SPI Energy Co., Ltd. - Quarter Report: 2012 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended September 30, 2012

For the transition period from              to             

Commission File Number 000-50142

SOLAR POWER, INC.

(Exact name of registrant as specified in its charter)

(916) 770-8100

(Issuer’s telephone number)

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  x    No  ¨

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

The number of outstanding shares of the registrant’s common stock as of November 14, 2012 was 198,214,456.

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PART I

FINANCIAL INFORMATION

SOLAR POWER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share data)

(unaudited)

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

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SOLAR POWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except for per share data)

(unaudited)

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

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SOLAR POWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)

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

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SOLAR POWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

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

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SOLAR POWER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of Business and Basis of Presentation

Description of Business

Solar Power, Inc. and its subsidiaries (collectively the “Company”) consist of the combination of the legacy reporting entity Solar Power, Inc. and Solar Green Technology S.p.A. (“SGT”) and their respective subsidiaries. Refer to Note 4—Acquisition of Solar Green Technology for further details of the accounting impact of the SGT acquisition.

The Company is a global solar energy facility (“SEF”) developer offering its own brand of high-quality, low-cost distributed generation and utility-scale SEF development services. Primarily, the Company works directly with and for developers around the world who hold large portfolios of SEF projects for whom it serves as an engineering, procurement and construction (“EPC”) contractor. The Company also performs as an independent, turnkey SEF developer for one-off distributed generation and utility-scale SEFs.

Basis of Presentation and Liquidity

The accompanying Condensed Consolidated Financial Statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. They should be read in conjunction with the financial statements and related notes to the financial statements of Solar Power, Inc. for the years ended December 31, 2011 and 2010 appearing in Solar Power, Inc.’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 16, 2012. The September 30, 2012 and 2011 unaudited interim Condensed Consolidated Financial Statements on Form 10-Q have been prepared pursuant to the rules and regulations of the SEC for smaller reporting companies. The financial statements for prior periods have been recast due to the accounting guidelines for a transfer of an entity under common control (refer to Note 4—Acquisition of Solar Green Technology). Certain information and note disclosures normally included in the annual financial statements on Form 10-K have been condensed or omitted pursuant to those rules and regulations, although the Company’s management believes the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operation for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

In January 2012, the Company reassessed its reportable segments and determined that the former cable, wire and mechanical assemblies operating segment no longer meets the qualitative and quantitative characteristics that require separate reporting. The basis for the reassessment is the decline in revenues related to this former segment. As such, effective January 2012, the Company operates in one reportable segment: photovoltaic installation, integration, and sales, the results of which are reflected in the Condensed Consolidated Financial Statements.

The Condensed Consolidated Financial Statements include the accounts of Solar Power, Inc. and its subsidiaries. Intercompany balances, transactions and cash flows are eliminated on consolidation.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements.

Our parent company, LDK Solar Co., Ltd. (“LDK”), who owns 70% of the Company’s outstanding Common Stock, has disclosed publicly that it had a net loss and negative cash flows from operations for the year ended December 31, 2011 and has a working capital deficit and was not in compliance with certain financial covenants on its indebtedness at December 31, 2011. These factors raise substantial doubt as to LDK’s ability to continue as a going concern. While management of LDK believes that it has a plan to satisfy LDK’s liquidity requirements for a reasonable period of time, there is no assurance that its plan will be successfully implemented. As a result of our close business relationship with, and equity ownership by, LDK and the relationship between LDK and China Development Bank (“CDB”), we are experiencing the following risks and uncertainties in our business:

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The significant risks and uncertainties described above could have a significant negative impact on the financial viability of Solar Power, Inc. and raise substantial doubt about the Company’s ability to continue as a going concern. Management has made changes to the Company’s business model to increase working capital by managing cash flow, securing project financing before commencing further project development, and requesting that the Company’s customers make cash payments for solar panels for projects under development. If the noted banks should call the debt or LDK demand payment of amounts owed by the Company prior to collection of the related receivables, management plans to obtain additional debt or equity financing. There is no assurance that management’s plans to accelerate the collection of outstanding receivables or to obtain additional debt or equity financing will be successfully implemented, or implemented on terms favorable to the Company. The Condensed Consolidated Financial Statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might result from the outcome of this uncertainty.

2. Summary of Significant Accounting Policies

These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2011. Except for the following, there have been no significant changes in the Company’s significant accounting policies for the three or nine months ended September 30, 2012, as compared to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2011. Refer to Note 4—Acquisition of Solar Green Technology for discussion of the transaction behind this change.

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

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

3. Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends current fair value measurement and disclosure guidance to provide increased transparency around valuation inputs and investment categorization. This update became effective prospectively for the Company in the first quarter of fiscal 2012. The Company’s adoption of this update did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

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

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other: Testing Goodwill for Impairment, which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If an entity can support the conclusion that it is more likely than not that the fair value of a reporting unit is more than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit.

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Goodwill must be tested for impairment at least annually, and prior to the ASU, a two-step test was required to assess goodwill for impairment. In Step 1, the fair value of a reporting unit is compared to the reporting unit’s carrying amount. If the fair value is less than the carrying amount, Step 2 is used to measure the amount of goodwill impairment, if any. The update was effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. The adoption of this update did not have a significant impact on the Company’s financial position, results of operations or cash flows.

