Solar IntegratedTech - Final Results
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RNS Number:1111R
Solar Integrated Technologies Inc
31 March 2008
SOLAR INTEGRATED TECHNOLOGIES INC
SOLAR INTEGRATED REPORTS 2007 AUDITED FINANCIAL RESULTS AND PROVIDES 2008
GUIDANCE
- Revenues more than double in 2007
and transition to adjusted EBITDA positive -
- Expecting continued strong growth in 2008 and
transition to profitability -
London, UK and Los Angeles, California, March 31, 2008 - Solar Integrated
Technologies, Inc. (AIM:SIT.LN), a leading provider of building integrated
photovoltaic (BIPV) roofing systems, today announces its audited financial
results for the twelve months ended December 31, 2007, highlights of recent
corporate activities, and financial guidance for 2008. Unless otherwise noted,
all amounts are reported in U.S. dollars. This press release contains both U.S.
GAAP ("GAAP") and non-GAAP financial information, including non-GAAP adjusted
EBITDA financial information.
2007 Full Year Financial Highlights
• Revenue of $81.1 million, up 112% from $38.2 million in 2006
• Gross margin of 17.8%, up 144% from 7.3% in 2006
• Gross margin of $14.4 million, up $11.6 million or 414% from $2.8 million
in 2006
• Excluding non-cash stock-based warrant and option compensation and
depreciation, SG&A costs down $0.7 million or 4.1% to $16.3 million (2006:
$17.0 million) and down to 20.1% of revenue as compared to 44.5% of revenue
in 2006
• Adjusted EBITDA (which adjusts earnings before interest, tax, depreciation,
amortization by also excluding the effects of stock-based warrant and option
expense, change in fair value of warrants, recovery of impaired accounts
receivable and loss on debt conversion) of $0.1 million, compared to $(15.6)
million in 2006
• On a GAAP basis, net loss of $24.7 million or $0.35 per share, which
includes $13.9 million for non-cash stock-based warrant and option
compensation, $4.8 million for a non-cash loss on the conversion of
convertible notes, and $0.9 million for the fair value accounting of certain
warrants, partially offset by a $3.3 million recovery of an impaired
receivable, when compared with net loss for 2006 of $22.9 million or $0.62
per share
• Closed placement of 16,470,588 common shares for aggregate gross proceeds
of $28 million in December 2007
• Repositioned $31.1 million of convertible notes with reduction of $23.1
million of debt through retirement of $16.2 million of notes and conversion
of $6.9 million of notes into equity, along with amendment of remaining $8.0
million
• Cash balance of $11.3 million as of December 31, 2007, as compared to
$1.8 million as of June 30, 2007 and $7.0 million as of December 31, 2006
2007 Second Half (H2) Financial Highlights
• 2007 H2 revenue of $61.2 million, up $38.5 million or 170% from 2006 H2
revenue of $22.7 million
• 2007 H2 gross margin of 19.4%, up 177% compared to 7.0% in 2006 H2
• 2007 H2 gross margin of $11.9 million, up $10.3 million or 644% from $1.6
million in 2006 H2
• Excluding non-cash stock-based warrant and option compensation and
depreciation, 2007 H2 SG&A costs of $8.6 million (up 18% from 2006 H2 cash
SG&A costs of $7.3 million) down to 14.1% of revenue as compared to 32.2% of
revenue in 2006 H2
• 2007 H2 adjusted EBITDA of $4.8 million, a $12.1 million improvement
compared to 2006 H2 adjusted EBITDA of $(7.3) million
2007 Sales and Operations Highlights
• 76 solar projects completed in 2007, representing 9.1 MW of installed
solar systems (2006: 40 projects representing 4.2 MW)
o Completed 57 projects in Europe representing 5.5 MW of installed solar
systems
o Completed 19 turn-key projects in the U.S. representing 3.6 MW of
installed solar systems
• Expanded penetration into key solar markets with a total of more than 180
projects completed representing 19.3 MW of installed solar systems since
Company's inception
• Expanded customer list and signed new business for projects with each of
Audi, Carrefour, Metro, Tesco, Unibail-Rodamco, UPC Solar and Westfield
• Signed $70 million contract to supply solar roofing systems on multiple
large buildings in Italy in 2008 and 2009
• Expanded product application to two new market opportunities
o Signed initial contracts totaling $10 million including a flexible
