 13(a) — 14(a)/15(d) — 14(a) Certification (Principal Financial Officer)*

32		Section 1350 Certifications*

Footnotes to Exhibits Index


*		Filed herewith

(1)		Incorporated by reference to Form 8-K filed with the SEC on February 3, 2006.

(2)		Incorporated by reference to Form 8-K filed with the SEC on August 29, 2006.

(3)		Incorporated by reference to Form 8-K filed with the SEC on October 6, 2006.

(4)		Incorporated by reference to Form 8-K filed with the SEC on December 6, 2006.

(5)		Incorporated by reference to Form 8-K filed with the SEC on December 22, 2006.

(6)		Incorporated by reference to Form 8-K filed with the SEC on February 20, 2007.

(7)		Incorporated by reference to the Form SB-2 filed with the SEC on January 17, 2007.

(8)		(Reserved)

(9)		Incorporated by reference to Form 8-K filed with the SEC on September 23, 2009.

(10)		Incorporated by reference to Form 8-K filed with the SEC on June 7, 2010.

(11)		Incorporated by reference to Form 8-K filed with the SEC on August 4, 2010.

(12)		Incorporated by reference to Form 8-K filed with the SEC on January 6, 2011.

(13)		Incorporated by reference to Form 10KSB filed with the SEC on April 16, 2007

(14)		Incorporated by reference to the Pre-Effective Amendment No. 1 to Form SB-2 filed with the SEC on March 6, 2007

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SOLAR POWER, INC.
March 14, 2011	/s/ Stephen C. Kircher
	By: Stephen C. Kircher
	Its: Chief Executive Officer and Chairman of the Board (Principal Executive Officer)


March 14, 2011	/s/ Joseph G. Bedewi
	By: Joseph G. Bedewi
	Its: Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:


Signature	Capacity	Date

/s/ Stephen C. Kircher Stephen C. Kircher	Director	March 14, 2011

/s/ Xiaofeng Peng	Director	March 14, 2011
Xiaofeng Peng

/s/ Jack K. Lai Jack K. Lai	Director	March 14, 2011

/s/ Ronald A. Cohan Ronald A. Cohan	Director	March 14, 2011

/s/ D. Paul Regan	Director	March 14, 2011
D. Paul Regan

/s/ Timothy B. Nyman Timothy B. Nyman	Director	March 14, 2011

/s/ Francis Chen Francis Chen	Director	March 14, 2011

Index to Financial Statements


	Page
Item 8. — Financial Statements of Solar Power, Inc., a California corporation
Report of Independent Registered Public Accounting Firm — Perry-Smith LLP		F-2
Report of Independent Registered Public Accounting Firm — Macias Gini & O’Connell LLP		F-3
Consolidated Balance Sheets as of December 31, 2010 and 2009		F-4
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009		F-6
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended December 31, 2010 and 2009		F-7
Notes to Consolidated Financial Statements		F-8

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Solar Power, Inc.

We have audited the accompanying consolidated balance sheet of Solar Power, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solar Power, Inc. and subsidiaries at December 31, 2010, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Perry-Smith LLP

Sacramento, California

March 14, 2011

F-2

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Solar Power, Inc.

Roseville, California

We have audited the accompanying consolidated balance sheet of Solar Power, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solar Power, Inc. and subsidiaries at December 31, 2009, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Macias Gini & O’Connell LLP

Sacramento, California

May 14, 2010, except for the restatement discussed in Note 18, as to which the date is March 14, 2011.

F-3

SOLAR POWER, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2010 and 2009

(dollars in thousands, except for par value and share data)


	2010			2009

ASSETS
Current assets:
Cash and cash equivalents	$	1,441		$	3,136
Accounts receivable, net of allowance for doubtful accounts of $28 and $395 at December 31, 2010 and 2009, respectively and net of deferred revenues at December 31, 2009 (note 12)		5,988			17,985
Costs and estimated earnings in excess of billings on uncompleted contracts		2,225			7,800
Note receivable, net of deferred revenue — current portion at December 31, 2009 (note 12)		—			—
Inventories, net		4,087			5,213
Asset held for sale (Note 2 and 13)		6,669			—
Prepaid expenses and other current assets		702			1,275
Restricted cash		285			280

Total current assets		21,397			35,689

Goodwill		435			435
Note receivable, net of deferred revenue — long term portion at December 31, 2009 (note 12)		—			—
Restricted cash		1,059			—
Property, plant and equipment at cost, net		915			1,390

Total assets	$	23,806		$	37,514

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	6,055		$	16,110
Accrued liabilities		4,298			4,201
Income taxes payable		2			291
Billings in excess of costs and estimated earnings on uncompleted contracts		1,767			154
Loans payable and capital lease obligations		3,808			260

Total current liabilities		15,930			21,016
Loans payable and capital lease obligations, net of current portion		13			53

Total liabilities		15,943			21,069


Commitments and contingencies

Stockholders’ equity
Preferred stock, par $0.0001, 20,000,000 shares authorized, none issued and outstanding at December 31, 2010 and 2009		—			—
Common stock, par $0.0001, 100,000,000 shares authorized 52,292,576 shares issued and outstanding at December 31, 2010 and 2009		5			5
Additional paid in capital		42,114			41,808
Accumulated other comprehensive loss		(240	)		(222	)
Accumulated deficit		(34,016	)		(25,146	)

Total stockholders’ equity		7,863			16,445

Total liabilities and stockholders’ equity	$	23,806		$	37,514

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

F-4

SOLAR POWER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2010 and 2009

(dollars in thousands, except for per share and share data)


	2010			2009

Net sales	$	34,036		$	52,551
Cost of goods sold		29,282			45,788

Gross profit		4,754			6,763

Operating expenses:
General and administrative		7,578			8,849
Sales, marketing and customer service		3,652			3,841
Engineering, design and product management		947			939

Total operating expenses		12,177			13,629


Operating loss		(7,423	)		(6,866	)

Other income (expense):
Interest expense		(450	)		(49	)
Interest income		—			12
Other expense		(1,138	)		(21	)

Total other expense		(1,588	)		(58	)


Loss before income taxes		(9,011	)		(6,924	)

Income tax (benefit) expense		(141	)		46


Net loss	$	(8,870	)	$	(6,970	)


