SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2010
¨ 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: 333-140637
PREMIER POWER RENEWABLE ENERGY, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (916) 939-0400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
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 x No
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 registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. x Yes ¨ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) 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. ¨
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).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $15,496,959 as of June 30, 2010, based upon 11,069,257 shares at $1.40 per share as reported on the OTC Bulletin Board.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. x Yes ¨ No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the last practicable date: 29,099,750 shares of common stock as of March 15, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This annual report on Form 10-K contains forward-looking statements. Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for working capital. Forward-looking statements that involve assumptions and describe our future plans, strategies, and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this annual report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this annual report generally. This annual report may contain market data related to our business that may have been included in articles published by independent industry sources. Although we believe these sources are reliable, we have not independently verified this market data. This market data includes projections that are based on a number of assumptions. If any one or more of these assumptions turns out to be incorrect, actual results may differ materially from the projections based on these assumptions. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this annual report will in fact occur. In addition to the information expressly required to be included in this annual report, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this annual report as well as other public reports that may be filed with the United States Securities and Exchange Commission. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this annual report to reflect new events or circumstances, unless and to the extent required by applicable law. Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933, as amended (the “Act”), provides any protection for statements made in this annual report.
When used in this annual report, the terms the “Company,” “Premier Power,” “we,” “us,” “our,” and similar terms refer to Premier Power Renewable Energy, Inc., a Delaware corporation, and our subsidiaries.
Item 1. Business.
We are a developer, designer, and integrator of ground mount and rooftop solar energy solutions for commercial, industrial, residential and equity fund customers in North America and Europe. Additionally, we distribute solar modules and inverters in our markets, primarily in Europe. We provide a full range of installation services to our solar energy customers including design, engineering, procurement, permitting, construction, grid connection, warranty, system monitoring, and maintenance services. We use solar components from the industry’s leading suppliers and manufacturers including solar panels from GE, Canadian Solar, Sharp, Jinko, Tianwei, and Sun Power, inverters from Power One, Fronius, SMA, Satcon, and Xantrex, solar trackers from PV Tracker and PV Powered. We have installed over 1,400 solar power systems since the commencement of our current business operations in 2003, with the scale of these projects ranging from 5 kilowatts to multi megawatts of installed capacity. We believe our experience in developing, designing, and installing large and complex solar projects differentiates us from many of our competitors.
We were originally incorporated as “Harry’s Trucking, Inc.” in Delaware on August 31, 2006. Effective September 5, 2008, we changed our name to “Premier Power Renewable Energy, Inc.” On September 9, 2008, we consummated a share exchange transaction whereby we acquired Premier Power Renewable Energy, Inc., a California corporation (“Premier Power California”) and Premier Power California’s wholly owned subsidiaries, Premier Power Sociedad Limitada (“Premier Power Spain”) and Bright Future Technologies, LLC (“Bright Future”). On July 31, 2009, we acquired Premier Power Italy S.p.A. (formerly known as ARCO Energy, SRL, hereinafter “Premier Power Italy”), a distributor of solar modules and developer and integrator of ground mount and rooftop solar power systems in Italy. On July 23, 2010, we formed Premier Power Development, a wholly-owned subsidiary, to focus on European developer solar opportunities.
Premier Power California’s history dates back to 2001 when Premier Homes Properties, Inc. (“Premier Homes”), a privately held homebuilder based in Roseville, formed a solar power systems design and integration division (the “Solar Division”) in order to meet its internal mandate to make one out of every three homes Premier Homes developed into a solar home. On April 22, 2003, in order to meet the growing demand for commercial and residential retrofit solar power system installations, the Solar Division was spun-off to form Premier Power California, with ownership independent of Premier Homes.
Bright Future, a wholly owned subsidiary of Premier Power California, was formed on December 13, 2006 as a Nevada limited liability company. Bright Future operates as a trading company that allows Premier Power California and Premier Power Spain to consolidate its purchases from suppliers of solar energy products in order to achieve advantageous trade terms.
Premier Power Spain, a wholly owned subsidiary of Premier Power California, was formed on July 7, 2006 as a Spanish limited liability company by the principals of Premier Power California in order to conduct design, sales, and installation operations in Spain and other parts of Europe.
On July 31, 2009, we acquired all of the capital stock of Rupinvest SARL, a corporation duly organized and existing under the law of Luxembourg (“Rupinvest”). Rupinvest initially owned 90% of Premier Power Italy, a private limited company duly organized and existing under the laws of Italy. On December 31, 2009, Rupinvest purchased the remaining 10% interest in Premier Power Italy making it a wholly owned subsidiary. Premier Power Italy is a distributor, developer, and integrator of ground mount and rooftop solar power systems in Italy.
On July 23, 2010, the Company formed Premier Power Development to enhance its European project development efforts.
Challenges Facing the Electric Power Industry
According to the Energy Information Administration (“EIA”), a section of the United States Department of Energy, energy outlook projects moderate growth in U.S. energy consumption with greater use of renewables. In fact the EIA’s outlook in 2010 was that global energy consumption would increase by 14% from 2008 to 2035. Electric power used to operate businesses and industries provides the power needed for homes and offices and provides the power for our communications, entertainment, transportation, and medical needs. Electricity is now more commonly used for local transportation (electric vehicles) and space/water heating needs.
Due to continuously increasing energy demands, we believe the electric power industry faces the following challenges:
Drivers of Solar Market Adoption
The challenges facing the traditional electric power industry are driving the adoption of renewable energy sources. Solar power systems have been used to produce electricity for several decades, although at generally higher costs as compared with traditional energy sources. Technological advances during the past decade that have significantly reduced system costs, combined with the advantages of solar power as a renewable energy source and government subsidies and incentives for solar power, have led to solar power becoming one of the fastest growing renewable energy technologies.
Advantages that solar power offers over other sources of power include:
According to Solarbuzz, an independent solar energy research firm, the world solar photovoltaic market grew to 18.2 Gigawatts in 2010, up 139% year over year.
Government Incentives for Solar Energy
Despite the significant advantages of solar energy that have resulted in recent rapid market growth, solar energy continues to represent only a small fraction of the world’s energy output as a result of costs that remain higher than those of traditional energy sources. According to Solarbuzz, a residential solar energy system typically costs about $8-10 per watt. Where government incentive programs exist, together with lower prices secured through volume purchases, installed costs as low as $3-4 watt – or 10-12 cents per kilowatt hour (kWh) – can be achieved. Without incentive programs, solar energy costs (in an average sunny climate) range between 22-40 cent/kWh for very large PV systems. These incentives include:
U.S. Solar Market Dynamics
According to Solarbuzz, the market for solar energy in the United States grew from .49 gigawatt (GW) in 2009 to .97 GW in 2010. The market has grown significantly over the past 15 years, and Solarbuzz research shows that demand in the U.S. is expected to have strong growth over the next five years. Drivers for solar market growth include rapidly declining costs of solar systems as much as 20% to 40% over the next three years as well as government incentives including an investment tax credit (providing a 30% federal rebate for solar energy systems), renewable portfolio standards in 33 states, and selected state and local tax credits.
European Solar Market Dynamics
According to Solarbuzz, 2009 was a year of recovery from the sudden collapse of the world’s largest PV market in 2008, Spain. The recovery was driven by a new, low pricing environment that set the foundation for a 2010 market boom. Growth of the European market was just 16% in 2009; excluding Spain, however, growth was 126%. The boom and bust cycles in Europe illustrate the industry’s continued dependence on subsidy or market incentives. Italy, Czech Republic, and Germany provided the basis for the European market.
Our Products and Services
We provide a full range of installation services to our solar energy customers including design, engineering, procurement, permitting, construction, grid connection, warranty, system monitoring, and maintenance services. In addition, we are a reseller of solar energy system components including, but not limited to, racking, wiring, inverters, solar modules, and other related components sourced from the industry’s leading manufacturers and suppliers. We assist in arranging power purchase agreement programs for our customers.
We operate in three business segments: North America, Italy, and Other European. During the three months ended September 30, 2010 the Company renamed the segment previously known as Spain to Other European to reflect an increased level of sales outside of Spain in 2010. Prior to 2010 this segment’s activities were almost exclusively conducted within Spain.
During the three months ended September 30, 2010 the Company renamed the segment previously known as U.S. to North America to reflect its initial sales outside the U.S. in Canada. Prior to the three months ended September 30, 2010 this segment’s activities were exclusively within the U.S.
North America (N.A.)
Our N.A. commercial business consists of ground mount or rooftop solar energy projects generally ranging from 100 kilowatt (kWh) to 3.1 MW provided to corporate, municipal, agricultural, and utility customers. In this market, we design and build our solar energy systems to meet each customer’s individual needs and circumstances. We assess the customer’s annual power requirements and average daily consumption rates in different seasons of the year to size and engineer the solar energy system. We assess the customer’s site and if relevant roof size, configuration, and composition to determine the optimum location for the solar modules. We factor in information about the customer’s electrical service territory and its rate structures, and we identify the customer’s budget and preferred financing method, as well as the customer’s aesthetic preferences. We also identify the relevant federal, state, and local regulations, including building codes that are important to the cost, operation, and return on investment of the customer’s solar energy system, as well as relevant tax rates and various other factors. We assess this data using solar monitoring tools that enable us to design a solar energy system to a size and configuration that maximizes energy efficiency for each customer’s circumstances. We provide customers with a return on investment analysis and determine the rebates and performance-based incentives that are available to each customer. We prepare final construction plans to obtain a building permit and, as soon as the permit is approved, our installation professionals begin the installation by placing metal racking on the customer’s roof (or by building a ground mount), followed by installation of the solar modules, inverters, and the balance of systems components and safety equipment.
After the solar photovoltaic (PV) modules and inverters are procured and installed, we obtain a final inspection of the installation by the local building department, prepare and submit all rebate applications to the appropriate rebating jurisdiction, and apply for the local utility company to interconnect the customer’s solar energy system to the utility grid. The entire process from signing of the contract through final inspection by the local building department typically takes between 3 and 6 months.
Our N.A. residential business consists mainly of rooftop solar installations generally ranging from 5 kWh to 40 kWh provided to customers primarily in California as a result of an attractive government incentive. We do provide installations in other states when financially attractive. The services we provide to our residential customers are largely similar to our N.A. commercial customers. Key differences include that the entire process typically takes between 60 to 90 days for residential customers versus 3 to 6 months for commercial customers, and the actual installation work usually requires two to five days for residential customers versus two weeks to two months for commercial customers.
We also distribute solar modules and inverters in the U.S. In 2010 and 2009, distribution revenue in N.A. was minimal.