ground-mount system for installation at the Malagrotta Landfill site
outside of Rome, Italy
o Signed initial contracts for solar carports that provide shaded parking
for vehicles while generating clear solar energy
• In response to strong order demand, second and third shifts were added to
manufacturing operations in May and October, respectively
• Increased production throughput by more than 100% over 2006 production
• Achieved certification by the California Energy Commission for performance
monitoring and metering of the Company's Renewable Energy Management (REM)
software system; 46 REM systems now installed, monitoring over 8 MW of
installed solar systems
• Won Sika Sarnafil's "2007 U.S. Sustainability Project of the Year" for
Tesco's Fresh & Easy Markets 663,000 sq. ft. distribution centre in
Riverside, California, believed to be the world's largest BIPV solar roofing
project
2007 Corporate Platform Highlights
• Strengthened sales, product development and manufacturing teams with key
management appointments:
o Bart Van Ouytsel as Vice President, Sales & Marketing - Europe
o John Snelling as Vice President, Sales & Marketing - Americas
o David Gralnik as Vice President, Strategic Accounts & Alliances
o Arthur Rudin as Vice President, Product Development
o Dr. -Ing Claas Helmke as Director, Product Development - Europe
o Peter Douglas as Director, Manufacturing
• Appointed Ernst & Young as new independent auditor
• In March 2008, granted a U.S. patent for proprietary "no compromise" BIPV
roofing product
2008 Outlook
• 2008 revenue guidance in the range of $140 million to $160 million,
representing up to 100% growth over 2007 revenue
• 2008 full year consolidated gross margin guidance for core BIPV products in
excess of 18% (excludes non-core BIPV products and roofing)
• Revenue and gross margin contribution weighted in 2008 H2
o Revenue guidance of $40 million for 2008 H1
• Expect to more than double production throughput in 2008 compared to 2007
• Evaluating option of opening a European manufacturing facility
• Achieve profitability on a full-year consolidated basis, excluding the
effect of any non-cash fair value accounting
Commenting on the results, R. Randall MacEwen, President & CEO, said:
"We had an extraordinary turn-around in 2007 and exited the year firing on all
cylinders. While successfully managing triple-digit growth, we significantly
improved our financial performance through gross margin expansion and
disciplined management of our overhead costs and working capital. After
transitioning to EBITDA positive in 2007, our line of sight is now on
profitability in 2008. With a growing order book of profitable business, we are
now positioned as a compelling growth story in the attractive commercial solar
roofing market."
John M. Palumbo, Chief Financial Officer, added: "In addition to improved
operational performance, we made important progress in 2007 on strengthening our
balance sheet. Our equity capital raise in December facilitated the elimination
of $23.1 million of convertible debt, reducing our related annual cash interest
costs from $2.6 million to $0.5 million. This will support our goal of
profitability in 2008. In addition, our improved financial condition enables us
to invest in the business at a time when new attractive solar markets are
developing with premium feed-in tariffs for BIPV products."
The Company will host a conference call today (Monday, March 31, 2008) at 3:00
pm London time/10:00 am ET/7:00 am PT. Investors and analysts can participate
in the call by dialing 719-325-4858 with code 2043089. The event will be
webcast and can be accessed from Solar Integrated's website at
www.solarintegrated.com.
About Solar Integrated:
Solar Integrated Technologies, Inc. (SIT: AIM.LN) is a Los Angeles-based company
that manufactures, designs and installs building integrated photovoltaic (BIPV)
roofing systems for non-residential, low-slope rooftops. We are a leader in the
development of an innovative and proprietary BIPV roofing system that combines
flexible thin-film solar modules with a single-ply roofing membrane for
large-scale commercial and industrial applications. Our BIPV roofing system
enables our customers to transform a traditional rooftop into a value-generating
asset.