Net loss per common share:
Basic	$	(0.17	)	$	(0.17	)

Diluted	$	(0.17	)	$	(0.17	)


Weighted average number of common shares used in computing per share amounts
Basic		52,292,576			41,787,637

Diluted		52,292,576			41,787,637

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

F-5

SOLAR POWER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2010 and 2009

(in thousands)


	2010			2009

Cash flows from operating activities:
Net loss	$	(8,870	)	$	(6,970	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		526			827
Amortization of loan fees		5			—
Stock issued for services		—			127
Stock-based compensation expense		306			709
Bad debt expense		523			418
Income tax expense		—			43
Loss on disposal of fixed assets		21			15
Changes in operating assets and liabilities:
Accounts receivable		11,474			(15,394	)
Costs and estimated earnings in excess of billing on uncompleted contracts		18			(7,506	)
Inventories		1,126			(546	)
Asset held for sale		(1,112	)		—
Prepaid expenses and other current assets		856			(363	)
Accounts payable		(10,055	)		12,194
Income taxes payable		(289	)		—
Billings in excess of costs and estimated earnings on uncompleted contracts		1,613			(6	)
Deferred revenue		—			(125	)
Accrued liabilities		(89	)		1,005

Net cash used in operating activities		(3,947	)		(15,572	)
Cash flows from investing activities:
Acquisitions of property, plant and equipment		(63	)		(53	)

Net cash used in investing activities		(63	)		(53	)
Cash flows from financing activities:
Proceeds from issuance of common stock		—			12,943
Restricted cash		(1,064	)		247
Principal payments on notes and capital leases payable		(400	)		(341	)
Net proceeds from loan payable		3,899			—
Payment of loan fees		(102	)		—

Net cash provided by financing activities		2,333			12,849

Decrease in cash and cash equivalents		(1,677	)		(2,776	)
Cash and cash equivalents at beginning of period		3,136			5,915
Effect of exchange rate changes on cash		(18	)		(3	)

Cash and cash equivalents at end of period	$	1,441		$	3,136


Supplemental disclosure of cash flow information:
Cash paid for interest	$	435		$	44

Cash paid for income taxes	$	126		$	3


Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired through notes payable and capital leases	$	9		$	—
Amounts reclassified from costs and estimated earnings in excess of billing on uncompleted contracts to assets held for sale	$	5,557			—
Stock issued for services		—			127

	$	5,566		$	127

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

F-6

SOLAR POWER, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

For the Years Ended December 31, 2010 and 2009

(dollars in thousands, except for share data)


										Accumulated Other
	Common Stock				Additional		Accumulated			Comprehensive
	Shares		Amount		Paid-In Capital		Deficit			Loss			Total

Balance January 1, 2009		37,771,325	$	4	$	28,029	$	(18,176	)	$	(222	)	$	9,635
Comprehensive income

Net loss								(6,970	)					(6,970	)

Translation adjustment											—			—


Total comprehensive loss														(6,970	)

Issuance of stock for option exercises		76,750		—		77								77

Issuance of restricted stock		237,501		—		197								197

Issuance of stock for services		130,000		—		127								127

Issuance of stock, net of costs		14,077,000		1		12,866								12,867

Stock-based compensation expense						512								512


Balance December 31, 2009		52,292,576		5		41,808		(25,146	)		(222	)		16,445
Comprehensive income

Net loss								(8,870	)					(8,870	)

Translation adjustment											(18	)		(18	)


Total comprehensive loss														(8,888	)

Stock-based compensation expense						306								306

Balance December 31, 2010		52,292,576	$	5	$	42,114	$	(34,016	)	$	(240	)	$	7,863

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

F-7

SOLAR POWER, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Financial Statement Presentation

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

Solar Power, Inc. was incorporated in the State of California in 2006. In August 2006, the Company entered into a merger agreement with International Assembly Solutions, Limited (“IAS HK”) which was incorporated in Hong Kong in January 2005. Effective November 2006, the equity owners of IAS HK transferred all their equity interests to Solar Power, Inc.

In August 2006, the Company, Dale Renewable Consulting Inc. (DRCI) and Dale Stickney Construction, Inc., (DSCI) formalized an acquisition agreement (the Merger Agreement) and entered into an Assignment and Interim Operating Agreement (the “Operating Agreement”). As a result of the Operating Agreement the Company began consolidating the operations of DRCI from June 1, 2006.

In December 2006, Solar Power, Inc., a California corporation, became a public company through its reverse merger with Solar Power, Inc., a Nevada corporation (formerly Welund Fund, Inc.) We were considered the accounting acquirer after that merger. The accompanying consolidated financial statements reflect the results of the operations of Solar Power, Inc., a California corporation and its subsidiaries.

2. Summary of Significant Accounting Policies

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

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 the various limits of the country in which such balances are held. Limits in the jurisdictions in which we maintain cash deposits are as follows: U.S. FDIC limits are unlimited for checking accounts and $250,000 per depositor for other types of deposits, Hong Kong limits are HK$100,000 (approximately US$12,800) per account, but through 2010, that limit is raised to 100% of the deposit and in the PRC coverage is not afforded on any cash deposit. The Company has not experienced any losses with respect to bank balances in excess of government provided insurance. At December 31, 2010 and 2009, the Company held approximately $2,255,000 and $3,099,000 in cash and cash equivalents and restricted cash balances in excess of the insurance limits.

Inventories —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 fiscal year ended December 31, 2009 or on prior fiscal years. 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 — Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) 260 Earnings Per Share, provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and 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

F-8

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 years ended December 31, 2010 and 2009 nil and 298,785 shares of common stock equivalents, respectively were excluded from the computation of diluted earnings per share since their effect would be anti-dilutive.

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


	December 31,
	2010		2009

Weighted Average Shares Outstanding
Basic		52,292,576		41,787,637
Dilutive effect of warrants outstanding		—		—
Dilutive effect of stock options outstanding		—		—

Diluted		52,292,576		41,787,637

Property 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
Trucks		3 years
Leasehold improvements		the shorter of the estimated life or the lease term

Goodwill — Goodwill is the excess of purchase price over the fair value of net assets acquired. The Company applies FASB ASC 350-20 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. The Company evaluated the carrying value of its goodwill at December 31, 2010 and 2009, and determined that no impairment of goodwill was identified during any of the periods presented.