In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment, which simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. An organization is now allowed to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Adoption of this update is not expected to have a significant impact on the Company’s financial position, results of operations or cash flows.

4. Acquisition of Solar Green Technology

On June 27, 2012, Solar Power, Inc. entered into an Acquisition and Stock Purchase Agreement dated as of June 25, 2012 (the “SGT Agreement”) with the shareholders of SGT, an Italian-based limited liability company. Under the SGT Agreement, Solar Power, Inc. acquired 100% of the issued and outstanding shares of SGT from SGT shareholders in exchange for 5.0 million Euros (approximately $6.3 million U.S. Dollars) payable in cash and common stock of the Company (the “Purchase Price”). The acquisition of SGT complements the Company’s global growth strategy. The shareholders of SGT consisted of LDK Solar Europe Holding S.A (“LDK Europe”) and the two founders of SGT. LDK Europe, through its 70% ownership of the outstanding common stock of SGT, controlled SGT prior to the close of the transaction. LDK Europe is the wholly owned subsidiary of LDK, which owned approximately seventy percent (70%) of the issued and outstanding common stock of the Company prior to and after the date of the acquisition of SGT. In July 2012, the Company issued 9,771,223 shares of its Common Stock to LDK Europe and 1,814,655 shares of its Common Stock to each of the two founders of SGT. In addition, the Company agreed to pay each of the two founders 100,000 Euros in cash, the payments of which were made in July 2012. The amount of shares of the Company’s Common Stock that were issued under the SGT Agreement were determined by calculating the amount of the Purchase Price payable to each shareholder divided by the daily volume-weighted average price of the Company’s Common Stock for each of the 90 trading days prior to June 11, 2012.

Because SGT and Solar Power, Inc. were under the common control of LDK as of the June 27, 2012 acquisition date, the acquisition is treated as a transaction between entities under common control. In accordance with ASC Topic 805, Business Combinations these financial statements reflect the combination of Solar Power, Inc. and SGT’s financial statements for all periods presented under which both entities were under the common control of LDK. The predecessor entity was determined to be SGT due to the fact that SGT was the first entity controlled by LDK. LDK obtained a controlling interest in SGT on July 10, 2009. LDK obtained a controlling interest in Solar Power, Inc. on March 31, 2011. As such, the Company recognized the assets and liabilities of SGT (the accounting receiving entity) at their historical carrying values in accordance with U.S. GAAP and has recast the assets and liabilities of the legacy Solar Power, Inc. entity (the transferring entity) to reflect carrying value of the parent, LDK, which were stepped up to fair value on March 31, 2011 upon LDK obtaining a controlling interest in Solar Power, Inc. Refer to Note 7—Goodwill and Other Intangible Assets for details of the balances carried by LDK now reflected in the Condensed Consolidated Financial Statements. The period from January 1, 2011 through March 30, 2011 represents SGT’s financial results only given that it is the predecessor entity in the transaction. Upon LDK acquiring its controlling interest in Solar Power, Inc. on March 31, 2011, the equity of the new reporting entity for the combined financial statements of Solar Power, Inc. and SGT reflects the Preferred and Common Stock of Solar Power, Inc. and associated additional paid-in capital and SGT’s retained earnings and foreign currency translation at March 31, 2011. Adjustments to eliminate the capital share accounts of SGT were recorded to additional paid-in capital.

5. Notes Receivable

The Company agreed to advance to one customer predevelopment and site acquisition costs related to an EPC contract between the customer and the Company and recorded the amount in the account notes receivable. The terms of the EPC agreement require repayment of the advance upon final completion of the SEF, which is expected to occur in the first half of 2013, and bears interest at the rate of 5% per year that is payable at the time the principle is repaid. The credit quality indicators considered related to this note receivable were the customer’s position as one of largest privately held independent power producers on the East Coast, their financial condition and forecast, and their credit history. At September 30, 2012 and December 31, 2011, the balance of the note receivable from this customer was $7.0 million and $5.9 million, respectively.

On April 27, 2012, the Company made a secured loan of $1.0 million to Solar Hub Utilities, LLC (“Solar Hub”), to be used for pre-development costs, and recorded the amount in the account notes receivable. On June 8, 2012, the Company agreed to advance Solar Hub up to $9.0 million under a new $9.0 million secured promissory note, which refinanced the original $1.0 million advance and bears a six percent annual interest rate. This note receivable is secured by the project assets. Repayment in full of all borrowed amounts is due on December 31, 2013. As of September 30, 2012, the balance of the note receivable from Solar Hub was $6.0 million.

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6. Inventories

Inventories consisted of the following (in thousands):

7. Goodwill and Other Intangible Assets

Goodwill is the excess of purchase price over the fair value of net assets acquired. The carrying value of goodwill is evaluated for impairment on an annual basis, or more frequently if certain indicators are present, using a fair-value-based approach. The carrying value for goodwill was $5.2 million at December 31, 2011, all of which was allocated to the Company’s single reportable segment. Of this balance, $4.7 million reflected the balance of Solar Power, Inc. carried by its parent company, LDK, as required under the accounting guidelines for a transfer of an entity under common control (refer to Note 4—Acquisition of Solar Green Technology). At September 30, 2012, due primarily to the recent reduction in the Company’s market capitalization, the Company’s market value was significantly below its book value, thus triggering an impairment analysis. As a result of this analysis, the Company recorded a goodwill impairment charge of $5.2 million, the amount of which was measured using a discounted cash flow analysis using level 3 unobservable inputs. As such, the balance of goodwill as of September 30, 2012 was zero. For the three and nine months ended September 30, 2011, no impairment of goodwill was recorded.