Our proprietary 'no compromise' approach for solar roofing is fundamental to our
vision of BIPV solutions. Unlike typical after-market solar panel providers, we
provide an integrated BIPV roofing system that meets the customer's energy,
environmental and roofing requirements. Our lightweight, flexible and durable
product typically forms the top layer of the customer's roof with no additional
roofing penetrations, thereby preserving the roof's structural integrity and
aesthetics, while also delivering the full benefits from electricity generation
through clean, secure natural sunlight.
Our customers include Audi, Carrefour, Coca-Cola Enterprises, Frito-Lay,
Honeywell, IKEA, Metro, ProLogis, San Diego Unified School District, Tesco,
Toyota, Unibail-Rodamco, UPC Solar, U.S. Air Force, U.S. GSA, U.S. Navy,
Wal-Mart and Westfield. For more information, please visit
www.solarintegrated.com.
For more information, please contact:
Solar Integrated Investor Contacts:
Solar Integrated Technologies, Inc Solar Integrated Technologies, Inc
R. Randall MacEwen John M. Palumbo
President & Chief Executive Officer Chief Financial Officer
Los Angeles, California, USA Los Angeles, California, USA
+1.562.299.0136 +1.562.299.0121
KBC Peel Hunt Ltd. Mirabaud Securities Limited
Nominated Advisor and Joint-Broker Joint-Broker
Jonathan Marren or Oliver Stratton Peter Krens or Kim Richardson
+44.20.7418.8900 +44.20.7878.3362
Solar Integrated Media Contacts:
Pelham Public Relations
Chelsea Hayes / Robert Koh
London, UK
+44 207 743 6675
Thinking Integrated. Building Integrated.
* * * * * * * * * * * * * * * * * * * * * * * * * * *
2007 Financial Highlights
Revenue
Revenue for 2007 was $81.1 million, up 112% from $38.2 million for 2006,
primarily due to growth in solar markets, new market penetration, new customer
penetration, repeat business and larger project sizes. The Company believes
that customers are increasingly understanding and accepting the Company's
differentiated solar roofing approach, differentiated product offering, and
value proposition for the commercial BIPV market segment. The Company's market
strategy is to be the trusted solar roofing partner for its customers across
their full portfolio of large-scale commercial buildings. The Company provides
its customers with solar roofing systems that are designed to meet the
customer's financial, energy, roofing and environmental objectives.
Consistent with prior periods, the Company booked a higher level of revenue in
2007 H2 than in 2007 H1. First half revenue has typically been, and will
continue to be in 2008, lower than second half revenue in large part as a result
of the seasonality of the business and the budget and construction cycles of the
Company's target customers. As the Company is involved in a construction
project-based business, the Company may experience revenue and financial
performance lumpiness from period to period.
The Company's revenue trend for 2007 H1, H2 and full year as compared to 2006
H1, H2 and full year is as follows:
Revenue by Period: http://www.rns-pdf.londonstockexchange.com/rns/1111r_1-2008-3-31.pdf
Management reviews revenue and gross margin performance of the business in three
market segments:
• Europe Solar: The Company manufactures its BIPV roofing panels for
projects in Europe where customers typically purchase the systems for
installation by others.
• U.S. Solar: The Company manufactures and installs its BIPV roofing
systems for projects in the United States where customers typically purchase
the systems on a turnkey basis or where the end customer prefers to purchase
solar generated electricity under a long term power purchase agreement
rather than purchase, own and operate the solar energy system directly.
• Roofing and Maintenance: The Company installs and maintains for select
clients energy-efficient roofing systems in Southern California. The
Company can install these roofing systems pre-wired for potential future
solar retrofit. The Company believes this strategy maintains and
strengthens its customer relationships, positions the Company to capture
additional business for its BIPV roofing systems, provides additional
margin-generating revenue, and provides for smoothing of labor deployment.
The Company expects this market segment to decline as a percentage of
revenue over time.
In 2007, revenue for the Europe Solar segment was $27.8 million, up 286% from
$7.2 million in 2006. In 2007, revenue for the U.S. Solar segment was $37.1
million, up 58% from $23.5 million in 2006. In 2007, revenue for the Roofing
and Maintenance segment was $16.2 million, up 116% from $7.5 million in 2006.