Revenue recognition

Photovoltaic installation, integration and sales — In our photovoltaic systems installation, integration and 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 year ended December 31, 2009, the Company did recognize one product sale on a bill and hold arrangement. The customer requested that we store product to combine with a subsequent order in order to reduce their transportation costs. Since all criteria for revenue recognition had been met the Company recognized revenue on the sale. There were no bill and hold arrangements during the year ended December 31, 2010.

F-9

revenue recognition. However, in the fourth quarter of 2009 the Company modified its revenue recognition method on this contract to the zero margin method since the financing structure the customer had in place to pay the outstanding balance on the contract did not fund as expected. The contract was for approximately $19,557,000. As of December 31, 2009 the Company had recognized revenue on the contract up to the incurred contract cost of approximately $14,852,000, deferring revenue of approximately $4,563,000. In December 2009 the Company made certain guarantees to assist its customer in obtaining financing for the contract. The Company recorded a liability at the estimated fair value of approximately $142,000 related to these guarantees. At December 31, 2010 the fair value of the guarantee, net of amortization was approximately $127,000. As of December 31, 2009, the deferred revenue of $4,563,000 had been netted on our balance sheet against the note and accounts receivable related to this contract. On December 22, 2010, the Company entered into a Note Purchase and Sale Agreement discounting the note receivable and receiving a cash payment of $1,000,000. The purchase price of the note was determined based on the present value of the obligation over the likely repayment period, the risk involved with the payment of such term, and the unsecured nature of the obligation, and the release of any claims against the Company by the issuer of the note related to the finance structure and assumptions. As a result of the transaction, the Company recognized approximately $464,000 of the revenue that had been previously deferred and that as a result of the transaction there was no additional revenue to be recognized and the note has been settled.

Additionally, in 2009, for a separate construction contract the Company determined the use of the completed contract method of revenue recognition was appropriate. At December 31, 2009 we recorded on our balance sheet approximately $5,557,000 of cost related to this contract in the caption cost and estimated earnings in excess of billings on uncompleted contracts. In our second fiscal quarter ended June 30, 2010 it was determined that the customer was unable to perform on its payment obligations under the contract. The Company took possession of the facility and its related Power Purchase Agreement (“PPA”) in lieu of payment. The Company reclassified the amount recorded in costs and estimated earnings in excess of billings on uncompleted contracts (approximately $5,557,000) and the remaining costs to complete the contract (approximately $4,459,000) to assets held for sale on its balance sheet. At December 31, 2010, the value of the asset held for sale on our balance sheet is approximately $6,669,000, the cost of the project (approximately $10,016,000) less the Section 1603 grant-in-lieu of tax credits of approximately $3,347,000.

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. 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 December 31, 2010 and 2009 the Company has recorded an allowance of approximately $28,000 and $395,000, respectively.

F-10

Allowance for bad debts as of December 31, 2010 and 2009 was as follows (in thousands):


	2010			2009

Balance January 1	$	395		$	49
Provision		523			418
Write offs		(890	)		(72	)
Recoveries		—			—

Balance December 31	$	28		$	395

Shipping and handling cost — Shipping and handling costs related to the delivery of finished goods are included in cost of goods sold. During the years ended December 31, 2010 and 2009, shipping and handling costs expensed to cost of goods sold were approximately $724,000 and $1,001,000, 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 $131,000 and $198,000 during the years ended December 31, 2010 and 2009, respectively.

Stock-based compensation — The Company accounts for stock-based compensation under the provisions of FASB ASC 718 Share-Based Payment, 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.

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 and our cable, wire and mechanical assemblies business, historically our warranty claims have not been material. In our cable, wire and mechanical assemblies segment our current standard product warranty for our mechanical assembly products ranges from one to five years. 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. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to our historical data and the historical data reported by other solar system installers and manufacturers. The Company has provided a warranty reserve of approximately $296,000 and $503,000 for the years ended December 31, 2010 and 2009, respectively.

The accrual for warranty claims consisted of the following at December 31, 2010 and 2009 (in thousands):


	2010		2009

Beginning balance	$	1,246	$	743
Provision charged to warranty expense		296		503
Less: warranty claims		—		—

Ending balance	$	1,542	$	1,246

Performance Guarantee

On December 18, 2009, the Company entered into a 10-year energy output guaranty related to the photovoltaic system installed for Solar Tax Partners 1, LLC (“STP”) at the Aerojet facility in Rancho Cordova, CA. The guaranty provided for compensation to STP’s system lessee for shortfalls in production related to the design and operation of the system, but excluding shortfalls outside the Company’s control such as government regulation. The Company believes that the probability of a shortfall is unlikely and if they should occur be covered under the provisions of its current panel and equipment warranty provisions. For the fiscal year ended December 31, 2010 there were no charges against our reserves related to this performance guarantee.

F-11

Accrued guarantee costs at December 31, 2010 and 2009 were as follows (in thousands):


Balance January 1	$	142		$	—
Additions		—			142
Amortization		(15	)		—

Balance December 31	$	127		$	142

Income taxes — We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon the weight of available evidence, including expected future earnings. A valuation allowance is recognized if it is more likely than not that some portion, or all of a deferred tax asset will not be realized.

The Company accounts for income taxes using FASB ASC 740 Accounting for Income Taxes, which is intended to create a single model to address uncertainty in income tax positions. ASC 740 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, ASC 740 clearly scopes out income taxes from FASB ASC 450.

ASC 740 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. ASC 740 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 effective settlement. This is determined on a cumulative probability basis.

The Company elects to accrue any interest or penalties related to its uncertain tax positions as part of its income tax expense.

Foreign currency translation — The consolidated financial statements of the Company are presented in U.S. dollars and the Company conducts substantially all of its 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 these subsidiaries are translated at average annual exchange rates. Gains and losses arising from the translation of the financial statements of these subsidiaries are not included in determining net income but are accumulated in a separate component of stockholders’ equity as 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 foreign currency transactions are included in income.

Aggregate net foreign currency transaction expense included in the income statement was approximately $1,025,000 and $91,000 for the years ended December 31, 2010 and 2009, respectively.