Resulting from the June 2012 SGT acquisition, reflected in the Condensed Consolidated Balance Sheets of the Company, are certain intangible assets, patent and customer relationships, and related amortization expense from March 31, 2011 forward, have been reflected in the Condensed Consolidated Financial Statements.

The following table presents details of the Company’s other intangible assets (in thousands):

As of September 30, 2012, the estimated future amortization expense related to other intangible assets is as follows (in thousands):

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8. Property, Plant and Equipment

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

In 2009, Solar Power, Inc. capitalized a photovoltaic (“PV”) solar system relating to the Aerojet 1 solar development project along with the associated financing obligation, recorded under loans payable, financing and capital lease obligations on its consolidated financial statements. Due to certain guarantee arrangements as disclosed in Note 13—Commitments and Contingencies, the Company will continue to record this solar system within its property, plant and equipment with its associated financing obligation in loans payable and financing obligations as long as it maintains its continuing involvement with this project. The income and expenses relating to the underlying operation of the Aerojet 1 project are recorded in the Company’s Condensed Consolidated Financial Statements.

During the year ended December 31, 2011, the Company’s subsidiary, SGT, completed construction of two SEFs, which they sold to and leased back from a leasing company in May 2012. The SEFs are classified as PV solar systems under capital leases, which were recorded under the account loans payable, financing and capital lease obligations, net of current portion, on the Condensed Consolidated Financial Statements. Refer to Note 13—Commitments and Contingencies for more information related to the capital leases. As of December 31, 2011, this asset was classified as held for sale (refer to Note 9—Assets Held for Sale).

Depreciation expense for the three months ended September 30, 2012 and 2011 was $0.3 million and $0.3 million, respectively. Depreciation expense for the nine months ended September 30, 2012 and 2011 was $0.8 million and $0.6 million, respectively.

9. Assets Held for Sale

During the year ended December 31, 2010, Solar Power, Inc. recorded an asset held for sale of $10.0 million. The asset held for sale resulted from Solar Power, Inc. taking possession of a solar facility for which the customer was unable to complete payment. During 2010, the asset held for sale was reduced by $3.3 million to $6.7 million by funds received from the United States Treasury under Section 1603, Payment for Specified Energy Property in Lieu of Tax Credits. Although this asset has been held for sale for the past twenty-one months, during the period of the closing of the stock purchase by LDK, this asset was not actively marketed to third parties at LDK’s request and Solar Power, Inc. could not accept offers to sell the facility under the provisions of the LDK stock purchase agreement. Subsequent to the stock purchase by LDK, Solar Power, Inc. proceeded to actively market the asset to third parties and expected that this asset would be sold within the next twelve months. Accordingly, the asset held for sale was recorded as a current asset in the Condensed Consolidated Balance Sheets at December 31, 2011. During the quarter ended September 30, 2011, Solar Power, Inc. recorded an impairment charge of $0.4 million to reduce the carrying amount to the estimate of fair value less cost to sell. The fair value was estimated based on a discounted cash flow analysis using level 3 unobservable inputs. In May 2012, the Company recorded further impairment of $0.7 million, based on qualitative changes in the solar market. In June 2012, the Company sold the asset and assigned the related loan obligation, in the amount of $4.2 million, to HEK, LLC (“HEK”) and received net proceeds from the sale of $1.5 million consistent with the new fair value of the asset.

During the year ended December 31, 2011, the Company’s subsidiary, SGT, completed construction of two SEFs, which were classified in the amount of $5.5 million as assets held for sale on the Condensed Consolidated Financial Statements. In May 2012, these Italian assets held for sale were sold to and leased back from a leasing company. Refer to Note 8—Property, Plant and Equipment for more information related to the assets. The fair value of the assets was estimated using a discounted cash flow analysis using level 3 unobservable inputs.

At September 30, 2012 and December 31, 2011, the balance of the account assets held for sale was zero and $11.8 million, respectively.

10. Stockholders’ Equity

Issuance of common stock

On March 31, 2011, Solar Power, Inc. and LDK consummated the transactions contemplated by the second closing of the Stock Purchase Agreement whereby Solar Power, Inc. issued 20,000,000 shares of Series A Preferred Stock for an aggregate purchase price of $22.2 million. On

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June 22, 2011, the shareholders of the Company approved an amendment to the Company’s Articles of Incorporation increasing the authorized shares and enabling the automatic conversion of the 20,000,000 Series A Preferred stock to 88,910,400 shares of Common Stock of Solar Power, Inc. The 20,000,000 shares of Series A Preferred Stock were cancelled pursuant to the conversion. In combination with the issuance of 42,835,947 shares of Common Stock of Solar Power, Inc., under the first closing of the Stock Purchase Agreement in January 2011 in exchange for $10.7 million, the total shares owned by LDK represented 70% of the Company’s outstanding Common Stock at June 22, 2011.