The Company's comparative revenue mix from its three market segments for 2007
and 2006 was as follows:
Revenue Mix by Segment: http://www.rns-pdf.londonstockexchange.com/rns/1111r_2-2008-3-31.pdf
The Company's revenue performance for 2007 H1, 2007 H2 and 2007 full year as
compared to 2006 H1, 2006 H2 and 2007 full year for these three market segments
was as follows:
Revenue by Market Segment (in $ millions)
H1 Revenue Change H2 Revenue Change FY Revenue Change
2007 2006 $ % 2007 2006 $ % 2007 2006 $ %
Europe Solar $6.3 $2.8 $3.5 125.0% $21.5 $4.4 $17.1 388.6% $27.8 $7.2 $20.6 286.1%
U.S. Solar 8.3 10.1 ($1.8) -17.8% 28.8 13.4 $15.4 114.9% 37.1 23.5 $13.6 57.9%
Roofing & 5.2 2.6 $2.6 100.0% 11.0 4.9 $6.1 124.5% 16.2 7.5 $8.7 116.0%
Maintenance
TOTAL $19.8 $15.5 $4.3 27.7% $61.3 $22.7 $38.6 170.0% $81.1 $38.2 $42.9 112.3%
The Company expects significant growth in its Europe Solar and US Solar segments
in 2008, with Europe Solar expected to represent over 50% of the Company's 2008
revenue.
Gross Margin
For 2007, the Company improved its full year gross margin to 17.8% of revenue,
an improvement of 144% from 7.3% of revenue in 2006. The Company achieved gross
margin of $14.4 million in 2007, up $11.6 million or 414% from gross margin of
$2.8 million in 2006. For 2007 H2, the Company achieved gross margin of 19.4%,
up 177% compared to 7.0% for 2006 H2. In 2007 H2, consolidated gross margin was
$11.9 million, up $10.3 million or 644% from $1.6 million in 2006 H2.
The improvements in the Company's gross margin performance in 2007 full year and
2007 H2 were due to stronger average selling prices, lower product and project
costs, different product mix, and different geographic revenue mix.
The Company's trend for gross margin as a percentage of revenue for 2007 H1, H2
and full year as compared to 2006 H1, H2 and full year is as follows:
Gross Margin Trend: http://www.rns-pdf.londonstockexchange.com/rns/1111r_3-2008-3-31.pdf
The Company's trend for gross margin dollar contribution for 2007 H1, H2 and
full year as compared to 2006 H1, H2 and full year is as follows:
Gross Margin by Period: http://www.rns-pdf.londonstockexchange.com/rns/1111r_4-2008-3-31.pdf
The Company expects to achieve a higher gross margin from the sale of its core
BIPV products in its Europe Solar segment in 2008 as a result of a change in
product mix, a change in geographic mix and lower product costs. The Company
also expects to achieve a higher gross margin from the sale and installation of
its core BIPV products in its U.S. Solar segment in 2008 as a result of a change
in product mix, a change in geographic mix, lower product costs, lower project
costs, and economies of scale. The Company expects its gross margin performance
for the Roofing & Maintenance segment to decline modestly in 2008 primarily as a
result of tightening market conditions and different product and services mix.
SG&A
Selling, General and Administrative (SG&A) expenses for 2007 were $30.7 million,
including $12.4 million in non-cash stock-based warrant compensation and $1.5
million in non-cash stock-based option compensation, and $0.5 million in
non-cash depreciation. Excluding non-cash stock-based warrant and option
compensation and non-cash depreciation, SG&A costs were down $0.7 million or
4.1% to $16.3 million in 2007 from $17.0 million in 2006. Excluding non-cash
stock-based warrant and option compensation and non-cash depreciation, SG&A
costs as a percentage of revenue declined to 20.1% in 2007 as compared to 44.5%
of revenue in 2006. The Company's trend of SG&A costs (excluding non-cash
stock-based warrant and option compensation and non-cash depreciation) as a
percentage of revenue for 2006 H1 and H2 and 2007 H1 and H2 is as follows:
SG&A as % of Revenue: http://www.rns-pdf.londonstockexchange.com/rns/1111r_5-2008-3-31.pdf
Adjusted EBITDA
On a non-GAAP basis, after adjusting for (i) $12.4 million in non-cash
stock-based warrant compensation, (ii) $1.5 million in non-cash stock-based
option compensation, (iii) a $0.9 million non-cash change in the fair value of
warrants, (iv) the $3.3 million recovery of a previously impaired receivable,
and (v) a $4.8 million charge related to the conversion of certain convertible
notes, adjusted EBITDA was $0.1 million for 2007, an improvement of $15.7
million when compared to 2006 adjusted EBITDA of $(15.6) million. The following
is a reconciliation of GAAP net loss to non-GAAP adjusted EBITDA.