Comprehensive income (loss) — FASB ASC 220 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 years ended December 31, 2010 and 2009, comprehensive loss was approximately $8,888,000 composed of a net loss of approximately $8,870,000 and currency translation loss of approximately $18,000 and $6,970,000, composed entirely of a net loss, respectively.

Post-retirement and post-employment benefits — The Company’s subsidiaries which are located in the People’s Republic of China and Hong Kong contribute to a state pension scheme on behalf of its employees. The Company recorded approximately $118,000 and $66,000 in expense related to its pension contributions for the years ended December 31, 2010 and 2009, 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.

F-12

Presentation — Prior period presentations have been modified to conform to current presentations.

3. Recently Issued Accounting Pronouncements

F-13

4. Restricted Cash

At December 31, 2010, the Company had restricted bank deposits of approximately $1,344,000. The restricted bank deposits consist of approximately $1,004,000 as a reserve pursuant to our guarantees of our customer Solar Tax Partners 1, LLC with the bank providing the debt financing on their solar generating facility (subsequent to year end, in January, 2011, Solar Tax Partners 1, LLC refinanced their loan reducing the amount of restricted cash to $400,000), approximately $285,000 as a reserve pursuant to our loan agreement with the bank providing the debt financing for the solar generating facility owned by our subsidiary, Solar Tax Partners 2, LLC, approximately $20,000 securing our corporate credit card and approximately $35,000 as retention by our bank for our merchant credit card services. At December 31, 2009, the Company’s restricted bank deposits of $280,000 as collateral for the outstanding letter of credits in the amount of $255,000 and the Company’s bank credit card of $25,000.

5. Inventories

Inventories consisted of the following at December 31 (in thousands):


	2010			2009

Raw material	$	2,137		$	2,348
Finished goods		2,079			2,882
Provision for obsolete stock		(129	)		(17	)

	$	4,087		$	5,213

6. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at December 31 were (in thousands):


	2010		2009

Rental, equipment and utility deposits	$	177	$	189
Supplier deposits		24		606
Insurance		94		188
Advertising		105		160
Taxes		141		—
Loan fees		96		—
Other		65		132

	$	702	$	1,275

7. Property and Equipment

Property and equipment consisted of the following at December 31 (in thousands):


	2010			2009

Plant and machinery	$	686		$	669
Furniture, fixtures and equipment		351			345
Computers and software		1,437			1,424
Trucks		118			246
Leasehold improvements		402			410

Total cost		2,994			3,094
Less: accumulated depreciation		(2,079	)		(1,704	)

	$	915		$	1,390

Depreciation expense was approximately $526,000 and $827,000 for the years ended December 31, 2010 and 2009, respectively.

F-14

8. Accrued Liabilities

Other accrued liabilities at December 31 were (in thousands):


	2010		2009

Accrued payroll and related costs	$	462	$	770
Sales tax payable		965		874
Warranty reserve		1,542		1,246
Customer deposits		368		566
Insurance premium financing		—		141
Accrued commission		—		276
Accrued financing costs		578		—
Accrued guarantee reserve, net		127		142
Other		256		186

	$	4,298	$	4,201

9. Stockholders’ Equity

Issuance of common stock

On October 6, 2009, the Company issued 120,000 shares of its common stock pursuant to a resolution of the Company’s Board of Directors, on October 6, 2009, in settlement of an obligation. The shares were fair-valued at $1.00, the closing price of the Company’s common stock on October 6, 2009 and the Company settled approximately $120,000 in accounts payable related to this transaction.

On September 23, 2009 and October 2, 2009, we completed a private placement of 14,077,000 shares of restricted common stock at a purchase price of $1.00 per share to 31 accredited investors. After the costs of the transaction, the Company recorded net proceeds of approximately $12,867,000.

On May 15, 2009, the Company issued 10,000 shares of its common stock pursuant to a resolution of the Company’s Board of Directors, on February 27, 2009, as compensation for services. The shares were fair-valued at $0.74, the closing price of the Company’s common stock on May 15, 2009 and the Company recorded approximately $7,400 in expense related to this transaction.

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.

Issuance of warrants to purchase common stock

In October 2010, in conjunction with a consulting agreement, we issued a warrant to purchase 500,000 shares of our common stock to a consultant at an exercise price of $0.25 per share. The warrant is exercisable over a five-year period and vests based on certain performance criteria. This warrant was fair-valued at $0.23 per share using the Black-Scholes model. The warrant expires on October 1, 2015. Since the warrant is performance based no expense was recorded for the fiscal year ended December 31, 2010.

F-15

The following table summarizes the Company’s warrant activity:


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

Outstanding as of January 1, 2009		2,366,302		2.88		2.35	$	—
Issued		—		—		—		—
Exercised		—		—		—		—
Cancelled or expired		—		—		—		—

Outstanding as of December 31, 2009		2,366,302		2.88		1.91		—
Issued		500,000		0.25		5.00		—
Exercised		—		—		—		—
Cancelled or expired		—		—		—		—

Outstanding December 31, 2010		2,866,302	$	2.42		2.11	$	—

Exercisable December 31, 2010		2,366,302	$	2.88		1.55	$	—

Assumptions used in the determination of the fair value of warrants issued during 2010 using the Black-Scholes model were as follows:

Expected

Risk-free

Weighted Average

Exercise

Fair-Value

Term in

interest

Remaining

Dividend

Date Issued

Price

(in thousands)

years

rate

Contractual Life

Volatility

Yield

In conjunction with a project development agreement

10/01/2010

0.25

113

5.00

1.70

4.75

169.2

10. Income Taxes

Loss before provision for income taxes is attributable to the following geographic locations for the years ended December 31 (in thousands):


	2010			2009
United States	$	(8,216	)	$	(8,498	)
Foreign		(795	)		1,574

	$	(9,011	)	$	(6,924	)

As of December 31, 2010, the Company had a net operating loss carry forward for federal income tax purposes of approximately $34.8 million, which will start to expire in the year 2027. The Company had a total state net operating loss carry forward of approximately $34.4 million, which will start to expire in the year 2017.