On July 22, 2011, the Company issued 400,000 shares of restricted Common Stock under the Company’s 2006 Equity Incentive Plan (defined below) as compensation to its non-employee directors. The fair value of the shares was $0.48 per share, the closing price of the Company’s Common Stock on July 22, 2011, the date of the grant. The shares vested on the date of grant. On June 8, 2012, the Company issued 400,000 shares of restricted Common Stock pursuant to the Company’s 2006 Equity Incentive Plan (defined below) as compensation to its non-employee directors. The fair value of the shares was $0.265 per share, the closing price of the Company’s Common Stock on June 12, 2012, the date of the grant. The shares vested on the date of grant.

In July 2012, the Company issued 9,771,223 shares of its Common Stock to LDK Europe, a wholly-owned subsidiary of LDK, and 1,814,655 of its Common Stock to each of the two founders of SGT pursuant to the SGT Acquisition and Stock Purchase Agreement as part of an aggregate purchase price of 5.0 million Euros (approximately $6.3 million in U.S. Dollars). For further discussion of the transaction, refer to Note 4—Acquisition of Solar Green Technology.

Issuance of warrants to purchase common stock

On February 15, 2012, the Company’s Board of Directors approved the issuance of a warrant agreement for Cathay General Bancorp to purchase 300,000 shares of the Company’s Common Stock at $0.75 per share related to the credit facility entered into with Cathay Bank for an aggregate principle amount of $9.0 million. The fair value of $0.44 per share was determined using the Black-Scholes-Merton model. The warrant expires on February 15, 2015 and is exercisable anytime within that period for an exercise price of $0.75 per share. The value of the warrant will be amortized over the remaining term of the associated credit facility through December 31, 2012. For the three and nine month period ended September 30, 2012, $38,000 and $0.1 million, respectively, was amortized to interest expense.

In October 2010, in conjunction with a consulting agreement, Solar Power, Inc. issued a warrant to purchase 500,000 shares of its Common Stock to a consultant at an exercise price of $0.25 per share. The warrant was exercisable over a five-year period and vested based on certain performance criteria. This warrant was fair-valued at $0.23 per share using the Black-Scholes-Merton model. The warrant expires on October 1, 2015. Since the warrant was performance-based and none of the performance requirements were considered probable of being met as of September 30, 2012 or 2011, no expense was recorded for the three or nine month periods ended September 30, 2012 and 2011, respectively. The consultation agreement dated October 2010 was terminated by mutual agreement in June 2012, therefore also cancelling the related warrant to purchase 500,000 shares.

11. Stock-based Compensation

The Company measures the 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.

The following table summarizes the consolidated stock-based compensation expense, by type of awards for the three and nine months ended September 30, 2012 and 2011 (in thousands):

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The following table summarizes the consolidated stock-based compensation by line item for the three and nine months ended September 30, 2012 and 2011 (in thousands):

Stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimated its average pre-vesting forfeiture rate at 20.7% and 26.3% for the three months ended September 30, 2012 and 2011, respectively.

Valuation Assumptions

Valuation and Amortization Method—The Company estimates the fair value of service-based and performance-based stock options, if any, granted using the Black-Scholes-Merton option-pricing formula. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Time-based and performance-based options, if any, typically have a five-year life from date of grant and vesting periods of three to four years. There were no performance-based options outstanding at September 30, 2012 or December 31, 2011.

Expected Term—The 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 for estimating the expected term of the stock-based award, instead of historical exercise data.

Expected Volatility—The Company uses the historical volatility of the price of its common shares.

Expected Dividend—The Company has never paid dividends on its common shares and currently does not intend to do so and, accordingly, the dividend yield percentage is zero for all periods.

Risk-Free Interest Rate—The Company bases the risk-free interest rate used in the Black-Scholes-Merton valuation method upon the implied yield curve currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.

Assumptions used in the determination of the fair value of share-based payment awards using the Black-Scholes-Merton model for stock option grants during the three and nine months ended September 30, 2012 and 2011 were as follows:

Equity Incentive Plan

On November 15, 2006, subject to approval of the stockholders, Solar Power, Inc. 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, stock and stock appreciation rights. The Plan was approved by the stockholders on February 7, 2007.

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The Company currently has time-based options and restricted stock grants outstanding. The time-based options vest 25% annually and expire five years from the date of grant. The restricted shares are fully vested as of September 30, 2012. 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 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 unissued 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 September 30, 2012 there were 11,081,198 total shares available to be issued under the plan.

The following table summarizes the Company’s stock option activities for the nine month periods ended September 30, 2012 and 2011:

The following table summarizes the Company’s restricted stock activities for the nine month periods ended September 30, 2012 and 2011:

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12. Line of Credit, Loans Payable and Financing Obligations

Line of Credit

On December 26, 2011, the Company entered into a Business Loan Agreement with Cathay Bank (“Cathay”) whereby Cathay agreed to extend the Company a line of credit of the lesser of $9.0 million or seventy percent (70%) of the aggregate amount in certain accounts receivable, which will mature December 31, 2012. LDK agreed to guaranty the full amount of the loan under a Commercial Guaranty by and between LDK and Cathay dated December 26, 2011. The interest rate under the loan is variable, 1.25% above the prime rate. In conjunction with the Business Loan Agreement, the Company and Cathay entered into a Commercial Security Agreement dated December 26, 2011 (“Cathay Security Agreement”), pursuant to which Cathay is granted a security interest in the collateral, which is certain accounts receivable. See Note 10—Stockholders’ Equity regarding the warrants associated with the line of credit that were issued in February 2012. As of September 30, 2012 and December 31, 2011, the Company had a balance outstanding to Cathay on the line of credit of $7.5 million and $6.0 million, respectively, recorded in the current account lines of credit.