Our Italian business consists of distribution, ground mount, roof mount, and solar power plant installations. In Italy, a portion of our business consists of ground mount or rooftop solar energy projects generally ranging from 50 kWh to 500 kWh provided to corporate, municipal, agricultural, and utility customers. In Italy, our customers commission us to install solar energy systems based on customer-defined specifications, but we have the ability to define our own projects and select sites based on attractive solar characteristics. These projects are typically 1 MW in size. We enter into these projects generally with a reseller of solar power plants or a financial investor who contracts us to construct the project. Upon completion of a project, the acquirer of the project has the rights to sell electricity to the Italian power authority at specified rates over 20 years based on Italy’s feed-in tariff. Global Green Energy (formerly Global Green Advisors) is a major reseller of solar power plants for our Italian operations, and we have completed construction of 3 MW’s under an agreement with this reseller.
Our Italian business also consists of distribution of solar modules and inverters. In 2010 and 2009, distribution revenue in Italy amounted to $16.9 million and $4.8 million, respectively.
Our Other European business consists of rooftop solar installations generally ranging 5 kWh to 2 MW provided primarily to businesses that own commercial buildings or warehouses. The segment primarily serves countries other than Italy. The services we provide to our customers are largely similar to our N.A. commercial customers. In addition, our Other European segment consists of large scale international distribution and business development as well as Engineering, Procurement & Construction (“EPC”). The service we provide to our customers consists of large scale procurement, EPC, and consulting. Thru our relationship with several key manufacturers we can provide pricing and availability advantages over the competition.
In addition, we have expanded our sales and distribution reach into other European countries, such as the Czech Republic and Bulgaria through a collaborative agreement and direct sales efforts. On March 29, 2010, we entered into a collaborative agreement with Plaan Czech, s.r.o. for a total of 19 MW of PV solar projects in the Czech Republic.
Our goal is to be the leading integrator of commercial solar energy systems. We intend to pursue the following strategies to achieve this goal:
Our business consists of the installation of solar energy systems and all related components for use by commercial and industrial enterprises, municipalities, residential homeowners, and other solar energy providers. The following table highlights the breakdown of our revenue by market during 2010, 2009, and 2008:
In 2010, our largest customers were an Italian reseller, which represented 12% of our total revenue, and a Spanish commercial customer, which represented 10% of our total revenue. For the 2010 fiscal year, 97% of our revenue was derived from commercial and industrial customers, and 3% of our revenue was derived from residential customers. In 2009, our largest customers were an Italian reseller, which represented 17% of our total revenue, a distribution customer, which represented 5% of our total revenue, and a N.A. commercial customer, which represented 6% of our total revenue. For the 2009 fiscal year, 81% of our revenue was derived from commercial and industrial customers, and 19% of our revenue was derived from residential customers.
Our clients in the United States have included utility companies such as Pacific Gas and Electric and Sierra Pacific Power Company, home builders such as KB Homes, and numerous agricultural clients such as leading wineries in Napa Valley, California. Our clients in Italy have included Global Green Energy, Nicastri, and Camardo. Our clients in our Other European segment have included Plaan Czech, TSK, and Solar Jorosev.
We believe that the solar energy market is dynamic and constantly changing as certain government standards and directives that affect the marketplace have allowed, and will continue to allow, for new customers in new geographic areas. We believe that Renewable Portfolio Standards (“RPS”) in the United States have resulted in increased demand for solar energy in the American marketplace. RPS is a state policy that requires electricity providers to obtain a minimum amount of their power from renewable energy by a certain date. According to the U.S. Department of Energy, there were 33 states that adopted a RPS-type mechanism. We believe that this number will continue to increase. With each new state that adopts a RPS, bases of new customers of solar energy will develop. We also believe that the renewable energy directive of the European Union also plays a role in growth of our marketplace. According to the European Renewable Energies Foundation and the European Future Energy Forum, the EU’s member-nations are required to provide at least 20% of gross final energy consumption from renewable energy sources by 2020. This target is mandatory of the 27 member-nations. Each member-nation must draft a Renewable Energy Action Plan, which must include clear development targets for electricity, heating, cooling, and fuel. Consequently, to avoid penalties, the member-nations provide incentives in the form of feed-in tariffs for the generation of solar electricity. This EU renewable energy directive, thus, also provides for an increase in customers within the EU. We believe that our customer base will grow as a result of such standards and directives.
We have a “zero defect” quality assurance program for installation of solar energy systems. Instituted in 2006, the zero defect policy was created to set the highest quality and customer satisfaction standards in the industry today. The program sets standards for ten areas of installation: (1) installed equipment, (2) solar array, (3) array mounting structure, (4) wire runs, (5) system component location, (6) system component mounting, (7) electrical, (8) system performance, (9) building requirements, and (10) surrounding property. Each of our installations is independently verified by a quality control officer and must meet a rigid standard for excellence. One point is awarded for each standard that is met, and our installation crews must have a score of at least 9 points for each installation. If an installation crew scores less than 9 points for a particular installation, we follow up with the customer to allow management to understand the core problem with that particular installation and to design and implement measures to further improve the customer experience.
Our review standards go beyond the quality of the installation to include measures of the customer experience. We use the “Net Promoter Score” developed by the Massachusetts Institute of Technology and implemented by companies such as GE and Toyota to measure quality and customer satisfaction. We regularly review customer surveys and scores and design and implement measures to further improve the customer experience.
We are active in the North American and European markets and have a few direct competitors that are concurrently active in both of those markets. The following provides more specific competitive information for each of our target markets.
In the United States, the solar design and integration market is highly fragmented, and we face direct competition in this market from a number of smaller local installers within many U.S. cities, particularly for residential customers. For residential opportunities in American cities and regions such as Los Angeles, the San Francisco Bay Area, and California’s Central Valley, we also experience competition from regional installers such as Akeena Solar, Solar Universe, Solar City, and SPG. Based on our geographic diversification, buying power, and unique installation methods, the effect of any one installer on our business is limited but growing. In particular, among the commercial grade opportunities, there are few companies with the level of experience to perform, and therefore only a few competitors qualify under larger scale “Request for Proposal” projects. These competitors include SunPower and BP Solar. We seek to distinguish ourselves from the competition by marketing our depth of experience, complex engineering and design capabilities, customer satisfaction, and our track record for delivering “on-time” and “on-budget” installations and when project finance is required providing the customer with an attractive financing model.
In the Italian market, we face competition from Enerqos and SAEM Energy Alternative, among other companies. Premier Power Italy intends to operate as a solar developer and solar integrator. In 2009 and 2010, we largely operated as a constructor of solar power plants. In addition, we also intend to build and market large scale solar power plants as turnkey systems to mostly financial buyers that acquire systems for purposes of investment because once these systems are connected to the power grid they produce a constant stream of cash flow for 20 years for the electricity they produce pursuant to the Italian feed-in tariff program. Dealing in the construction of large scale capital intensive solar power plants for sophisticated financial buyers that purchase and manage a portfolio of income producing solar power plants as a core business requires significant resources, capabilities, relationships, and a proven track record. These factors, in addition to long development cycles that must be funded in advance, a localized culture that can impede outsiders, and the complex nature of the relatively new solar feed-in tariff program and varied regional permitting processes, create barriers to competitor entry and hinder both small and large companies alike from entering the market.
Other European Competitors
In the Other European market, we face competition from both module manufacturers and large scale EPC’s such as Phoenix Solar and Proinso. As the feed in tariff model changes depending on the maturity of each country/market Other European business model is differentiated because it is geared to quickly take advantage of changes in the feed in tariffs, and pursue international customers.
Selling and Marketing Activities
We participate in the solar industry’s leading trade shows, use radio and print advertising and marketing tools, and have hosted consumer-focused seminars in targeted markets, as well as customer appreciation events to raise awareness of solar power options and our brand, services and products. At times we also employ a national public relations firm in the United States, and have used web-based promotion tools on our websites to educate customers, to showcase our latest installations, and to provide general and specific sales information.
In May 2010, we entered into a reseller agreement with immixGroup, Inc. whereby our solar installation services and products are sold to immixGroup’s government customers under its General Services Administration (GSA) contract. Pursuant to the agreement, we sell our solar installation services and products to immixGroup for each order that immixGroup takes from its government customers. To date, no revenue has been recognized fromt his agreement as we are waiting on GSA approval of our products.
The components used in our solar energy systems consist of solar modules, inverters, racking, wire, hardware, monitoring equipment, and electrical equipment. We have no exclusive supplier relationships. We purchase the components from leading solar energy product suppliers including solar modules from GE, Sharp, and SunPower Corporation; inverters from Power One, Fronius, Satcon, SMS, and Zantrex; solar trackers from PV Tracker.
Solar modules and inverters comprise a substantial portion of the total cost of our installations. We constantly evaluate the outlook for supply of solar panels and other components. However, we currently do not maintain any long-term supply agreements for the purchase of these components, and thus we may be subject to the availability of and/or market price fluctuations for the components used in our solar energy systems.
Intellectual Properties and Licenses
We have trademark protection for the brand name “Premier Power,” for which we received approval from the U.S. Patent and Trademark Office (“USPTO”) on July 21, 2009, and for the brand name “Bright Futures,” for which we received approval from the USPTO on December 15, 2009. We also received approval for trademark protection of our sales slogan, “Your Solar Electricity Specialist”, on November 16, 2010.
Agreements with Genesis Capital Advisors
We are party to an engagement agreement with Genesis Capital Advisors, LLC (“Genesis”) dated October 31, 2008 for the exclusive services of Genesis in connection with a possible sale, merger, acquisition, financing, or transactions involving the Company in exchange for a cash fee equal to 6% of the transaction value for a sale of equity, merger acquisition, or asset sale by the Company or a cash fee equal to 2% of the transaction value with respect to a power purchase agreement financing or debt financing. Genesis has been actively assisting us since 2007, particularly in connection with our international expansion. Genesis has helped the Company identify acquisition targets and new emerging markets in our industry, and they provided general business consulting services, such as assisting in the placement of senior employees and consulting on investor relations issues. The engagement agreement is terminable by us or Genesis on 90 days prior notice; provided, however, that Genesis will continue to be entitled to its fee on any transaction that is contracted within 24 months of the termination date of the agreement. The engagement letter could, therefore, increase the cost of our entering into certain transactions for a considerable period of time after its termination.
On April 28, 2010, we entered into an agreement with Genesis clarifying the terms of compensation owed by the Company to Genesis for certain services provided by Genesis. Under this agreement, we must pay a cash fee equal to 6% of the total revenue we receive from projects relating to the construction of solar power plants, for such projects where Genesis provides assistance in developing, and the financing or sale of such plants or the related special purposes entities of such plants. To date, no payments have been made to Genesis.