Utilization of the federal and state net operating loss may be subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

F-16

The (benefit) provision for income taxes consists of the following for the year ended December 31 (in thousands):


	2010			2009
Current:
Federal	$	—		$	—
State		3			3
Foreign		(144	)		43

Total provision (benefit) for income taxes	$	(141	)	$	46

The reconciliation between the actual income tax expense and income tax computed by applying the statutory U.S. Federal income tax rate of 35% to pre-tax loss before provision for income taxes for the years ended December 31 are as follows (in thousands):


	2010			2009
(Benefit) Provision for income taxes at U.S. Federal statutory rate	$	(3,154	)	$	(2,432	)
State taxes, net of federal benefit		2			2
Foreign taxes at different rate		134			(509	)
Non-deductible expenses		5			8
Valuation allowance		2,872			2,978
Other		—			(1	)

	$	(141	)	$	46

Deferred income taxes reflect the net tax effects of loss carry forwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets for federal, state and foreign income taxes are as follows at December 31 are presented below (in thousands):


	2010			2009
Deferred income tax assets:
Net operating loss carry forwards	$	14,282		$	11,621
Temporary differences due to accrued warranty costs		631			550
Temporary differences due to Compensation related accruals		1,015			337
Other temporary differences		49			133

		15,977			12,641
Valuation allowance		(15,977	)		(12,641	)

Total deferred income tax assets		—			—

Net deferred tax assets	$	—		$	—

FASB ACS 740-10-05 provides for the recognition of deferred tax assets if it is more likely than not that those deferred tax assets will be realized. Management reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income in assessing the need for a valuation allowance to reduce deferred tax assets to their estimated realizable value. Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Because of our lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $3.3 million during the year ended December 31, 2010, primarily as a result of operating losses. The valuation allowance increased by $3.8 million during the year ended December 31, 2009, primarily as a result of operating losses.

The Company has not provided for U.S. income taxes on undistributed earnings of its Hong Kong subsidiary because they are considered permanently invested outside of the U.S. Upon repatriation, some of these earnings could generate foreign tax credits which may reduce the U.S. tax liability associated with any future dividend. At December 31, 2010, the cumulative amount of earnings upon which U.S. income taxes have not been provided was approximately $621 thousand.

F-17

The Company has no unremitted foreign earnings as of December 31, 2010 from its PRC operations.

PRC Taxation — Our PRC subsidiary of the Company is a foreign investment enterprise established in Shenzhen, the PRC, and is engaged in production-oriented activities; under the corporate income tax laws enacted in 2007, a foreign investment enterprise is generally subject to income tax at a 25% rate. The subsidiary of the Company was granted income tax incentives prior to 2007 and will continue to enjoy the tax incentives under the grandfather rules provided by the 2007 law. The incentive provides that the subsidiary is exempted from the PRC enterprise income tax for two years starting from the first profit-making year, followed by a 50% tax exemption for the next three years. The subsidiary’s first profitable year was 2007. As a result of operating losses for the fiscal year ended December 31, 2010, no provision was made. A provision of $15,000 has been provided for the year ended December 31, 2009.

Hong Kong Taxation — A subsidiary of the Company is incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. The applicable profits tax rate for all periods is 17.5%. A provision of approximately $11,000 and $28,000 for profits tax was recorded for the years ended December 31, 2010 and 2009, respectively.

We evaluate our income tax positions and record tax benefits for those tax positions where it is more likely than not that a tax benefit will be sustained. We have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate or effective settlement with a taxing authority that has full knowledge of all relevant information. For those tax positions where it is not more likely than not that a tax position will be sustained, no tax benefit has been recognized in the financial statements. When applicable, associated interest and penalties have been recognized as a component of income tax expense. During 2010 the company filed tax returns and settled all uncertain tax positions recorded during 2009 and previous years for approximately $120,000. At December 31, 2010 and 2009, the liabilities related to total unrecognized tax positions were zero and $275 thousand respectively, all of which had an impact on the effective tax rate in 2010. While the Company does not expect that the total amount of unrecognized benefit will significantly change over the next 12 months, it is reasonably possible that a change could occur. The Company had no accrued interest and penalties at December 31, 2010 and 2009, and had insignificant interest and penalty expense for the years ending December 31, 2010 and 2009.

We file income tax returns in the U.S., as well as California, Colorado, and certain other foreign jurisdictions. We are currently not the subject of any income tax examinations. The Company’s tax returns remain open for examination for years beginning in 2007 and subsequent years.

Reconciliation of the unrecognized tax benefits for the years ended December 31, 2010 and 2009 are as follows (in thousands):


	2010			2009
Beginning balance	$	275		$	248
Additions for current year tax positions		—			27
Reductions for current year tax positions		—			—
Additions for prior year tax positions		—			—
Reductions for prior year tax positions		(155	)		—
Settlements		(120	)		—

Ending balance	$	—		$	275

11. Stock-based Compensation

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 FASB ACS 715. Prior to 2006 the Company had not issued stock options or other forms of stock-based compensation.

F-18

The following table summarizes the consolidated stock-based compensation expense, by type of awards (in thousands):


	Years Ended December 31
	2010		2009

Employee stock options	$	272	$	512
Restricted stock		34		197

Total stock-based compensation expense	$	306	$	709

The following table summarizes the consolidated stock-based compensation by line items (in thousands):


	Years Ended December 31
	2010			2009
General and administrative	$	162		$	536
Sales, marketing and customer service		84			136
Engineering, design and product development		60			37

Total stock-based compensation expense		306			709
Tax effect on stock-based compensation expense		—			—

Total stock-based compensation expense after income taxes	$	306		$	709

Effect on net loss per share:
Basic and diluted	$	(0.001	)	$	(0.017	)

As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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 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. In the case of performance-based stock options, amortization does not begin until it is determined that meeting the performance criteria is probable. Service-based and performance-based options typically have a five year life from date of grant and vesting periods of three to four years. Prior to September 23, 2007 the fair value of share awards granted was determined by the last private placement price of our common stock since our shares were not trading during that time.

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 No. 107”) for estimating the expected term of the stock-based award, instead of historical exercise data. Prior to 2006 the Company did not issue share-based payment awards and as a result there is no historical data on option exercises. 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 has chosen to use its historical volatility rates to calculate the volatility for its granted options.

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 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.