Under the Business Loan Agreement, the Company is required to adhere to certain covenants, including a profitability requirement and financial statement ratio covenants. On June 15, 2012, the Company and Cathay executed a modification to the terms of the line of credit to adjust the required debt to worth ratio from three to one from two and one-half to one, and to subject all future advances to seventy percent of the receipts related to EPC agreements reviewed and approved by Cathay. Due to the accounting treatment related to the Aerojet 1 solar project development, the Company’s debt to worth covenant was in violation at December 31, 2011 and continues to be in violation until the related financial obligation is satisfied. The Company obtained a waiver from Cathay that excludes the financial impact of the Aerojet 1 restatement from the calculation of the debt to worth ratio through the term of the loan.

As of September 30, 2012, the Company was in violation of two other covenants. Due to the loss before income taxes for the three months ended September 30, 2012, the Company did not meet the minimum $1.0 million pre-tax profit covenant. As a result of the second quarter 2012 reclassification of the CDB loan from long-term to short-term, the Company did not meet the current ratio covenant. Currently, a notice of default has not been issued by Cathay. The Company is in discussions to obtain a waiver on the violated covenants or modification to the terms of the Business Loan Agreement. Should the bank declare the amounts immediately due and payable, the Company does not have the ability to make the payments without additional sources of financing or accelerating the collection of outstanding receivables.

Additionally, related to the financial concerns of the Company’s parent, LDK, as discussed in Note 1—Description of Business and Basis of Presentation, the Cathay line of credit contains a material adverse change (“MAC”) clause under which the bank can declare amounts immediately due and payable. Due to the subjectivity of the MAC clause, it is not clear whether the events described above regarding LDK would represent a material adverse change. Should the banks declare amounts immediately due and payable under the MAC clause, the Company does not have the ability to make the payments without additional sources of financing or accelerating the collection of outstanding receivables.

During 2011 and 2012, SGT entered into various unsecured revolving credit agreements with six Italian financial institutions under which SGT may borrow up to 5.5 million Euros (approximately $7.0 million U.S. Dollars). Amounts borrowed for advances on customer invoices or for performance bonds to customers may be repaid and reborrowed after repayment. The Company is required to pay interest on outstanding borrowings at interest rates ranging from 4.2% to 8.8%, compounded quarterly. Repayment is due for each invoice advance upon repayment by the customer, up to one-hundred twenty days from utilization of each facility. As of September 30, 2012 and December 31, 2011, $6.2 million and $5.6 million, respectively, was outstanding under the revolving credit facilities, classified in the current account lines of credit.

Loans Payable

On December 30, 2011, the Company and CDB entered into a Security Agreement (the “CDB Security Agreement”), whereby the Company granted CDB a security interest in certain collateral. The CDB Security Agreement is providing CDB with security for two term loan facilities that CBD, as lender, is extending to a wholly owned subsidiary of the Company, SPI Solar New Jersey, Inc. (“SPI New Jersey”) as discussed below (collectively, the “Facility Agreements” and each a “Facility Agreement”). Under the CDB Security Agreement, CDB may, among other rights involving the collateral, sell the collateral or withdraw funds from certain accounts of the Company in the event of a default under a Facility Agreement. The CDB Security Agreement terminates upon satisfaction in full of the obligations under the Facility Agreements.

On December 30, 2011, SPI New Jersey entered into two facility agreements with CDB. The first Facility Agreement is for a $3.6 million facility and a RMB 72,150,000 ($11.5 million at current exchange rates) facility and relates to EPC Financing for one of the Company’s customers. The second Facility Agreement is for a $15.6 million facility and a RMB 77,850,000 ($12.3 million at current exchange rates) facility and relates to EPC financing for another of the Company’s customers. SPI New Jersey has twelve months to draw upon the facilities. The interest rate is a variable interest rate based on either LIBOR plus a margin, in the case of a loan under a U.S. dollar portion, or the standard RMB interest rate for similar loans, in the case of a loan under a RMB portion. The interest is payable every six months. Under each Facility Agreement, SPI New Jersey is obligated to pay a front-end fee of 1.5% of the total amount of the U.S. dollars portion of a Facility Agreement upon the first drawing under the U.S. dollars portion of that Facility Agreement. Further, SPI New Jersey is obligated to pay a front-end fee of 1.5% of the total amount of the RMB portion of a Facility Agreement upon the first drawing under the RMB portion of that Facility Agreement. Additionally, SPI New Jersey is obligated to pay a fee equal to 0.5% per annum of the available but undrawn funds. The loans under a facility may be prepaid in whole or in part. However, any repaid portion cannot be re-borrowed. The full amount outstanding under a facility is required to be paid in full twenty-four months from the date the facility was first utilized, which was December 2011. The loans outstanding under the facility also become payable on the occurrence of certain events, including a change of control of SPI New Jersey. During the three months ended March 31, 2012, SPI New Jersey repaid the first Facility Agreement of $3.6 million upon completion of the related solar development project. During the three months ended June 30, 2012, the Company drew down the remaining amount of RMB 77,850,000 (or $12.3 million in USD) under the second Facility Agreement. As of December 31, 2011, the outstanding balance under these two credit facilities was $19.2 million, which was recorded in the account loans payable, financing and capital lease obligations, net of current portion. As of September 30, 2012, the outstanding balance under these two credit facilities was $27.9 million, which was recorded in the current account loans payable and capital lease obligations.