Research and Development
We are focused on leveraging our years of experience in designing and installing solar systems to develop best practices and differentiating know how. For example, we helped GE develop its popular solar tile. Any technology and/or procedures that are developed are based on the decades of experience in solar installations held by the persons behind the development and in-house expertise in electrical and structural engineering. Our experienced engineering team constantly looks for new and innovative ways to address space constraints, time, and cost saving designs that will increase efficiencies and drive added revenue.
Our research and development efforts are often aimed at technology integrations and system productivity and performance features. Our engineering team has evaluated thin film module technology, new racking system, next generation inverter, and connector applications on various installation projects throughout the year. Under our installation contracts, we typically obtain the rights to use any improvements to our technology developed or discovered on a particular installation on other customer installations.
Government Approval and Regulation
All products that we resell are guaranteed by the manufacturer to have passed all required government approval and regulation requirements. Some of the electrical services we provide are regulated and require licensing. For example, the installations of electrical components that are connected to the electric meter require a C10 license in California and C2 license in Nevada, and the installation of solar systems in California requires a C46 license. As we expand our installations operation into other states, we may need to obtain additional licenses required by the local building authorities. Some states accept a C10 license from California. We possess and maintain all the necessary licenses required for the services we provide. Our employees hold some of the highest levels of licensing and certifications available in the industry, and some employees are certified by the North America Board of Certified Energy Practitioners (NABCEP). For our European operations, we hold the applicable and appropriate licenses to operate.
Compliance with Environmental Laws
We are not required to comply with any environmental laws that are particular to the solar industry, either in the United States or Europe. However, it is our policy to be as environmentally conscientious in every aspect of our operations.
As of March 15, 2011, we had approximately 65 employees, all of whom are full-time employees. We are not party to any union agreements.
Offices and Websites
Our principal executive offices are located at 4961Windplay Drive, Suite 100, El Dorado Hills, CA 95762. Our main telephone number is (916) 939-0400, and our fax number is (916) 939-0490. We have offices in North America, Italy, Czech Republic, and Spain. We also have websites located at www.premierpower.com and www.mysolarexperience.com. The information on these websites is not incorporated herein by reference.
Item 1A. Risk Factors.
The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition, or results of operations could be harmed.
Risks Relating to Our Business
We had an operating loss in 2009 and 2010 and have used increasing amounts of cash for operations and to fund our project development and future acquisitions.
We had a $4.6 million operating loss in 2009 and a $4.0 million operating loss in 2010. Cash used in operations was $6.2 million in 2009 and cash provided by operations was $1.4 million in 2010. We continue to pursue additional solar projects, acquisitions, and investment opportunities and may need to support the financing needs of our subsidiaries. We currently have enough cash on hand and projected cash flow to fund our operations for the next 12 months. However, we may need additional funds to finance future investment and acquisition activity we wish to undertake. We do not know if such funds will be available if needed on terms that we consider acceptable. We may have to limit or adjust our project development and investment/acquisition strategy or sell some of our assets in order to continue to pursue our corporate goals.
We are dependent upon our suppliers for the components used in the systems we design and install, and our major suppliers are dependent upon the continued availability and pricing of polysilicon and other raw materials used in solar modules. Any increases in the price of solar components or any interruptions to or shortage or decline in the quality of the solar components we purchase for our solar energy systems could adversely affect our business.
Key components used in our systems are purchased from a limited number of manufacturers. We are subject to market prices for the components that we purchase for our installations, which are subject to fluctuation. We cannot ensure that the prices charged by our suppliers will not increase because of changes in market conditions or other factors beyond our control. An increase in the price of components used in our systems could result in an increase in costs to our customers and could have a material adverse effect on our revenues and demand for our products and services. Our suppliers are dependent upon the availability and pricing of polysilicon, one of the main materials used in manufacturing solar panels. Interruptions in our ability to procure needed components for our systems, whether due to discontinuance by our suppliers, delays or failures in delivery, shortages caused by inadequate production capacity or unavailability, or for other reasons, would adversely affect or limit our sales and growth. In addition, increases in the prices of solar modules could make systems that have been sold but not yet installed unprofitable for us. There is no assurance that we will continue to find qualified manufacturers on acceptable terms and, if we do, there can be no assurance that product quality will continue to be acceptable, which could lead to a loss of sales and revenues.
Various licenses and permits are required to operate our business, and the loss of or failure to renew any or all of these licenses and permits could prevent us from either completing current projects or obtaining future projects, and, thus, materially adversely affect our business.
We, together with our subsidiaries, hold all required licenses in all the areas in which we operate. Also, we hold all certifications required by the jurisdictions in which we operate. The loss of any such licenses or certifications, or the loss of any key personnel who hold such licenses or certifications, would materially adversely affect our business because it could prevent us from obtaining and/or completing solar integration projects in states where we or our personnel lose such licenses or certifications or are in non-compliance with state licensing or certification requirements.
Our growth strategy may prove to be disruptive and divert management resources.
Our growth strategy may involve complex transactions and present financial, managerial and operational challenges, including diversion of management attention from our existing businesses, difficulty with integrating personnel and financial and other systems, increased expenses, including compensation expenses resulting from newly hired employees, the assumption of unknown liabilities and potential disputes. We could also experience financial or other setbacks if any of our growth strategies incur problems of which we are not presently aware.
We may need to obtain additional debt or equity financing to fund future capital expenditures and to meet working capital requirements, which may be obtained on terms that are unfavorable to the Company and/or our stockholders.
We may require additional financing in the future in connection with our growth strategy to fund future capital expenditures and for working capital. Additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
In addition to the foregoing challenges, our ability to obtain additional financing may be limited. We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
Our ability to raise capital, in general, is limited by the terms of our engagement of Genesis Capital Advisors.
We are party to an engagement agreement with Genesis Capital Advisors, LLC for their exclusive services in connection with sales, mergers, acquisitions, financings, or other transactions involving the Company. Should we terminate this agreement with Genesis, its right to compensation continues with respect to transactions entered into for the 24 month period following termination. If we require additional capital and engage other firms or persons in capital-raising efforts, we will need to obtain a waiver by Genesis of the exclusivity provisions of their engagement. Any such waiver may cause a delay or discourage third parties from entering into a business relationship with us. We may also need to compensate Genesis for such a waiver if Genesis is willing to waive its exclusivity rights. We are currently attempting to renegotiate the agreement and have no assurances that favorable terms will be obtained.
Geographical business expansion efforts we make could result in difficulties in successfully managing our business and consequently harm our financial condition.
As part of our business strategy, we may seek to expand by acquiring competing businesses or customer contracts outside of our current geographic markets, or we may open offices in the geographical markets we desire to operate within. We may face challenges in managing expanding product and service offerings and in integrating acquired businesses with our own. We cannot accurately predict the timing, size and success of our expansion efforts and the associated capital commitments that might be required. We expect to face competition for expansion candidates, which may limit the number of expansion opportunities available to us and may lead to higher expansion costs. There can be no assurance that we will be able to identify, acquire or profitably manage additional businesses and contracts or successfully integrate acquired businesses and contracts, if any, into our company, without substantial costs, delays or other operational or financial difficulties. In addition, expansion efforts involve a number of other risks, including:
Client dissatisfaction or performance problems at a single acquired business could negatively affect our reputation. The inability to acquire businesses on reasonable terms or successfully integrate and manage acquired companies, or the occurrence of performance problems at acquired companies, could result in dilution to our stockholders, unfavorable accounting charges and difficulties in successfully managing our business.
Our inability to obtain capital, use internally generated cash, or use shares of our common stock or debt to finance future expansion efforts could impair the growth and expansion of our business.
Reliance on internally generated cash or debt to finance our operations or to complete business expansion efforts could substantially limit our operational and financial flexibility. The extent to which we will be able or willing to use shares of common stock to consummate expansions will depend on our market value from time to time and the willingness of potential sellers to accept it as full or partial payment. Using shares of common stock for this purpose also may result in significant dilution to our then existing stockholders. To the extent that we are unable to use common stock to make future expansions, our ability to grow through expansions may be limited by the extent to which we are able to raise capital for this purpose through debt or equity financings. No assurance can be given that we will be able to obtain the necessary capital to finance a successful expansion program or our other cash needs. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of any expansion. In addition to requiring funding for expansions, we may need additional funds to implement our internal growth and operating strategies or to finance other aspects of our operations. Our failure to (i) obtain additional capital on acceptable terms, (ii) use internally generated cash or debt to complete expansions because it significantly limits our operational or financial flexibility, or (iii) use shares of common stock to make future expansions may hinder our ability to actively pursue any expansion program we may decide to implement and negatively impact our stock price.
Additionally, a majority of our cash is held offshore, and while we do not currently believe there are any material limitations or restrictions on our ability to repatriate profits, there may be tax consequence or changes in statutory rules which would affect our ability to do so.
Our operations are cash intensive, and our business could be adversely affected if we fail to maintain sufficient levels of working capital.
We expend a significant amount of cash in our operations, principally to fund our materials procurement. Our suppliers typically provide us with credit. In turn, we typically require our customers to make payment at various stages of the project. We generally fund most of our working capital requirements out of cash flow generated from operations. If we fail to generate sufficient revenues from our sales or if we experience difficulties collecting our accounts receivables, we may not have sufficient cash flow to fund our operating costs, and our business could be adversely affected.
Although our internal controls over financial reporting were determined to be effective as of December 31, 2010, they were determined to be deficient as of December 31, 2009. Failure to maintain effectiveness may reduce our ability to accurately report our financial results or prevent fraud.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management identified a significant deficiency related to limited finance and accounting resources in our internal control over financial reporting and concluded that our internal controls over financial reporting were ineffective at December 31, 2009. Our financial reporting includes various highly complex technical accounting issues. As a result of the previously identified significant deficiency, we have made the following significant changes in our internal controls over financial reporting to reasonably ensure that our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States:
Such changes in our internal control structure remediated the significant deficiency in the fiscal year ended December 31, 2010. However, if we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders and the market in general could lose confidence in our financial reporting, which loss of confidence could harm our business and the trading price of our common stock.
Because the solar integration industry is highly competitive and has low barriers to entry, we may lose market share to larger companies due to increased competition.
Our industry is highly competitive and fragmented, is subject to rapid change and has low barriers to entry in some of the markets in which we operate. We may in the future compete for potential customers with solar system installers and servicers, electricians, roofers, utilities and other providers of solar power equipment or electric power. Some of these competitors may have significantly greater financial, technical and marketing resources and greater name recognition than we have. We believe that our ability to compete depends in part on a number of factors outside of our control, including:
Competition in the solar power services industry may increase in the future, partly due to low barriers to entry, as well as from other alternative energy resources now in existence or developed in the future. Increased competition could result in price reductions, reduced margins or loss of market share and greater competition for qualified technical personnel. There can be no assurance that we will be able to compete successfully against current and future competitors. If we are unable to compete effectively, or if competition results in a deterioration of market conditions, our business and results of operations would be adversely affected.