F-19

Assumptions used in the determination of the fair value of share-based payment awards using the Black-Scholes model were as follows:


	2010					2009
	Service-based			Performance-based		Service-based			Performance-based
Expected term		3.25-3.75			N/A		3.25 - 3.75			N/A
Risk-free interest rate		1.70	%		N/A		1.72	%		N/A
Volatility		72%-75	%		N/A		74% - 88	%		N/A
Dividend yield		0	%		N/A		0	%		N/A

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 (“Option”), 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 at a rate of 25% per year over four years.

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 December 31, 2010 there were approximately 4,964,299 shares available to be issued under the plan (9% of the outstanding shares of 52,292,576 plus outstanding warrants of 2,866,302). There were 3,056,043 options and restricted shares issued under the plan, 164,195 options exercised under the plan and 1,744,061 shares 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.

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


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

Outstanding as of January 1, 2009		2,356,900			1.28		3.45	$	—
Granted		489,500			1.10		3.78		63,635
Exercised		(76,750	)		1.00		—		—
Forfeited		(75,250	)		1.00		—		—

Outstanding as of December 31, 2009		2,694,400			1.20		2.80		80,832
Granted		1,331,000			0.84		4.38		—
Exercised		—			—		—		—
Forfeited		(1,520,225	)		1.34		—		—

Outstanding December 31, 2010		2,505,175		$	0.92		2.99	$	—

Exercisable December 31, 2010		1,171,050		$	1.08		1.59	$	—

The weighted-average grant-date fair value of options granted during 2010 and 2009 was $0.84 and $0.75, respectively. The total intrinsic value of options exercised during 2010 and 2009 was nil.

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


	Shares
Outstanding January 1, 2009		313,367
Granted		237,501
Forfeited		—

Outstanding as of December 31, 2009		550,868
Granted		—
Forfeited		—

Outstanding as of December 31, 2010		550,868

Vested as of December 31, 2010		525,868

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


	Stock-based Options					Performance-based Options					Restricted Stock
				Weighted-Average					Weighted-Average					Weighted-Average
				Grant Date Fair					Grant Date Fair					Grant Date Fair
	Shares			Value Per Share		Shares			Value Per Share		Shares			Value Per Share
Non-vested as of January 1, 2009		1,124,334		$	0.84		50,000		$	0.73		75,000		$	1.20
Granted		489,500			0.45		—			—		237,501			0.83
Vested		(494,334	)		0.79		(50,000	)		0.73		(262,501	)		1.34
Forfeited		(75,250	)		0.61		—			—		—			—

Non-vested as of December 31, 2009		1,044,250			0.71		—			—		50,000			1.34
Granted		1,331,000			0.34		—			—		—			—
Vested		(288,875	)		0.69		—			—		(25,000	)		1.34
Forfeited		(752,250	)		0.64		—			—		—			—

Non-vested as of December 31, 2010		1,334,125		$	0.78		—		$	—		25,000		$	1.34

As of December 31, 2010, there was approximately $504,000, $0 and $31,000 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 3.25 years for service-based options and 1.0 years for restricted stock grants. The total fair value of shares vested during the year ended December 31, 2010 was $272,000, $0 and $34,000 for service-based options, performance-based options and restricted stock grants, respectively. The total fair value of shares vested during the year ended December 31, 2009 was $479,000, $33,000 and $197,000 for service-based options, performance-based options and restricted stock grants, respectively. There were no changes to the contractual life of any fully vested options during the years ended December 31, 2010 and 2009.

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12. Note Receivable

On December 22, 2009 the Company entered into a Promissory Note (“Note”) in the amount of three million six hundred thirty thousand one hundred sixty four dollars ($3,630,164) with HEK Partners, LLC (“HEK”) in connection with a completed Engineering, Procurement and Construction Agreement (“EPC”) between Solar Tax Partners 1, LLC (“STP1”) and the Company. The note receivable represented partial consideration for the total commitment due under the EPC of $19,557,000. HEK, the maker of the Note, is the managing partner of STP1 and has agreed to assume this obligation as part of its capital contribution to STP1. HEK will make periodic payments under this Note with a payment of one million dollars ($1,000,000) on or before December 31, 2010 and thereafter will make annual payments, prior to the maturity date, in amounts equal to the percent (10%) of the outstanding principal balance on the Note, with a final payment due on December 31, 2016. Payments will be applied first to any fees or charges due under the Note, second to accrued interest and third to the principal balance. The Note bears interest of 6.5% per annum. The Note was issued in connection with a construction contract recorded under the zero margin method (see Note 2). At December 31, 2009 deferred revenue of approximately $4,563,000 has been netted against the note receivable and accounts receivable related to the contract. The deferred revenue will be recognized in income as the Note and receivable is collected.

On December 22, 2010, the Company entered into a Note Purchase and Sale Agreement, discounting the note receivable and receiving a cash payment of $1,000,000. The purchase price of the note was determined based on the present value of the obligation over the likely repayment period, the risk involved with the payment of such term, and the unsecured nature of the obligation, and the release of any claims against the Company by the issuer of the Note related to the finance structure and assumptions. As a result of the transaction, the Company recognized approximately $464,000 of the revenue that had been previously deferred and that as a result of the transaction the is no additional revenue to be recognized and the note has been settled.

13. Asset Held for Sale

During the twelve months ended December 31, 2010 the Company recorded an asset held for sale of approximately $10,016,000. The Company used the guidance under FASB ACS 360-10-45-9 to evaluate the classification, as discussed in Note 2. The asset held for sale resulted from the Company taking possession of a solar facility for which the customer was unable to complete payment. The Company expects that this asset will be sold within the next twelve months and is currently marketing the facility for sale. At December 31, 2010, the asset held for sale on the consolidated balance sheet was reduced by approximately $3,347,000 to $6,669,000 for funds received from the United States Treasury under Section 1603, Payment for Specified Energy Property in Lieu of Tax Credits. Accordingly, the asset held for sale is recorded as a current asset in the consolidated balance sheet as of December 31, 2010.