Reconciliation of GAAP Net Loss to Non-GAAP Adjusted EBITDA:
http://www.rns-pdf.londonstockexchange.com/rns/1111r_6-2008-3-31.pdf
The Company's adjusted EBITDA trend for 2006 H1 and H2 and 2007 H1 and H2 is as
follows:
Adjusted EBITDA: http://www.rns-pdf.londonstockexchange.com/rns/1111r_7-2008-3-31.pdf
Net Loss
On a GAAP basis, net loss for 2007 was $24.7 million, or $0.35 per share (which
includes (i) $12.4 million in non-cash stock-based warrant compensation, (ii)
$1.5 million in non-cash stock-based option compensation, (iii) a $0.9 million
non-cash change in the fair value of warrants, and (iv) a $4.8 million charge
related to the conversion of certain convertible notes, partially offset by a
$3.3 million recovery of an impaired receivable), when compared with net loss
for 2006 of $22.9 million or $0.62 per share.
Availability of Report and Accounts
The Company's full report and accounts will be mailed to shareholders as soon as
is practicable. Copies will also be available on the Company's website at
www.solarintegrated.com and on request from Pelham Public Relations, London, UK,
+44 207 743 6675, Attention: Robert Koh.
Non-GAAP Measures:
To supplement the consolidated financial results prepared under U.S. GAAP, Solar
Integrated uses non-GAAP measures which are adjusted from the most directly
comparable GAAP results to exclude certain non-cash and other expenses.
Management does not consider these items in evaluating the core operational
activities of the Company. Management uses these non-GAAP measures internally
to make strategic decisions, forecast future results and evaluate the Company's
current performance. Given management's use of these non-GAAP measures, Solar
Integrated believes these measures are important to investors in understanding
the Company's current and future operating results as seen through the eyes of
management. In addition, management believes these non-GAAP measures are useful
to investors in enabling them to better assess changes in Solar Integrated's
core business across different time periods. These non-GAAP measures are not in
accordance with or an alternative for GAAP financial data and may be different
from non-GAAP measures used by other companies.
Forward-Looking Statement:
This release includes forward-looking statements which are based on certain
assumptions and reflect management's current expectations as contemplated under
the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act
of 1995. These forward-looking statements are subject to a number of risks and
uncertainties that could cause actual results or events to differ materially
from current expectations. Some of these factors include: the availability and
cost of capital; uncertainty as to whether our strategies, partnerships and
business plans will yield the expected benefits; general global economic
conditions; general industry and market conditions and growth rates; increasing
competition; the ability to identify, develop and achieve commercial success for
new products, services and technologies; changes in technology; changes in laws
and regulations, including government incentive programs; intellectual property
rights; our ability to secure and maintain strategic relationships, including
key supply relationships; and the availability of, and our ability to retain,
key personnel. Additional factors are discussed in our public disclosure
materials from time to time. We disclaim any intention or obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Thinking Integrated. Building Integrated.
* * * * * * * * * * * * * * * * * * * * * * * * * * *
Solar Integrated Technologies, Inc.
Consolidated Financial Statements
Years Ended December 31, 2007 and 2006
Report of Independent Auditors
Board of Directors and Shareholders
Solar Integrated Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Solar Integrated
Technologies, Inc. (the Company) as of December 31, 2007 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Solar Integrated Technologies, Inc. for the
year ended December 31, 2006, were audited by other auditors whose report dated
June 21, 2007, expressed an unqualified opinion on those statements and included
an explanatory paragraph that disclosed the Company's adoption of Statement of
Financial Accounting Standards No. 123(R), "Share-based Payment" (SFAS 123R)
discussed in Note 2 to the consolidated financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated 2007 financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Solar Integrated Technologies, Inc. as of December 31, 2007 and the consolidated
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 of the consolidated financial statements, the Company
changed its method of accounting for recognizing revenue to the percentage of
completion method on January 1, 2007.