The CDB Facility Agreements also contain a MAC clause. LDK financial issues may trigger an acceleration of the CDB loans if CDB reasonably believes that LDK’s financial concerns would have a material adverse effect on the Company. While the Company currently does not

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believe that it is probable that repayment of these debts will be accelerated by CDB, given inherent uncertainty on this determination by CDB and because the amounts outstanding relate to ongoing EPC projects and are expected to be paid within one year following the end of the construction, in the second quarter 2012 the Company reclassified the related balance from a noncurrent liability account to the current account loans payable and capital lease obligations.

On June 1, 2010, Solar Power, Inc. and Five Star Bank (“Five Star”) entered into a Loan Agreement (the “Original Loan Agreement”). Under the Original Loan Agreement, Five Star agreed to advance a loan in an amount equal to $3.9 million at an interest rate equal to 8.00% per annum. The Original Loan Agreement was evidenced by a Promissory Note, which was payable in 120 equal monthly payments of $48,000, commencing on July 15, 2010 through the maturity date of the loan, which was June 15, 2020. On June 1, 2011, Solar Power, Inc. refinanced the above Original Loan Agreement by entering into a Term Loan Agreement (the “Loan Agreement”) with East West Bank (“East West”). Under the Loan Agreement, East West agreed to advance a loan in an amount equal to $4.5 million at a variable interest rate based on the Prime Rate plus 1.25% as provided in the Loan Agreement, not to be less than 6.00% per annum. The Loan Agreement was evidenced by a Promissory Note which is payable in 108 monthly payments, and has a maturity date of May 1, 2020. The Loan Agreement contained 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 11.00% per annum. Borrowings under the Loan Agreement were secured by (i) a blanket security interest in all of the assets of our wholly owned subsidiary, Solar Tax Partners 2, LLC (“STP2”), and (ii) a first priority lien on the easement interest, improvements, fixtures, and other real and personal property related thereto located on the property described in the Loan Agreement. The loan payable under the Loan Agreement of $4.3 million at December 31, 2011 was recorded as a current liability on the consolidated balance sheet at December 31, 2011, since if the facility was sold the loan could contractually be required to be paid, and the facility was expected to be sold within twelve months. In June 2012, the Company sold the STP2 facility and assigned the related loan obligation, resulting in a zero balance for this loan payable as of September 30, 2012.

13. Commitments and Contingencies

Commitments

Restricted cash—At September 30, 2012 and December 31, 2011, the Company had restricted bank deposits of $0.5 million and $1.0 million, respectively. The restricted bank deposits consist of a reserve pursuant to our guarantees of Solar Tax Partners 1, LLC (“STP”) with the bank providing the debt financing on the Aerojet 1 solar generating facility (see below for additional details related to the Aerojet 1 development project) and reserves pursuant to SGT’s performance bonds and surety guarantees held at various foreign banks. As part of the sale of STP2 in June 2012, the previously restricted bank deposits of $0.3 million were released upon assignment to HEK of the related loan agreement with the bank providing the debt financing for the solar generating facility formerly owned by our subsidiary, Solar Tax Partners 2, LLC.

Guarantee—On December 22, 2009, in connection with an equity funding of STP related to the Aerojet 1 solar development project, the Company along with STP’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 EPC. Specific guarantees made by Solar Power, Inc. include the following in the event of the other investors’ failure to perform under the operating agreement:

The Company has recorded on its Condensed Consolidated Balance Sheet the guarantees of $0.1 million at September 30, 2012 and December 31, 2011, respectively, which approximates their fair value (refer to Note 13—Fair Value of Financial Instruments). These amounts, less related amortization, are included in accrued liabilities. These guarantees for the Aerojet 1 project are accounted for separately from the financing obligation related to the Aerojet 1 project because they are with different counterparties.

Financing Obligation—The guarantees associated with Aerojet 1 constitute a continuing involvement in the project. While the Company maintains its continuing involvement, it will apply the financing method and, therefore, has recorded and classified the proceeds received of $13.1 million and $13.9 million from the project in long-term liabilities within loans payable, financing and capital lease obligations, net of current portion, at September 30, 2012 and December 31, 2011, respectively, in the Condensed Consolidated Balance Sheets.

Performance Guaranty—On December 18, 2009, the Company entered into a 10-year energy output guaranty related to the photovoltaic system installed for STP at the Aerojet 1 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

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government regulation. The Company believes that the probability of shortfalls is unlikely and if they should occur they would be covered under the provisions of its current panel and equipment warranty provisions. For the three and nine months ended September 30, 2012 and three and six months ended September 30, 2011, there were no charges against the Company’s reserves related to this performance guaranty.