We act as the general contractor for our customers in connection with the installation 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 some 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. Also, 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. We operate in international markets that have unique permitting requirements, which, if not met, may cause delays. The occurrence of any of these events could have a material adverse effect on our business and results of operations.
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 short 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 the amount of revenue recognized 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 cash flows.
We are subject to particularly lengthy sales cycles with our equity fund, commercial, and government customers, which may adversely affect our sales and marketing efforts.
Factors specific to certain of our customers’ industries have an impact on our sales cycles. Our equity fund, commercial, and government customers may have longer sales cycles due to the timing of various state and federal requirements. 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 failure to meet a customer’s expectations in the performance of our services, and the risks and liabilities associated with placing our employees and technicians in our customers’ homes and businesses, could give rise to claims against us.
Our engagements involve projects that are critical to our customers’ business or home. Our failure or inability to meet a customer’s expectations in the provision of our products and services could damage or result in a material adverse change to their premises or property, and therefore could give rise to claims against us or damage our reputation. In addition, we are exposed to various risks and liabilities associated with placing our employees and technicians in the homes and workplaces of others, including possible claims of errors and omissions, harassment, theft of client property, criminal activity and other claims.
We generally do not have long-term agreements with our solar integration customers and, accordingly, could lose customers without warning.
Our products are generally not sold pursuant to long-term agreements with solar integration customers, but instead are sold on a purchase order basis. We typically contract to perform large projects with no assurance of repeat business from the same customers in the future. Although cancellations on our purchase orders to date have been insignificant, our customers may cancel or reschedule purchase orders with us on relatively short notice. Cancellations or rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing us sufficient time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in forecasts or the timing of orders from these or other customers expose us to the risks of inventory shortages or excess inventory. This, in addition to the non-repetition of large systems projects and our failure to obtain new large system projects due to current economic conditions and reduced corporate and individual spending, could cause our revenues to decline, and, in turn, our operating results to suffer.
Our profitability depends, in part, on our success in brand recognition, and we could lose our competitive advantage if we are unable to protect our trademark against infringement. Any related litigation could be time-consuming and costly.
We believe our brand has gained substantial recognition by customers in certain geographic areas. We have trademark protection for the brand names “Premier Power” and “Bright Futures” and have applied for trademark protection of our sales slogan “Your Solar Electricity Specialist.” Use of our name or a similar name by competitors in geographic areas in which we have not yet operated could adversely affect our ability to use or gain protection for our brand in those markets, which could weaken our brand and harm our business and competitive position. In addition, any litigation relating to protecting our trademark against infringement is likely to be time consuming and costly.
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 assurances 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 patent or trademarks, 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 any 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 do not carry business interruption insurance, and any unexpected business interruptions could adversely affect our business.
Our operations are vulnerable to interruption by earthquake, fire, power failure and power shortages, hardware and software failure, floods, computer viruses, and other events beyond our control. In addition, we do not carry business interruption insurance to compensate us for losses that may occur as a result of these kinds of events, and any such losses or damages incurred by us could disrupt our solar integration projects and other Company operations without reimbursement.
A decrease in the availability of credit or an increase in interest rates could make it difficult for customers to finance the cost of solar energy systems and could reduce demand for our services and products.
Some of our prospective residential and commercial customers may depend on debt financing, such as power purchase agreements or home equity loans, to fund the initial capital expenditure required to purchase a solar energy system. Third-party financing sources, specifically for solar energy systems, are currently limited, especially due to recent domestic and worldwide economic troubles. The lack of financing sources, a decrease in the availability of credit or an increase in interest rates could make it difficult or more costly for our potential customers to secure the financing necessary to purchase a solar energy system on favorable terms, or at all, thus lowering demand for our products and services and negatively impacting our business.
A portion of our revenues is generated by construction contracts, and, thus, a decrease in construction could reduce our construction contract-related sales and, in turn, adversely affect our revenues.
Some of our solar-related revenues were generated from the design and installation of solar power products in newly constructed and renovated buildings, plants and residences. Our ability to generate revenues from construction contracts will depend on the number of new construction starts and renovations, which should correlate with the cyclical nature of the construction industry and be affected by general and local economic conditions, changes in interest rates, lending standards and other factors. For example, the current housing slump and tightened credit markets have resulted in reduced new home construction, which could limit our ability to sell solar products to residential and commercial developers.
We derive most of our revenue from sales in a limited number of territories, and we will be unable to further expand our business if we are unsuccessful in adding additional geographic sales territories to our operations.
We currently derive most of our revenue from sales of our solar integration services in the United States and Europe. This geographic concentration exposes us to growth rates, economic conditions, government regulations, permitting requirements, and other factors that may be specific to those territories to which we would be less subject if we were more geographically diversified. In addition, our reliance on tariffs and other government incentive programs (which may not always be available to us) could magnify any adverse consequences associated with such geographic concentration. The growth of our business will require us to expand our operations and commence operations in other states, countries, and territories. Any geographic expansion efforts that we undertake may not be successful, which, in turn, would limit our growth opportunities.
Our financial results often vary significantly from quarter to quarter, and results for a particular quarter may not necessarily be indicative of the results for the following quarter.
Since individual solar projects can represent a meaningful percentage of our revenues and net income in any single quarter, the deferral or failure to complete a single order in a quarter can result in unexpected revenue and net income shortfalls. We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs are to a large extent fixed. As a result, we may not be able to sufficiently reduce our costs in any quarter to adequately compensate for an unexpected near-term shortfall in revenues, and even a small shortfall could disproportionately and adversely affect financial results for that quarter.
We face risks associated with international trade and currency exchange that could have a material impact on our profitability.
We transact business in the U.S. dollar and the Euro. Changes in exchange rates would affect the value of deposits of currencies we hold. We do not currently hedge against exposure to currencies. We cannot predict with certainty future exchange rates and their impact on our operating results. Movements in the exchange rate between the U.S. dollar and the Euro could have a material impact on our profitability.
Our success may depend in part on our ability to make successful acquisitions.
As part of our business strategy, we plan to expand our operations through strategic acquisitions in our current markets and in new geographic markets. We cannot accurately predict the timing, size, and success of our acquisition efforts. Our acquisition strategy involves significant risks, including the following:
These risks, as well as other circumstances that often accompany expansion through acquisitions, could inhibit our growth and negatively impact our operating results. In addition, the size, timing, and success of any future acquisitions may cause substantial fluctuations in our operating results from quarter to quarter. Consequently, our operating results for any quarter may not be indicative of the results that may be achieved for any subsequent quarter or for a full fiscal year. These fluctuations could adversely affect the market price of our common stock.
Our failure to integrate the operations of acquired businesses successfully into our operations or to manage our anticipated growth effectively could materially and adversely affect our business and operating results.
In order to pursue a successful acquisition strategy, we must integrate the operations of acquired businesses into our operations, including centralizing certain functions to achieve cost savings and pursuing programs and processes that leverage our revenue and growth opportunities. The integration of the management, operations, and facilities of acquired businesses with our own could involve difficulties, which could adversely affect our growth rate and operating results. We may be unable to do any of the following:
Our rate of growth and operating performance may suffer if we fail to manage acquired businesses profitably without substantial additional costs or operational problems or to implement effectively combined growth and operating strategies.
Costs incurred because we are a public company may affect our profitability.
As a public company, we incur significant legal, accounting and other expenses, and we are subject to the SEC’s rules and regulations relating to public disclosure that generally involve a substantial expenditure of financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, requires changes in corporate governance practices of public companies. We expect that full compliance with such rules and regulations will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly, which may negatively impact our financial results. To the extent our earnings suffer as a result of the financial impact of our SEC reporting or compliance costs, our ability to develop an active trading market for our securities could be harmed.
Our business is exposed to risks associated with a weakened global economy, which increases the uncertainty of project financing for commercial solar installations and the risk of non-payment by our customers.
The tightening of the credit markets and turmoil in the financial markets and a weak global economy contributes to slowdowns in the solar industry, which slowdowns may continue and worsen if current economic conditions are prolonged or deteriorate further. The market for installation of solar power systems depends largely on commercial and consumer capital spending. Economic uncertainty exacerbates negative trends in these areas of spending, and may cause our customers to push out, cancel, or refrain from placing orders, which may reduce our net sales. Difficulties in obtaining capital and deteriorating market conditions may also lead to the inability of some customers to obtain affordable financing, including traditional project financing and tax-incentive based financing and home equity-based financing, resulting in lower sales to potential customers with liquidity issues, and may lead to an increase of incidents where our customers are unwilling or unable to pay for systems they purchase, and additional bad debt expense for the Company. Further, these conditions and uncertainty about future economic conditions may make it challenging for us to obtain equity and debt financing to meet our working capital requirements to support our business, forecast our operating results, make business decisions, and identify the risks that may affect our business, financial condition and results of operations. If we are unable to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition, or results of operations may be materially and adversely affected.
We are highly dependent on senior management and key sales and technical personnel. The loss and inability to replace any such persons could have a material adverse effect on our business and operations.
We are highly dependent on our senior management to manage our business and operations and our key managerial, financial, sales, design, engineering, technical and other personnel for the sale, development and installation of our solar power systems. In particular, we rely substantially on Dean R. Marks, our Chief Executive Officer, and Miguel de Anquin, our President, to manage our operations. Although we have employment agreements with, and have obtained key-man life insurance policies for our benefit on the lives of, Messrs. Marks and de Anquin, we cannot assure their continued services to the Company. The loss of either one of them, or any other member of our senior management, would have a material adverse effect on our business and operations. Competition for senior management, sales and technical personnel is intense, and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any member of our senior management or key sales and technical personnel that we lose. In addition, if any member of our senior management or key sales and technical personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners, other key professionals and staff members of our company. Although each of our senior management and key sales and technical personnel has signed a confidentiality and non-competition agreement in connection with his employment with us, we cannot provide assurances that we will be able to successfully enforce these provisions in the event of a dispute between us and any member of our senior management or key operational personnel.
If we are unable to attract, train, and retain highly qualified personnel, the quality of our services may decline, and we may not meet our business and financial goals.
We compete for qualified personnel with other solar integration companies. Intense competition for these personnel could cause our compensation costs to increase significantly, which, in turn, could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals, which will require the retention of these qualified employees to work on our future solar integration projects as we expand our business.
Shortages in the supply of silicon could adversely affect the availability and cost of the solar PV modules used in our solar energy systems.