14. Loans Payable and Capital Lease Obligations

On June 1, 2010, our wholly-owned subsidiary, Solar Tax Partners 2, LLC (“STP 2”), and Five Star Bank (“Five Star”) entered into a Loan Agreement (the “Loan Agreement”). Under the Loan Agreement, Five Star agreed to advance a loan in an amount equal to $3,898,560 at an interest rate equal to 8.00% per annum. The Loan Agreement is evidenced by a Promissory Note, which is payable in 120 equal monthly payments of $47,535 commencing on July 15, 2010 through the maturity date of the loan, which is the earlier of June 15, 2020 or the date on which Aerojet General Corporation terminates that certain Power Purchase Agreement with STP 2 (the “PPA”) or purchases the solar power generation facility pursuant to the PPA. The Loan Agreement contains customary representations, warranties and financial covenants. In the event of default as described in the Loan Agreement, the accrued and unpaid interest and principal immediately becomes due and payable and the interest rate increases to 12.00% per annum. Borrowings under the Loan Agreement are secured by (i) a blanket security interest in all of the assets of STP 2, and (ii) a first priority lien on the easement interest, improvements, and fixtures and other real and personal property related thereto located on the property described in the Loan Agreement. The primary asset is a power generating facility recorded as an asset held for sale which is discussed in Note 13 above. The note payable of $3,782,000 has been recorded as a current liability in the December 31, 2010 balance sheet since if the facility is sold the Loan could contractually be required to be paid and the facility is expected to be sold in twelve months.

The Company was obligated under loans payable requiring minimum payments as follows (in thousands):


Years ending December 31,
2011	$	3,804
2012		5
2013		—

		3,809
Less current portion		(3,804	)

Long-term portion	$	5

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The Company leases equipment under capital leases. The leases expire from 2012 to 2013. The Company was obligated for the following minimum payments under these leases (in thousands):


Years ending December 31,
2011	$	7
2012		6
2013		2
Less amounts representing interest		(3	)

Present value of net minimum lease payments		12
Less current portion		(4	)

Long-term portion	$	8

15. Commitments and Contingencies

	•		Recapture Event — The Company shall be responsible for providing Greystone with payments for losses due to any recapture, reduction, requirement to repay, loss or disallowance of certain tax credits (Energy Credits under Section 48 of Code) or Cash Grant (any payment made by US Dept. of Treasure under Section 1603 of the ARRT of 2009) or if the actual Cash Grant received by Master Tenant is less that the Anticipated Cash Grant (equal to $6,900,000);

	•		Repurchase obligation — If certain criteria occur prior to completion of the Facility, including event of default, if the managing member defaults under the operating agreement or the property or project are foreclosed on, or if the property qualifies for less than 70% of projected credits (computed as an attachment to Master Tenants operating agreement), SPI would be required to fund the purchase of Greystone’s interest in Master Tenant if the managing member failed to fund the repurchase;

	•		Fund Excess Development Costs — The Company would be required to fund costs in excess of certain anticipated development costs;

	•		Operating Deficit Loans — The Company would be required to loan Master Tenant or STP1 monies necessary to fund operations to the extent costs could not be covered by Master Tenant’s or STP1’s cash inflows. The loan would be subordinated to other liabilities of the entity and earn no interest; and

	•		Exercise of Put Options — At the option of Greystone, the Company may be required to fund the purchase by managing member of Greystone’s interest in Master Tenant under an option exercisable for 9 months following a 63 month period commencing with operations of the Facility. The purchase price would be equal to the greater of the fair value of Greystone’s equity interest in Master Tenant or $951,985.

F-23

Operating leases — The Company leases premises under various operating leases which expire through 2012. Rental expenses under operating leases included in the statement of operations were approximately $703,000 and $780,000 for the years ended December 31, 2010 and 2009, respectively.

On December 1, 2010 we leased approximately 3,900 square feet of office space to accommodate our support services operations in Shenzhen, China. The term of the lease is three years and expires on November 30, 2013 at an annual rent of approximately $38,334.

Our corporate headquarters are located in Roseville, California in a space of approximately 19,000 square feet. The five year lease commenced on August 1, 2007 and expires in July 2012. The rent is currently $342,972 per year for the first year, $351,540 for the second year, $360,336 for the third year, $369,336 for the fourth year and $378,576 for the remainder of the lease. The Company has an option to renew for an additional five years.

The Company is obligated under operating leases requiring minimum rentals as follows (in thousands):


Years ending December 31,
2011	$	499
2012		316
2013		—

Total minimum payments	$	815

F-24

Litigation — 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.

16. Operating Risk

Concentrations of Credit Risk and Major Customers — A substantial percentage of the Company’s net revenue comes from sales made to a small number of customers and are typically sold on an open account basis. Details of customers accounting for 10% or more of total net sales for the years ended December 31, 2010 and 2009 are as follows (in thousands):


Customer	2010		2009
Temescal Canyon RV, LLC	$	7,659	$	—
Solar Tax Partners I LLC.		—		14,853
Bayer & Roach GmbH		—		5,857
Sun Technics Ltd.				6,473

	$	7,659	$	27,183

Details of the accounts receivable, and note receivable net of deferred revenue, and costs and estimated earnings in excess of billings on uncompleted contracts from the customers with the largest receivable balances (including all customers with accounts receivable balances of 10% or more of accounts receivable) at December 31, 2010 and 2009, respectively are (in thousands):


Customer	2010		2009
Temescal Canyon RV, LLC	$	1,897	$	—
Solar Tax Partners 1, LLC — accounts receivable		—		8,172
Solar Tax Partners 2, LLC — costs and estimated earnings in excess of Billings on uncompleted projects		—		5,557

	$	1,897	$	13,729

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. 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 construction contracts within cost of sales. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to our historical data and historical data reported by other solar system installers and manufacturers.

F-25

Performance Guarantee

17. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents and accounts receivable, prepayments, notes payable, accounts payable, accrued liabilities, accrued payroll and other payables approximate their respective fair values at each balance sheet date due to the short-term maturity of these financial instruments.

Fair Value Guarantee

Guarantees — In accordance with FASB ASC 820-10, the Company used multiple techniques to measure the fair value of the guarantees using Level 3 inputs; the results of each technique have been reasonably weighted based upon management’s judgment to determine the fair value of the guarantees at the measurement date. As a result of applying reasonable weights to each technique, the Company believes a reasonable estimate of fair value for the guarantees was approximately $142,000 at December 31, 2009. At December 31, 2010 the value of the guarantee on our consolidated balance sheet, net of amortization, was approximately $127,000.