Product Warranties—Solar Power, Inc. offers the industry standard of 25 years for our solar modules and industry standard five years on inverter and balance of system components. Due to the warranty period, Solar Power, Inc. bears the risk of extensive warranty claims long after the Company has shipped product and recognized revenue. In our cable, wire and mechanical assemblies business, historically our warranty claims have not been material. In our solar photovoltaic business, our greatest warranty exposure is in the form of product replacement. Until the third quarter of 2007, Solar Power, Inc. purchased its solar panels from third-party suppliers and since the third-party warranties are consistent with industry standards it considered our financial exposure to warranty claims immaterial. Certain photovoltaic construction contracts entered into during the year ended December 31, 2007 included provisions under which Solar Power, Inc. agreed to provide warranties to the buyer, and during the quarter ended September 30, 2007 and continuing through the fourth quarter of 2010, Solar Power, Inc. installed its own manufactured solar panels. As a result, the Company recorded the provision for the estimated warranty exposure on these contracts within cost of sales. Since Solar Power, Inc. does not have sufficient historical data to estimate its exposure, it has looked to its own historical data in combination with historical data reported by other solar system installers and manufacturers. The Company now only installs panels manufactured by unrelated third parties and its parent, LDK. The Company provides the manufacturer’s pass through warranty, and reserves for unreimbursed costs, such as labor, material and transportation costs to replace panels and balance of system components provided by third-party manufacturers.

The accrual for warranty claims consisted of the following (in thousands):

Capital Lease Commitments—The Company’s SGT subsidiary completed construction of two SEFs in fiscal year 2011, which they sold to and leased back from a leasing company in May 2012. The balances of these Italian assets as of September 30, 2012 are under capital leases. Refer to Note 8—Property, Plant and Equipment for further details. The leases expire in 2030. The following is the aggregate minimum future lease payments under capital leases as of September 30, 2012 (in thousands):

Contingencies

Motech Industries, Inc. (“Motech”) filed a complaint against the Company on November 21, 2011, in the Superior Court of California, County of Sacramento, alleging that the Company breached a November 29, 2010 settlement agreement by failing to make payments set forth therein for products supplied to the Company by Motech. Motech has alleged causes of action for breach of contract and breach of the covenant of good faith and fair dealing seeking to recover a total of $339,544 in damages from the Company plus its attorneys’ fees and costs. The Company filed its answer on December 22, 2011 generally denying all of the allegations in Motech’s complaint. Specifically, the Company contends that it has paid Motech in full for all monies owed under the settlement agreement. No discovery has been conducted, and Motech has filed a motion for summary judgment, which is scheduled for January 25, 2013. The Company intends to defend the action and believes it is unlikely that the Company will be required to pay any amounts related to this complaint.

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From time to time, the Company also is involved in various other legal and regulatory proceedings arising in the normal course of business. While the Company cannot predict the occurrence or outcome of these proceedings with certainty, it does not believe that an adverse result in any pending legal or regulatory proceeding, individually or in the aggregate, would be material to its consolidated financial condition or cash flows; however, an unfavorable outcome could have a material adverse effect on its results of operations for a specific interim period or year.

14. Fair Value of Financial Instruments

Our financial instruments consist principally of cash and cash equivalents, notes receivable, guarantees and long-term debt. The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued.

The carrying amounts of cash and cash equivalents and note receivable approximate their fair values at each balance sheet date due to the short-term maturity of these financial instruments and are categorized as Level 1 and Level 2, respectively in the fair value hierarchy. The carrying amount of long-term debt approximates its fair values at each balance sheet date due to its variable market rates of interest that change with current Prime or LIBOR rate and no change in counterparty credit risk and, as such, is categorized as Level 2 in the fair value hierarchy. The Company used multiple techniques, including an income approach applying discounted cash flows approach, 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 applying qualitative considerations to determine the fair value of the guarantees at the measurement date.

15. Income Taxes

The Company calculates its interim income tax provision in accordance with ASC 740-270—Income Taxes. At the end of each interim period, the Company estimates the annual effective tax rate and applies that rate to its ordinary quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect, is recognized in the interim period in which those items occur. The Company evaluates its ability to recover deferred tax assets, in full or in part, by considering all available positive and negative evidence, including past operating results and our forecast of future taxable income on a jurisdictional basis. The Company bases its estimate of current and deferred taxes on the tax laws and rates that are currently in effect in the appropriate jurisdiction. Changes in laws or rates may affect the tax provision as well as the amount of deferred tax assets or liabilities.

The effective income tax rate of the Company for the three months ended September 30, 2012 and 2011 was (425.9)% and 7.5%, respectively. The effective income tax rate of the Company for the nine months ended September 30, 2012 was (8.7)%. The effective income tax rate of Solar Power, Inc. for the six months ended September 30, 2011, combined with the effective income tax rate of SGT for the nine months ended September 30, 2011 was (23.5)%. For further details regarding the organization of the reporting entity refer to Note 1—Description of Business and Basis of Presentation. In 2011, the Company generated taxable income in certain jurisdiction while incurring an overall worldwide loss. In 2012, the Company is also expecting to generate taxable income in certain jurisdictions while still experiencing an overall worldwide loss. The negative rate for the nine-month period is a result of tax liability due in certain profitable jurisdictions while loss generating jurisdictions are not able to benefit from current net operating losses due to lack of taxable income. The rate for the three-month period was primarily due to shifts in forecasted income as result of change in market conditions amongst profitable jurisdictions having differing tax rates and a determination during the three month period ended September 30, 2012 that it is no longer more likely than not that the benefit of current year tax losses will be realized, therefore, the deferred tax assets were reversed.

The Company and its subsidiaries did not have any unrecognized tax benefits or liabilities as of September 30, 2012 and December 31, 2011. The Company does not anticipate that its unrecognized tax benefits or liability position will change significantly over the next twelve months.