Shortages of silicon could adversely affect the availability and cost of the solar PV modules we use in our solar energy systems. Manufacturers of solar PV modules depend on the availability and pricing of silicon, one of the primary materials used in the manufacture of solar PV modules. The worldwide market for silicon from time to time experiences a shortage of supply, primarily because of demand for silicon by the semiconductor industry. Shortages of silicon cause the prices for solar PV modules to increase and supplies to become difficult to obtain. While we have been able to obtain sufficient supplies of solar PV modules to satisfy our needs to date, this may not be the case in the future. Future increases in the price of silicon could result in an increase in costs to us, price increases to our customers or reduced margins.
Product liability claims against us could result in adverse publicity and potentially significant monetary damages.
As a seller of consumer products, we may face product liability claims in the event that use or our solar energy systems results in injuries. Because solar energy systems produce electricity, it is possible that our products could result in injury, whether by product malfunctions, defects, improper installation or other causes. If such injuries or claims of injuries were to occur, we could incur monetary damages and our business could be adversely affected by any resulting negative publicity. The successful assertion of product liability claims against us also could result in potentially significant monetary damages and, if our insurance protection is inadequate to cover these claims, could require us to make significant payments from our own resources.
We may be subject to unexpected warranty expenses or service claims that could reduce our profits.
As a result of the length of the warranty periods we provide, we bear the risk of warranty claims long after we have completed the installation of a solar energy system. Our current standard warranty for our installation services includes a 10-year warranty period for defects in material and workmanship. In addition, most manufacturers of solar PV modules offer a 25-year period for declines in power performance. Although we maintain a warranty reserve for potential warranty or service claims and we have not had material warranty claims in the past, claims in excess of our reserve could adversely affect our operating results. Our failure to predict accurately future warranty claims could result in unexpected volatility in our financial condition.
We rely on communications and shipping networks to deliver our products.
Given our emphasis on customer service, the efficient and uninterrupted operation of order-processing and fulfillment functions is critical to our catalog and internet business. To maintain a high level of customer service, we rely on a number of third-party service providers, such as delivery companies, telecommunications companies and printers. Any interruption in services from our principal third-party service providers, including delays or disruptions resulting from labor disputes, power outages, human error, adverse weather conditions or natural disasters, could materially and adversely affect our business. In addition, products that we source overseas must be shipped to our distribution center by freight carriers, and a work stoppage or political unrest could adversely affect our ability to fulfill our customer orders.
Risks Relating To Our Industry
Our business depends on the availability of rebates, tax credits and other financial incentives, the reduction or elimination of which would reduce the demand for our services.
Many U.S. states, including California, Nevada, and New Jersey, offer substantial incentives to offset the cost of solar power systems. These incentives can take many forms, including direct rebates, state tax credits, system performance payments, and Renewable Energy Credits. There can be no assurance that these incentives will continue to be available. Moreover, although the United States Congress passed legislation to extend for 8 years a 30% federal tax credit for the installation of solar power systems, there can be no assurance that the tax credit will be further extended once they expire. Additionally, businesses that install solar power systems may elect to accelerate the depreciation of their system over five years. Spain also offers substantial incentives, including feed-in tariffs. Spain’s Industry Ministry has implemented a capped solar subsidy program for MW installation and reduced tariff levels. Italy offers incentives in the form of minimum user prices for solar electricity production and feed-in tariffs that are subject to reduction annually for new applications. In Italy, the current feed-in tariff decree is effective through 2011, however if subject to unannounced change. Subsequent decrees will redefine rates for solar power plants commissioned thereafter. A reduction in or elimination of such incentives could substantially increase the cost or reduce the economic benefit to our customers, resulting in significant reductions in demand for our products and services, which may negatively impact our sales.
We have experienced technological changes in our industry. New technologies may prove inappropriate and result in liability to us or may not gain market acceptance by our customers.
The solar power industry, which currently accounts for less than 1% of the world’s power generation according to the Solar Energy Industries Association, is subject to technological change. Our future success will depend on our ability to appropriately respond to changing technologies and changes in function of products and quality. If we adopt products and technologies that are not attractive to consumers, we may not be successful in capturing or retaining a significant share of our market. In addition, some new technologies are relatively untested and unperfected and may not perform as expected or as desired, in which event our adoption of such products or technologies may cause us to lose money.
Solar energy is generally a more expensive source of energy than conventional energy or non-solar alternative energy sources, and a drop in the retail price of conventional energy or non-solar alternative energy sources may negatively impact our profitability.
We believe that a customer’s decision to purchase or install solar power capabilities is primarily driven by the cost and return on investment resulting from solar power systems. Solar energy is generally a more expensive source of energy than conventional energy or non-solar alternative energy sources, especially in the United States. Fluctuations in economic and market conditions that impact the prices of conventional and non-solar alternative energy sources, such as decreases in the prices of oil, coal and other fossil fuels and changes in utility electric rates and net metering policies, could cause the demand for solar power systems to decline, which would have a negative impact on our profitability.
Existing regulations, and changes to such regulations, may present technical, regulatory, and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.
Installations of solar power systems are subject to oversight and regulation in accordance with national and local ordinances, building codes, zoning, environmental protection regulation, utility interconnection requirements for metering, and other rules and regulations. We attempt to keep up-to-date with these requirements on a national, state, and local level, and must design, construct and connect systems to comply with varying standards. Certain cities may have ordinances that prevent or increase the cost of installation of our solar power systems. In addition, new government regulations or utility policies pertaining to solar power systems are unpredictable and may result in significant additional expenses or delays and, as a result, could cause a significant reduction in demand for solar energy systems and our services. For example, there currently exists metering caps in certain jurisdictions that effectively limit the aggregate amount of power that may be sold by solar power generators into the power grid. Moreover, in certain markets, the process for obtaining the permits and rights necessary to construct and interconnect a solar power system to the grid requires significant lead time and may become prolonged, and the cost associated with acquiring such permits and project rights may be subject to fluctuation.
Adverse changes in the political and economic policies of European governments could have a material adverse effect on the overall economic growth of European markets, which could reduce the demand for our products and materially and adversely affect our competitive position in Europe.
A significant portion of our business operations are conducted in, and a significant portion of our sales are made in, Spain through our wholly-owned subsidiary, Premier Power Spain. In addition, we have business operations in Italy through our wholly owned subsidiary, Premier Power Italy. Spain and Italy offer substantial incentives, including feed-in tariffs, to encourage the growth of solar power as a form of renewable energy. However, there have been significant changes in Spain’s laws which cap the amount of kilowatts installed by solar power installers in Spain at 66 MW per quarter, effectively limiting the number of solar module installations throughout Spain, and such new laws also created a more complicated and lengthy permitting process in order to receive the government funded feed-in tariffs. Accordingly, our business, financial condition, results of operations, and prospects are affected significantly by economic, political, and legal developments in such European countries. Any adverse change in such policies could have a material adverse effect on the overall economic growth in Europe or on the level of our incentives, which, in turn, could lead to a reduction in demand for our products and consequently have a material adverse effect on our European operations and sales.
If the demand for solar power technology and solar power products does not continue to increase, our sales may decline, and we may be unable to achieve or sustain profitability.
The market for solar power products is continuing to evolve, and the level of demand for solar power technology is uncertain. Many factors will influence the widespread use of solar power technology and demand for solar power products, including:
If demand for solar power products fails to sufficiently grow, we may be unable to generate enough revenue to achieve and sustain profitability. In addition, demand for solar power products in the markets and geographic regions we target may not develop or may develop more slowly than we anticipate.
Public opposition toward solar farms may make it more difficult to obtain the necessary permits and authorizations required to develop or maintain a solar farm.
Public attitude towards aesthetic and environmental impacts of solar energy projects impacts the ability to develop our solar farms. In many jurisdictions, the environmental impact review process ensures a role for concerned members of the public who oppose solar energy projects in general or are concerned with potential environmental, health, or aesthetic impacts, impacts on property values or the rewards of property ownership, or impacts on the natural beauty of public lands, which can lead to changes in design or layout, extensive impact mitigation requirements, or even the rejection of a project. In such areas, local acceptance is critical to the ability to obtain and maintain necessary permits and approvals. We cannot assure you that any solar farm projects under development will be accepted by the affected population. Public opposition can also lead to legal challenges that may result in the invalidation of a permit or, in certain cases, the dismantling of an existing solar farm as well as increased cost and delays. Reduced acceptance of solar farms by local populations, an increase in the number of legal challenges, or an unfavorable trend in the outcome of these challenges could prevent us from achieving our plans, which, in turn, could have a material adverse effect on our business, results of operations, and financial condition.
Risk Relating to Our Securities
We have not paid any cash dividends, and no cash dividends will be paid in the foreseeable future, which may require our stockholders to generate a cash flow from their investment in our securities through alternative means.
We do not anticipate paying cash dividends on our common stock in the foreseeable future, and we may not have sufficient funds legally available to pay dividends. Even if funds are legally available for distribution, we may nevertheless decide not to or may be unable to pay any dividends to our stockholders. We intend to retain all earnings for our operations. Accordingly, our stockholders may have to sell some or all of their common stock in order to generate cash flow from their investment. Our stockholders may not receive a gain on their investment when they sell their common stock and may lose some or all of their investment. Any determination to pay dividends in the future on our common stock will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, capital requirements, and other factors that our board of directors deems relevant.
We may need additional capital, and the sale of additional shares or other equity securities could result in dilution to our stockholders. Additionally, our stockholders may face dilution from conversion of our Series A Convertible Preferred Stock or Series B Convertible Preferred Stock, and our stock price may be depressed by the transfer and subsequent sale of the 3 million shares held in escrow issuable to Esdras Ltd. in connection with our purchase of our Italian operations from Esdras Ltd.
We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain an increased credit facility. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and could result in further operating and financing covenants that would further restrict our operations. We cannot provide assurances that financing will be available in amounts or on terms acceptable to us, if at all. Additionally, there are outstanding shares of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock issued by us that could convert into additional shares of common stock, the conversion of which could dilute our current stockholders. Further, our current stockholders will face dilution from the issuance of any portion of the 3 million shares that are held in escrow and issuable to Esdras Ltd. in connection with our purchase of our Italian operations from Esdras Ltd.
The application of the “penny stock” rules could adversely affect the market price of our common stock and increase our stockholders’ transaction costs to sell those shares.
Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Securities Exchange Act of 1934, as amended. The penny stock rules apply to companies that are not traded on a national securities exchange whose common stock trades at less than $5.00 per share or that have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common stock, and may result in decreased liquidity for our common stock and increased transaction costs for sales and purchases of our common stock as compared to other securities.
Our common stock is thinly traded, and an active public market for our common stock may not develop or be sustained.
Although our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”), we cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common stock has historically been sporadically or “thinly traded” on the OTCBB, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or nonexistent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-adverse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on our stock price. We cannot provide assurances that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
The volatility of the market price of our common stock may render our stockholders unable to sell their shares of our common stock at or near “ask” prices or at all if they need to sell their shares to raise money or otherwise desire to liquidate their shares.