18. Geographical Information

During August and September 2009, the Company terminated all existing franchise agreements and will no longer be seeking new franchisees. The Company entered into arrangements with most of its former franchisees in which they will distribute our Yes! Solar Solutions^TM branded products. Costs associated with the termination of franchise agreements were approximately $283,000 and were recorded in the Statements of Operations under the sales, marketing and customer service classification for the year ended December 31, 2009. The Company converted some of the former franchisees to authorized dealers. In August and September 2010 the Company terminated its dealer program. The Company determined that discontinued operations treatment was not required due to the fact that revenue generated from this segment was not material to total revenue.

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

F-26

Contributions of the major activities, profitability information and asset information of the Company’s reportable segments for the years ended December 31, 2010 and 2009 are as follows:


	Year ended December 31, 2010					Year ended December 31, 2009 (restated)
Segment (in thousands)	Net sales		Income (loss)			Net Sales		Income (loss)
Photovoltaic installation, integration and sales	$	30,719	$	(9,990	)	$	47,623	$	(8,576	)
Cable, wire and mechanical assemblies		3,317		979			4,928		1,652

Segment total		34,036		(9,011	)		52,551		(6,924	)
Reconciliation to consolidated totals:
Sales eliminations		—		—			—		—

Consolidated totals

Net sales	$	34,036				$	52,551

Income before taxes			$	(9,011	)			$	(6,924	)


	Year ended December 31, 2010					Year ended December 31, 2009 (restated)
Segment (in thousands)	Interest income		Interest expense			Interest income		Interest expense
Photovoltaic installation, integration and sales	$	—	$	(450	)	$	12	$	(49	)
Cable, wire and mechanical assemblies		—		—			—		—

Consolidated total	$	—	$	(450	)	$	12	$	(49	)


	Year ended December 31, 2010						Year ended December 31, 2009 (restated)
					Depreciation and						Depreciation and
Segment (in thousands)	Identifiable assets		Capital expenditure		amortization		Identifiable assets		Capital expenditure		amortization
Photovoltaic installation, integration and sales	$	21,164	$	63	$	518	$	36,488	$	53	$	801
Cable, wire and mechanical assemblies		2,642		—		8		1,026		—		26

Consolidated total	$	23,806	$	63	$	526	$	37,514	$	53	$	827

Net sales by geographic location are as follows:


	Year ended December 31, 2010						Year ended December 31, 2009 (restated)
	Photovoltaic						Photovoltaic
	installation,		Cable, wire and				installation,		Cable, wire and
	integration and		mechanical				integration and		mechanical
Segment (in thousands)	sales		assemblies		Total		sales		assemblies		Total
United States	$	23,592	$	2,313	$	25,905	$	25,034	$	3,884	$	28,918
Asia		236		—		236		6,630		—		6,630
Europe		6,733		—		6,733		13,001		—		13,001
Australia		—		—		—		2,958		—		2,958
Mexico		—		1,004		1,004		—		1,044		1,044
Other		158		—		158		—		—		—

Total	$	30,719	$	3,317	$	34,036	$	47,623	$	4,928	$	52,551

The location of the Company’s identifiable assets is as follows:


	Year ended December		Year ended December
Segment (in thousands)	31, 2010		31, 2009
United States	$	21,256	$	31,421
China (including Hong Kong)		2,550		6,093

Total	$	23,806	$	37,514

F-27

Income tax expense by geographic location is as follows:


	Year ended December			Year ended December
Segment (in thousands)	31, 2010			31, 2009
China (including Hong Kong)	$	(144	)	$	43
United States		3			3

Total	$	(141	)	$	46

19. Related Party Transactions

In the fourth quarter of 2009, the Company completed a system installation under an Engineering, Procurement and Construction Contract (“EPC”) entered into with Solar Tax Partners I, LLC, a California limited liability company (“STP1”). Subsequent to the end of fiscal 2009, Stephen C. Kircher, our Chief Executive Officer and Chairman of the Board, and his wife, Lari K. Kircher, as Co-Trustees of the Kircher Family Irrevocable Trust dated December 29, 2004 (“Trust”) was admitted as a member of STP1. The trust made a capital contribution of $20,000 and received a 35% membership interest in STP1. Stephen C. Kircher, as trustee of the Trust was appointed a co-manager of STP1. Neither Stephen C. Kircher nor Lari K. Kircher are beneficiaries under the Trust.

19. Subsequent Events

Subsequent to year end, on January 5, 2011, we entered into a Stock Purchase Agreement (‘SPA”) with LDK Solar Co., Ltd. (“LDK”) in connection with the sale and issuance by the Company of convertible Series A Preferred Stock and Common Stock. At the first closing on January 10, 2011, we issued 42,835,947 shares of our common stock at $0.25 per share, and received proceeds net of expenses of approximately $10,505,000. The second closing, expected to occur before the end of the first quarter of 2011, we will issue 20,000,000 shares of our Series A Preferred Stock receiving proceeds of $22,227,669.

Litigation

Subsequent to fiscal year end, on January 25, 2011, a putative class action was against the Company, the Company’s directors and LDK Solar Co., Ltd. (“LDK”), in the Superior Court of California, County of Placer. The complaint alleges violations of fiduciary duty by the individual director defendants concerning a proposed transaction described above, pursuant to which defendant LDK agreed to acquire 70% interest in the Company. Plaintiff contends that the independence of the individual director defendants was compromised because they are allegedly beholden to defendant LDK for continuation of their positions as directors and possible further employment. Plaintiff further contends that the proposed transaction is unfair because it allegedly contains onerous and preclusive deal protection devices, such as no shop, standstill and no solicitation provisions and a termination fee that operates to effectively prevent any competing offers. The complaint alleges that the Company aided and abetted the breaches of fiduciary duty by the individual director defendants by providing aid and assistance. Plaintiff asks for class certification, the enjoining of the sale, or if the sale is completed prior to judgment, rescission of the sale and damages.

The case is in its early stages and the Company intends to vigorously defend this action. Because the complaint was recently filed, it is difficult at this time to fully evaluate the claims and determine the likelihood of an unfavorable outcome or provide an estimate of the amount of any potential loss. The Company does have insurance coverage for this type of action.

F-28