16. Net Loss Per Share

Basic earnings (loss) per share is computed by dividing income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock equivalents, including common stock options, warrants, and restricted common stock, in the weighted average number of common shares outstanding for a period, if dilutive. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. For the three months ended September 30, 2012 and 2011, 8.6 million and 7.7 million potentially dilutive securities, respectively, were excluded from the computation of diluted loss per share because their effect on net loss per share was anti-dilutive. For the nine months ended September 30, 2012 and 2011, 8.6 million and 7.7 million potentially dilutive securities, respectively, were excluded from the computation of diluted loss per share because their effect on net loss per share was anti-dilutive. As a result of the net loss for each of the three month and nine months ended September 30, 2012 and 2011 there is no dilutive impact to the net loss per share calculation for the periods.

17. Related Party Transactions

In the fourth quarter of 2009, Solar Power, Inc. completed a system installation under an EPC Contract entered into with STP. Subsequent to the end of 2009, Stephen C. Kircher, our Chief Executive Officer, 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 HEK, a member of STP. The Trust made a capital contribution of $20,000 and received a 35% membership interest in HEK. Stephen C. Kircher, as trustee of the Trust was appointed a co-manager of HEK. Neither Stephen C. Kircher nor Lari K. Kircher is a beneficiary under the Trust.

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In June 2012, Solar Power, Inc. sold the STP2 facility, previously recorded as an asset held for sale, and assigned the related loan obligation of $4.2 million to HEK for net proceeds of $1.5 million. Refer to Note 9—Assets Held For Sale for further detail on this transaction.

On March 31, 2011, the Company and LDK consummated the transactions contemplated by the second closing of the SPA whereby the Company issued 20,000,000 shares of Series A Preferred Stock for an aggregate purchase price of $22.2 million. On June 22, 2011, the shareholders of the Company approved an amendment to the Company’s Articles of Incorporation increasing the authorized shares and enabling the automatic conversion of the 20,000,000 Series A Preferred stock to 88,910,400 shares of the Company’s Common Stock. The 20,000,000 shares of Series A Preferred Stock were cancelled pursuant to the conversion. In combination with the issuance of 42,835,947 shares of Solar Power, Inc.’s Common Stock in January in exchange for $10.7 million, the total shares owned by LDK 70% of the Company’s outstanding Common Stock as of June 22, 2011.

In June 2011, the Company transferred to LDK Solar USA, Inc. at book value its interest in North Palm Springs Investments, LLC (“NPSLLC”) and entered into two EPC agreements with NPSLLC for the construction of two utility scale solar projects with a combined contract value of $29.2 million. The EPC agreements provide for milestone payments based on performance against a schedule of values.

In September 2012, Solar Green Technology SA (“SGT”) transferred its interest in its wholly owned subsidiary, Moiac Solare Srl (“Moiac”), to Terrasol Solar SA (“Terrasol”). Terrasol’s parent, Century Solar Jewel SA is 40% owned by LDK Solar Europe Holding SA, a wholly owned subsidiary of LDK. The total contract value from the EPC agreements for the construction of 641kW solar development projects owned by Moiac is $1.9 million.

In June 2012, SGT began construction on multiple solar development projects under EPC agreements with Terrasol. The total contract value from the construction of these solar development projects is $16.1 million.

During the three and nine months ended September 30, 2012, the Company recorded net sales to LDK, NPSLLC and Terrasol of $12.5 million and $33.5 million, respectively, with a cost of goods sold of $11.4 million and $31.0 million, respectively, primarily consisting of solar development costs. During the three and nine months ended September 30, 2011, the Company recorded net sales to LDK and NPSLLC of $5.9 million and $29.3 million, respectively, with a cost of goods sold of $6.6 million and $26.0 million, respectively, primarily consisting of solar development costs and the sale of an Italian SEF to LDK. As of September 30, 2012, accounts receivable from LDK was $26.1 million, primarily related to the receivables from solar development projects with and inventory sale to LDK. As of December 31, 2011, the Company had accounts receivable of $22.5 million from LDK and NPSLLC, primarily related to billings under EPC contracts with milestone payments due upon performance against a schedule of values in the agreements.

As of September 30, 2012 and December 31, 2011, the Company had accounts payable to LDK of $52.9 million and $62.2 million, respectively, primarily related to purchases of solar panels for solar development projects. See Note 1—Description of Business and Basis of Presentation for further discussion related to the accounts payables with LDK.

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

Factors That May Affect Future Results

This Quarterly Report on Form 10-Q and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as “expects,” “plans,” “will,” “estimates,” “forecasts,” “projects” and other words of similar meaning. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors described in the Company’s filings with the SEC, especially the Company’s Annual Report on Form 10-K and the Company’s Quarterly Reports on Form 10-Q. In various filings the Company has identified important factors that could cause actual results to differ from expected or historic results. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete list of all potential risks or uncertainties.

The following discussion is presented on a consolidated basis, and analyzes our financial condition and results of operations for the three and nine months ended September 30, 2012 and 2011. Unless the context indicates or suggests otherwise, reference to “we”, “our”, “us” and the “Company” in this section refers to the consolidated operations of Solar Power, Inc. and its subsidiaries, as defined in Note 1—Description of Business and Basis of Presentation to the Condensed Consolidated Financial Statements.

Overview

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

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

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

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

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

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Critical Accounting Policies and Estimates

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

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

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

Results of Operations

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

Acquisition of an entity under common control

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

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

Net sales

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

Cost of goods sold

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

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

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

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General and administrative expenses