The market price of our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” that could lead to wide fluctuations in our stock price. The price at which our common stock is purchased may not be indicative of the price that will prevail in the trading market. An investor in our common stock may be unable to sell their common stock at or above their purchase price if at all, which may result in substantial losses to such investor.
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our stock price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our stock price is attributable to a number of factors. As noted above, our common stock is sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event a large number of our shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its stock price. The following factors also may add to the volatility in the price of our common stock: actual or anticipated variations in our quarterly or annual operating results; adverse outcomes; additions to or departures of our key personnel, as well as other items discussed under this “Risk Factors” section, as well as elsewhere in this document. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain its current market prices, or as to what effect the sale of shares or the availability of shares for sale at any time will have on the prevailing market price.
If we do not meet the listing standards established by national securities exchange markets such as Nasdaq and NYSE Amex LLC, our common stock may not become listed for trading on one of those markets, which may restrict the liquidity of shares held by our stockholders.
We have applied for listing of our common stock for trading on national securities exchanges, and the applications are currently pending. The listing of our common stock on a national securities exchange may result in a more active public market for our common stock, resulting in turn in greater liquidity of shares held by our stockholders. National securities exchanges such as Nasdaq and NYSE Amex LLC have established certain quantitative criteria and qualitative standards that companies must meet in order to become and remain listed for trading on these markets. We cannot guarantee that we will be able to meet all necessary requirements for listing; therefore, we cannot guarantee that our common stock will be listed for trading on a national securities exchange.
Volatility in our common stock price may subject us to securities litigation that could result in substantial costs to our business.
The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect our stock price will be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources that otherwise could have been focused on our business operations.
Past activities of our company and affiliates may lead to future liability for our company.
Prior to our acquisition of Premier Power California, we were a third-party logistics provider for supply chain management, a business unrelated to our current operations. Any liabilities relating to such prior business against which we are not completely indemnified will be borne by us and may result in substantial costs to the Company and could divert management’s attention and resources that otherwise could have been focused on our business operations.
A large majority of our shares are held by a few stockholders, some of whom are members of our management. As these principal stockholders substantially control our corporate actions, our other stockholders may face difficulty in exerting any influence over matters not supported by these principal stockholders.
Our principal stockholders include Dean R. Marks, who is our Chairman of the Board and Chief Executive Officer, and Miguel de Anquin, who is our President and Corporate Secretary and a member of our Board. Messrs. Marks and de Anquin own approximately 62.0% of our outstanding shares of common stock. Additionally, Bjorn Persson, the Executive Vice President of European Operations, and Vision Opportunity Master Fund, Ltd. own approximately 8.8% and 5.4%, respectively, of our outstanding shares of common stock. Vision owns 6,300,000 shares of preferred stock. These stockholders, acting individually or as a group, could exert control over matters such as electing directors, amending our certificate of incorporation or bylaws, and approving mergers or other business combinations or transactions. In addition, because of the percentage of ownership and voting concentration in these principal stockholders and their affiliated entities, elections of our board of directors will generally be within the control of these stockholders and their affiliated entities. While all of our stockholders are entitled to vote on matters submitted to our stockholders for approval, the concentration of shares and voting control presently lies with these principal stockholders and their affiliated entities. As such, it would be difficult for stockholders to propose and have approved proposals not supported by these principal stockholders and their affiliated entities. There can be no assurance that matters voted upon by our officers and directors in their capacity as stockholders will be viewed favorably by all stockholders of our company. The stock ownership of our principal stockholders and their affiliated entities may discourage a potential acquirer from seeking to acquire shares of our common stock which, in turn, could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
Anti-takeover rules with respect to business combinations with certain stockholders under Delaware law could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.
We are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder (or a stockholder who owns more than 15% of the corporation's voting stock) for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.
The Certificate of Designation of Preferences, Rights and Limitations of our Series A Convertible Preferred Stock provides the holder of our Series A Preferred with anti-dilution rights, which, if triggered, will result in dilution to our existing stockholders.
The Certificate of Designation of our Series A Convertible Preferred provides certain anti-dilution rights to their holders. Vision Opportunity Master Fund, Ltd. is the sole holder of our Series A Convertible Preferred, and it currently holds 3,500,000 shares, which were issued on September 10, 2008. Vision’s shares of Series A Convertible Preferred are convertible into 3,500,000 shares of our common stock at a then current conversion price of $2.00. If the conversion price were reduced, our existing stockholders will be diluted.
Our certificate of incorporation authorizes our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.
Contractual limitations that restrict conversion of securities held by Vision Opportunity Master Fund, Ltd. may not necessarily prevent substantial dilution of the voting power and value of an investment in our securities.
The contractual limitations that restrict conversion of shares of Series A Convertible Preferred Stock and of Series B Convertible Preferred Stock held by Vision Opportunity Master Fund, Ltd. (“Vision”) for shares of our common stock are limited in their application and effect and may not prevent substantial dilution of our existing stockholders. Pursuant to the terms of such securities, Vision may not convert the Series A Stock or the Series B Stock to the extent that such conversion would cause Vision’s beneficial ownership, together with its affiliates, to exceed 9.99% of the number of shares of our outstanding common stock immediately after giving effect to the issuance of shares of common stock as a result of a conversion. Vision, may, however waive this limitation upon 61 days’ notice to the Company. In addition, this 9.99% limitation does not prevent Vision from converting the Series A Stock or the Series B Stock into shares of our common stock and then reselling those shares in stages over time where Vision and its affiliates do not, at any given time, beneficially own shares in excess of the 9.99% limitation. Consequently, this limitation will not necessarily prevent substantial dilution of the voting power and value of an investment in our securities. Further, the Company has registered for resale shares of the Company’s common stock issuable upon conversion of the Series A Stock and Series B Stock. Vision may waive the 9.99% limitation and sell a large number of shares of the Company’s common stock issued to it upon conversion of the Series A Stock and Series B Stock into the open market, which could result in a substantial drop in the market price of our common stock.
Our principal executive offices are located in El Dorado Hills, California. The table below provides a general description of our offices and facilities, including those for our international operations:
Premier Power Spain is party to cancelable leases with thirty day notice for operating facilities in Navarra, Spain, which expires in 2012 and Barcelona, Spain, which expires in 2014. Premier Power Italy is party to a non-cancelable renewable lease for operating facilities in Campobasso, Italy, which expires in 2015. We are party to a non-cancelable lease for offices in Anaheim, California, which expires in 2013. We are party to a non-cancelable lease for an office in Czech Republic, which expires in 2011. These leases provide for annual rent increases tied to the Consumer Price Index or equivalent indices in Spain and Italy. The leases require the following payments as of December 31, 2010, subject to annual adjustment, if any:
Item 3. Legal Proceedings.
We are not currently involved in any material legal proceedings, and we are not aware of any material legal proceedings pending or threatened against us. We are also not aware of any material legal proceedings involving any of our directors, officers, or affiliates or any owner of record or beneficially of more than 5% of any class of our voting securities.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “PPRW.” The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock as reported on the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions.
As of March 15, 2011, the closing sales price for shares of our common stock was $1.00 per share on the OTCBB.
As of March 10, 2011, we have approximately 54 stockholders of record of our issued and outstanding common stock based upon a shareholder list provided by our transfer agent. Our transfer agent is Computershare located at 350 Indiana Street, Suite 800, Golden, Colorado 80401, and their telephone number is (303) 262-0600.
We do not currently intend to pay any cash dividends in the foreseeable future on our common stock and, instead, intend to retain earnings, if any, for operations. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, and other factors that our board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth, as of December 31, 2010, certain information related to our compensation plans under which shares of our common stock are authorized for issuance.
On December 19, 2008, our board of directors approved the Premier Power Renewable Energy, Inc. 2008 Equity Incentive Plan (the “Plan”). All of our employees, officers, and directors, and those of our consultants who (i) are natural persons and (ii) provide bona fide services to the Company not connected to a capital raising transaction or the promotion or creation of a market for our securities are eligible to be granted options or restricted stock awards (each, an “Award”) under the Plan. The Plan is administered by our board, and the board establishes certain terms of option awards, including the exercise price and duration. Awards may be made under the Plan for up to 4,951,875 shares of our common stock, and the maximum number of shares of common stock with respect to which Awards may be granted to a “covered employee” as defined by section 162(m) of the Internal Revenue Code of 1986, as amended, is 1,500,000 shares of common stock. The Plan allows for adjustments for changes in common stock and certain other events, including, but not limited to, any change in control, stock split, reverse stock split, stock dividend, recapitalization, combination of shares, spin-off, any extraordinary distribution, and liquidation or dissolution.
Recent Sales of Unregistered Securities
The following discussion and analysis of the results of operations and financial condition of Premier Power Renewable Energy, Inc. for the fiscal years ended December 31, 2010 and 2009 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Statement Regarding Forward-Looking Information, and Business sections in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
We are a developer, designer, and integrator of solar energy solutions. We develop, market, sell, and maintain solar energy systems for residential, agricultural, commercial, industrial customers in North America and Europe. In addition, we distribute solar modules and invertors to smaller solar developers and integrators.
Our business is conducted by our wholly owned subsidiary, Premier Power Renewable Energy, Inc., a California corporation (“Premier Power California”), through its wholly owned subsidiaries, Bright Future Technologies, LLC, a Nevada limited liability company (“Bright Future”), and Premier Power Sociedad Limitada, a limited liability company formed in Spain (“Premier Power Spain”). Our business is also conducted by Rupinvest SARL, a corporation duly organized and existing under the law of Luxembourg (“Rupinvest”), through its wholly owned subsidiaries Premier Power Italy S.p.A. (“Premier Power Italy”) and Premier Power Development Srl (“Premier Power Development”), each of which are a private limited company duly organized and existing under the laws of Italy.
We procure solar components from the solar industry’s leading suppliers and manufacturers that includes Sun Tech, Sharp, various Chinese module manufacturers, Power One, Fronius, and SunPower Corporation. We procure solar components that best fit the respective project and do not have any exclusive supplier relationships.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid the reader in fully understanding and evaluating this discussion and analysis:
Basis of Presentation – The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles accepted in the United States (“GAAP”), and include the accounts of Premier Power Renewable Energy, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Inventories – Inventories, consisting primarily of raw materials, are recorded using the average cost method, and are carried at the lower of cost or market.
Goodwill and Other Intangible Assets – The Company does not amortize goodwill, but rather tests goodwill for impairment at least annually. We determine the fair value using a weighted market and income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we calculate the fair value of the reporting unit using selected comparable company’s revenue multiples from the Public Guideline Companies and apply the lowest revenue multiple to the reporting unit’s revenue. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment of goodwill has occurred and we recognize an impairment of loss for the difference between the carrying amount and the implied fair value of goodwill as a component of operating income. We did not recognize any goodwill impairment charges in 2010 and 2009. Intangible assets, consisting of a customer list, trademarks, and employee contract are amortized over their estimated useful lifes ranging from 2-17 years.
Fair Value of Financial Instruments – The carrying value reported for cash equivalents, accounts receivable, prepaid expenses, other receivables, accounts payable, and accrued liabilities approximated their respective fair values at each balance sheet date due to the short-term maturity of these financial instruments. Based on borrowing rates currently available to us for borrowings with similar terms, the carrying values of our line of credit also approximates fair value.
Revenue Recognition – Revenue on solar power projects installed by the Company for customers under installation contracts is recognized using the percentage of completion method of accounting. At the end of each period, the Company measures the cost incurred on each project and compares the result against its estimated total costs at completion. The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the installation 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 either costs or estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines a customer’s credit worthiness at the time an order is accepted. Sudden and unexpected changes in a customer’s financial condition could put recoverability at risk.
Contract costs include all direct material and labor costs attributable to a project as well as certain indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, 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 percentage of completion method requires the ability to estimate several factors, including the ability of the customer to meet its obligations under the contract, including the payment of amounts when due. If we determine that collectability is not assured at the onset of a contract, we will defer revenue recognition and use methods of accounting for the contract such as completed contract method until such time we determine that collectability is reasonably assured or through the completion of the project.
Revenue related to distribution sales is recognized when we have received either a purchase order or contract, deem delivery of product to have occurred, when the title and risk of ownership have passed to the buyer and we determine that collection is probable.
Product Warranties – The Company warrants its projects for labor and materials associated with its installations. The Company’s warranty is ten years in California and generally five to ten years elsewhere in the U.S., depending upon each state’s specific requirements. Premier Power Italy provides a ten year warranty covering the labor and materials associated with its installations. Premier Power Spain provides a one year warranty for all contracts signed after December 31, 2006. 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 a peer company solar system installer. Solar panels and inverters are warranted by the manufacturer for 25 years and 10 years, respectively.
Share-Based Compensation – The Company accounts for share-based compensation under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 (Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”), which requires the Company to measure the share-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’s requisite service period. Share-based compensation expense for all share-based compensation awards granted was based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718.
Income Taxes – The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the 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. Prior to September 2008, the Company was not subject to federal income tax.
FASB ASC 740-10 (Financial Accounting Standards Interpretation FIN No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48)). FASB ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company recognized no material adjustment in the liability for unrecognized income tax benefits as of December 31, 2010 and 2009. The Company does not expect there to be any material change to the assessment of uncertain tax positions over the next twelve months.
Premier Power Spain is organized under the laws of Spain and is subject to federal and provincial taxes. Premier Power Italy and Premier Power Development are recognized under the laws of Italy and are subject to federal and provincial taxes.
Contingent Consideration Liability – In connection with the acquisition of Rupinvest, contingent consideration liability of $12 million was recorded at the time of the purchase. The contingent consideration liability relates to the contingent issuance of 3 million shares to the sellers of Rupinvest. In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, the Company estimates the fair value of the contingent consideration liability at each reporting period, with changes in the estimated fair value recorded in income.
The fair value measurement assumes that the contingent consideration liability is transferred to a market participant at the valuation date and that the nonperformance risk related to the contingent consideration liability remains constant. The Company estimates the fair value using the market price of its shares since it believes this represents the present value of its future stock returns, discounted at the Company’s required rate of return. The Company also estimates the number of shares to be issued based on a number of financial scenarios weighted based on their relative probability. The Company considers the effect of counterparty performance risk in its fair value estimate. The Company estimates the counterparty performance risk by comparing its borrowing rate (5.0% at December 31, 2010) to those of U.S. treasury notes and uses the underlying spread to discount the estimated fair value.
Summary of 2010 Results of Operations
Our revenues for the year ended December 31, 2010 was $86.8 million, an increase of $56.0 million, or 182%, from the year ended December 31, 2009. North American revenues were $16.4 million for the year ended December 31, 2010, an increase of $2.4 million, or 17%, from the prior year. Italian revenues were $31.8 million for the year ended December 31, 2010, an increase of $21.0 million, or 194%, from the prior year. Other European revenues were $38.6 million for the year ended December 31, 2010, an increase of $32.6 million, or 552%, from the prior year. The increase in our revenues was primarily the result of our continuing efforts to expand our global reach through solar farm opportunities and distribution, which is particularly noted in the significant growth in Europe.
Our net loss for the year ended December 31, 2010, was $0.7 million, or $0.03 per share, compared to net income of $3.7 million, or $0.14 per share, for year ended December 31, 2009. Net loss in 2010 included gains of $6.3 million associated with changes in fair value of a contingent consideration liability. Our profitability is primarily dependent upon revenue from sales to commercial, governmental, residential, and equity fund customers. Profitability is also affected by the costs and expenses associated with installation of systems. Cost of revenues increased by $53.0 million, or 199%, in the year ended December 31, 2010, compared to the prior fiscal year. Most of the increase in cost of revenues directly correlates to the significant increase in revenues, however the decrease in overall margin percentages from 14.5% in the prior year to 8.2% in the current year highlights the effects of a continuing lag in the overall economic environment, resulting in the reduction in the pricing of solar systems to maintain sales volumes. In addition, the decrease in margin was the result of the increase in our distribution business which typically carries lower margins than our traditional revenue. Operating expenses increased by $2.4 million, or 28%, for the year ended December 31, 2010 as compared to the year ended December 31, 2009, due primarily to the inclusion of a full year of our Italian operations, compared to only five months of operations in the prior year, and to increases in recognized stock-based compensation.
Sources of Revenue
Our revenues include revenue recognized under installation contracts using the percentage of completion method of accounting. Additionally, we derive revenues from distribution sales to customers in Europe. The increase in North America was largely due to the expansion of our commercial projects offset by the reduction in volume in our residential installations. The growth in North American commercial projects was driven by the Company signing several megawatt projects in the latter part of the year as our customers have shown greater ability to access project finance. We have continued to build a strong project pipeline and backlog in North America, and we have partnered with several power purchase agreement providers and have signed projects from these efforts. The growth in Italian revenues is largely due to a full year of operations from our Italian subsidiary in the year ended December 31, 2010 compared to only five months of operations in the prior year due to the acquisition of the Italian operations in the third quarter of 2009. The current year increase was also driven by the inclusion of approximately $11 million in current year revenues from the recognition of the completion of two 1mW solar power plants in Southern Italy. The increase in Other European revenues is largely the result of the successful collaboration with a Czech Republic company for approximately $13.5 million in distribution and engineering, procurement, and construction services during the year on up to 19 megawatts of solar projects which began in the second quarter of 2010 and approximately $17 million in revenues from a distribution contract with a large Spanish development company.
Cost of Revenues
Cost of revenues include all direct material and labor costs attributable to a project as well as certain indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. The 199% increase in cost of revenues was primarily the result of increased recognized revenues across all segments, most significantly in the Italian and Other European markets. Cost of revenues for North America increased $3.5 million, or 28%, for the year ended December 31, 2010 compared to the year ended December 31, 2009. North America gross margin decreased to 3.2% due to the recognition of an insufficient volume of revenues to cover fixed operational costs from our residential business segment, the increased competitive nature of the industry, and the scope and size of projects as larger projects typically have lower gross margins. The increase in Italian cost of revenues of $17.8 million, or 201%, correlates to the significant increase in Italian revenues and is largely due to a full year of operations from our Italian subsidiary in the year ended December 31, 2010 compared to only five months of operations in the prior year. The gross margin for our Italian operations was 16.3%, down 2% from the prior year. This decrease was largely the result of the completion of the two solar power plants in Southern Italy, which were costly projects relative to similar projects in the past. These two power plants generated approximately $11 million of the current year revenue and provided a 16% margin, compared to a similar plant in the prior year that provided a 21% margin. The remainder of the decrease in Italian margin percentage was due to a combination of generating less of our revenue from other solar projects and increased lower margin distribution sales. Cost of revenues for our Other European operations increased $31.8 million, or 592%, from the prior year, which also correlates to the significant increase in revenues from the Other European segment. The gross margin for our Other European operations was 3.7%, down 5% from the prior year. The decline was largely due to entry into the Czech Republic market where initially we are primarily providing procurement, distribution, and limited engineering services, which generally have lower margins than those realized on our construction contracts. The remainder of the decline in margin percentages in Other European operations can be attributed to continued lag in the overall economic environment, resulting in the reduction in the pricing to maintain sales volumes.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of personnel costs and costs related to our sales force and marketing staff. They also include expenses relating to advertising, brand building, marketing promotions and trade show events, lead generation, and travel. Selling and marketing expenses increased $1.7 million, or 58%, largely as result of a full year of our Italian operations compared to only five months in the prior year. In addition, the increased revenues in 2010 from our European operations relative to the prior year resulted in increased commissions of $1.1 million to externally contracted agents. An increase of approximately $0.2 million in recognized stock-based compensation also contributed to the overall increase as many of stock and option grants granted to employees in our sales force in 2009 and 2010 continue to vest.
General and Administrative Expenses
General and administrative expenses consist of personnel and related costs for accounting, legal, information systems, human resources, and other administrative functions. They also include professional service fees, bad debt expense, other corporate expenses and related overhead. General and administrative expenses increased by $0.7 million, or 13%, for the year ended December 31, 2010 compared to the year ended December 31, 2009, largely as result of a full year of our Italian operations compared to only five months in the prior year. An increase of approximately $0.2 million in recognized share-based compensation also contributed to the overall increase as many of stock and option grants granted to employees in 2009 and 2010 continue to vest. The expected increases in general and administrative expenses as a result of our European expansions in the current year were partially offset by a decrease attributable to higher expenses incurred in the prior year relative to professional service fees of $0.7 million related to the purchase of our Italian operations.
Other Income and Expenses
Other income and expense consists of change in fair value of contingent consideration liability, interest income, interest expense, transactional foreign currency gains (losses), and other income (expense). Interest expense increased during 2010 as a result of an agreement with a module supplier for $0.3 million in interest expense in relation to the payoff of an outstanding payable for the construction of our Italian solar plants. Other income, net of expense, decreased $1.0 million, or 15%, from the prior year. A large portion of the change was related to a $2.2 million gain recognized in the prior year related to the cancellation of outstanding warrants. This decrease was largely offset by another significant component of other income, which was the $6.3 million of gain recognized in the current year for the change in fair value of the contingent consideration liability, compared to a gain of $4.3 million in the prior year. In addition, interest expense increased by $0.5 million due to increased borrowings throughout much of the year in Italy and the United States. Other income (expense) includes foreign currency gain (loss) of $(0.2) million and $0.3 million for the years ended December 31, 2010 and 2009, respectively.
Income Tax Benefit (Expense)
The effective tax rates in the years ended December 31, 2010 and 2009 were 136% and (65.9%), respectively. The effective tax rate in 2010 was significantly different from the federal statutory rate of 34%, primarily due to the recognition of a $3.6 million valuation allowance against deferred tax assets recognized in 2010, primarily resulting from the operating losses sustained from our North American segment. The effective tax rate in the year ended December 31, 2009 differed from the federal statutory rate of 34% primarily due to the recognition of tax benefits from net operating losses.
The Company generates cash from operations primarily from cash collections related to its installation and distribution revenues. Net cash flow provided by operating activities was $1.4 million for the year ended December 31, 2010, compared with net cash used by operations of $6.2 million in the year ended December 31, 2009. The increase in net cash flow from operating activities was primarily a result of the decrease in costs and estimated earnings in excess of billings on uncompleted contracts of $11.6 million, primarily due to the completion of projects in Italy, and the increase in billings in excess costs of $12.8 million, related to ongoing solar projects in North America, and an increase in accounts payable and accrued liabilities of $2.2 million, partially offset by operating loss of $4.0 million, an increase in inventories of $13.6 million and an increase in accounts receivable of $7.2 million. Accounts receivable increased as a result of increased activity in our European Operations. Inventories and billings in excess of costs and estimated earnings on uncompleted contracts increased significantly from 2009 as a result of one large solar construction project in process at year end.
Net cash flow used in investing activities was $42,000 and $0.2 million for the years ended December 31, 2010 and 2009, respectively. Both of these amounts were related to capital expenditures, and the prior year number was slightly higher due to assets purchased for the expansion of our Italian operations during that year.
Net cash flow used by financing activities was $1.6 million for the year ended December 31, 2010, compared to cash flow provided by financing activities of $4.5 million for the year ended December 31, 2009. The prior year cash flow was largely the result of proceeds from the issuance of preferred stock of $3 million and proceeds from borrowings of $2.4 million. In the current year, the Company expended a net of $1.6 million in the pay-down of debt balances.
Material Impact of Known Events on Liquidity
Our expanding large-scale solar power project development business in North America and Europe combined with tighter credit terms are driving increased liquidity requirements. Solar power project development cycles can take several months to develop. In certain of our markets, primarily Europe, it is not uncommon to receive payment at the end of a project. This may require us to make an advancement of costs prior to cash receipts. To date, we have financed these up-front construction costs using working capital and cash on hand. In addition, the solar module market has been in tight supply and has required us at times to pay for modules in advance of receipt or customer payment to ensure delivery timelines for our projects. In some instances our customers have structured accelerated payment terms to avoid this situation.
Additionally, a majority of our cash is held offshore, and while we do not currently believe there are any material limitations or restrictions on our ability to repatriate profits there may be tax consequence or changes in statutory rules which would affect our ability to do so.
The disruption in the credit markets has had a significant adverse impact on a number of financial institutions. As of December 31, 2010, however, our liquidity and capital investments have not been materially adversely impacted, and we believe that they will not be materially adversely impacted in the near future. We will continue to closely monitor our liquidity and the credit markets. Nonetheless, we cannot predict with any certainty the impact to us of any further disruption in the credit environment, as we currently have limited financing options.
There are no other known events that are expected to have a material impact on our short-term or long-term liquidity.
As of December 31, 2010, we had $3.4 million of cash and cash equivalents. At times we have extended payment terms on certain of our accounts payable from large solar projects that we believe will provide additional working capital. We have financed our operations primarily through operating activities and equity financings. In September 2010 we paid off the remaining outstanding balance of $0.9 million and cancelled our $7.0 million credit line with Umpqua Bank that was for working capital and capital expenditures. We renewed a €100,000 credit line for Premier Power Spain, which expires on August 1, 2011. Please see the discussion below under “Lines of Credit.” At December 31, 2010, there were no available borrowings under Premier Power Spain’s line of credit.
In November 2010, we entered into a factoring agreement with Prestige Capital Corporation (“Prestige”). The initial period of the agreement is through November 2011, with certain automatic extension provisions in the absence of written notice of cancellation by either party. Under the agreement, we agreed to sell from time-to-time certain trade receivables to Prestige. At the time of each transfer, Prestige assumes collections efforts and will earn increasing discounts on the sales price on the following scale: 2.25% if collected within 30 days, 3.25% if collected within 45 days, 4.25% if collected within 60 days, 5.25% if collected within 60 days, with an incremental 2% for each 15 day period thereafter until collected. Prestige maintains recourse to the Company for any accounts that are ultimately uncollectible for any reason other than customer insolvency. We will receive 75% of the sales price of approved receivables in advance, with the remaining 25% remitted to the Company at the time the receivables are collected by Prestige, net of any discounts and other amounts owed by the Company to Prestige. Under the terms of the agreement, net amounts due to Prestige cannot exceed $2 million at any time and are secured by certain assets of the Company. At December 31, 2010, there were no advances due to Prestige. We believe that this arrangement helps to reduce the amount of capital tied up in uncollected receivables and allows these funds to be utilized for other operating purposes.
We also have contracted backlog in the amount of approximately $23.9 million in North America, as of December 31, 2010, consisting of non-cancellable signed contracts for projects that the Company expects to complete within the next 12 months. In addition, we have approximately 2MW of projects in Spain that we continue to evaluate as the Spanish government adjusts it solar incentives that has an effect on the value of the 2MW, and therefore we are excluding from our current backlog until the incentives are finalized. In addition to our cash and cash equivalents and accounts receivable, we expect to invoice approximately $1.1 million against our costs and estimated earnings in excess of billings on uncompleted contracts in the next 90 days. Thus, we believe that our current cash and cash equivalents, cash flow from operations, our factoring arrangement, and our line of credit in Spain will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures for at least the next 12 months.
We may seek to raise additional cash to fund future project investments or acquisitions we may decide to pursue. To the extent it becomes necessary to raise additional cash in the future, we may seek to raise it through the sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or loans, issuance of common stock, or a combination of the foregoing. We cannot provide any assurances that we will be able to secure the additional cash or working capital we may require to continue our operations.
Contractual Obligations and Off-Balance Sheet Arrangements
Line of Credit
On July 13, 2009, the Company entered into a loan agreement with Umpqua Bank, an Oregon corporation, for a line of credit of up to $12 million, maturing on July 13, 2011. The loan agreement provided for an initial line of credit of $7 million, provided, however, that the Company may request no more than twice prior to the maturity date that the line of credit be increased to an amount not to exceed $12 million in the event the Company acquires another subsidiary and require additional working capital for such subsidiary. The balance of the line of credit was paid off and terminated September 15, 2010. There is no outstanding balance, and the Company has no further borrowing capabilities under this line of credit.
At Decembers 31, 2010, Premier Power Spain had an unsecured line of credit for $0.1 million, which has interest terms of Euribor+3.25 and is due in full on August 1, 2011. As of December 31, 2010, there was $0.1 million outstanding on the line and no available borrowings.
At December 31, 2010, the Company had a factoring agreement with Prestige for up to $2 million of advances against eligible receivables. There were no advances due to Prestige at December 31, 2010.
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following table summarizes our contractual obligations as of December 31, 2010, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
In May 2010, we entered into an agreement with a reseller to sell into the Federal GSA market. Under the agreement, we pay $1,000 per month, with the first 6 months of fees waived. Additionally, we provide the reseller a margin of 5%-6% on sales of our products by the reseller. The agreement expires in May 2011, unless renewed. To date, no sales have been made under this agreement as we await approval from the GSA.
At times we enter into take or pay agreements with our suppliers. This provides pricing advantages to the Company in return for supply certainty. During 2010, we, as part of the purchase of solar modules from a vendor for a project in the Czech Republic, entered in to a take or pay agreement of which 500 kilowatts of solar modules with a value of approximately $1.0 million remain to be delivered. This agreement is supported by a Letter of Credit. We currently have no take or pay commitments outstanding and have incurred no losses as a result of these agreements.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity, or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to us or engages in leasing, hedging, or research and development services with us.
Recently Issued Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820) — Fair Value Measurements and Disclosures (ASU 2010-06) to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. Levels 1, 2, and 3 of fair value measurements are defined in Note 16 of our accompanying financial statements. The Company has adopted the provisions of this guidance, except for those pertaining to Level 3 fair value measurements, which it will adopt on January 1, 2011, as required. There was no material impact on the Company’s results of operations, cash flows, or financial position resulting from the adoption of this guidance. Further, the Company expects that adoption of the provisions pertaining to Level 3 fair value measurements on January 1, 2011 will not have an impact on its results of operations, cash flows, or financial position.
In June 2009, the FASB issued FASB ASC 810 (SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC 810 applies to FASB ASC 105 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. The Company adopted this guidance with no impact to our consolidated financial statements.
In June 2009, the FASB issued FASB ASC 860 (SFAS No. 166, “Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140”). FASB ASC 860 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 FASB ASC 860 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 Company adopted this guidance with no impact to our consolidated financial statements.
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 Company adopted this guidance with no impact to our consolidated financial statements.
In August 2009, an update was made to Fair Value Measurements and Disclosures –Measuring Liabilities at Fair Value.” This update permits entities to measure the fair value of liabilities, in circumstances in which a quoted price in an active market for an identical liability is not available, using a valuation technique that uses a quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or the income or market approach that is consistent with the principles of Fair Value Measurements and Disclosures. Effective upon issuance, the Company adopted this guidance with no impact to our consolidated financial statements.
In October 2009, the FASB ratified FASB ASC 605-25 (the EITF’s final consensus on Issue 00-21, “Revenue Arrangements with Multiple Deliverables”). FASB ASC 605-25 is effective for fiscal years beginning on or after June 15, 2010. Earlier adoption is permitted on a prospective or retrospective basis. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements for the years ended December 31, 2010 and 2009 begin on the following page.
Board of Directors and Shareholders
Premier Power Renewable Energy, Inc.
El Dorado Hills, California
We have audited the accompanying consolidated balance sheets of Premier Power Renewable Energy, Inc. and subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits 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. An audit includes 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 audits provide 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 Premier Power Renewable Energy, Inc. and subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Macias Gini & O'Connell, LLP
March 30, 2011
PREMIER POWER RENEWABLE ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
The accompanying notes are an integral part of these financial statements.
PREMIER POWER RENEWABLE ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these financial statements.
PREMIER POWER RENEWABLE ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
The accompanying notes are an integral part of these financial statements.
PREMIER POWER RENEWABLE ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
The accompanying notes are an integral part of these financial statements.
PREMIER POWER RENEWABLE ENERGY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended December 31, 2009 and 2010