Ernst & Young LLP
March 26, 2008
Solar Integrated Technologies, Inc.
Consolidated Balance Sheets
(In Thousands, except per share data)
December 31
2007 2006
Assets
Current assets:
Cash and cash equivalents $ 11,282 $ 6,984
Trade receivables, net 14,406 7,302
Unbilled accounts receivable 1,858
-
Lease receivables 946 1,551
Inventories 21,561 19,714
Prepaid expenses and other current assets 1,286 548
Total current assets 51,339 36,099
Noncurrent assets:
Restricted cash 1,209 740
Lease receivables, net of current 18,596 20,562
Property and equipment, net 2,354 2,830
Solar systems held for sale 3,276
-
Loan fees, net of amortization 1,167 5,459
Deposits and other assets 626 429
Total assets $ 75,291 $ 69,395
The accompanying notes are an integral part of these consolidated financial statements.
Solar Integrated Technologies, Inc.
Consolidated Balance Sheets
(In Thousands, except per share data)
December 31
2007 2006
Liabilities
Current liabilities:
Trade and other payables $ 10,934 $ 3,626
Borrowings on credit facility 2,544
-
Warranty accrual 2,225 1,706
Other accrued expenses 3,831 4,150
Progress billings 2,131 5,553
Structured financing - current 723 2,418
Total current liabilities 22,388 17,453
Convertible notes, net 8,000 30,495
Warrant liabilities 2,693 1,786
Deferred revenue 2,109
-
Unearned income, net of current 3,602 3,647
Structured financing, net of current 13,073 13,954
Total liabilities 49,756 69,444
Shareholders' equity (deficiency):
Common stock: $0.0001 par value:
Authorized shares - 250,000
at December 31, 2007 and 2006
Issued and outstanding 91,380 and 69,463 at
December 31, 2007 and 2006, respectively 9 7
Additional paid-in-capital 101,722 49,683
Stock subscription receivable (3,261) (1,613)
Accumulated other comprehensive loss (133) -
Accumulated deficit (72,802) (48,126)
Shareholders' equity (deficiency): 25,535 (49)
Total liabilities and shareholders' equity $ 75,291 $ 69,395
The accompanying notes are an integral part of these consolidated financial statements.
Solar Integrated Technologies, Inc.
Consolidated Statements of Operations
(In Thousands, except per share data)
Years Ended December 31
2007 2006
Revenue $ 81,066 $ 38,234
Cost of sales 66,637 35,471
Gross margin 14,429 2,763
Selling, general, and administrative expenses 30,707 18,266
(Recovery) impairment of related party receivable (3,273) 3,273
Severance costs - 1,893
Loss from operations (13,005) (20,669)
Change in fair value of warrant liability 907 (4,727)
Interest expense, net 7,411 6,955
Loss on debt conversion 4,777 -
Other income (1,424) (15)
Net loss $ (24,676) $ (22,882)
Basic and diluted loss per share $ (0.35) $ (0.62)
Weighted-average number of shares outstanding
(basic and diluted) 70,991 36,856
The accompanying notes are an integral part of these consolidated financial statements.
Solar Integrated Technologies, Inc.
Consolidated Statements of Shareholders' Equity
Additional Accumulated
Paid-in Stock Other Total
Common Stock Capital Subscription Comprehensive Accumulated Shareholder's
Shares Amount Amount Receivable Income (Loss) Deficit Equity
(In Thousands)
Balance at December 31, 2005,
as restated 34,642 $ 4 $ 25,456 $ - $ - $ (25,244) $ 216
Net loss - - - - - (22,882) (22,882)
Issuance of common stock
on note conversions 566 - 1,920 - - - 1,920
Proceeds of option exercise 200 - 431 - - - 431
Warrant exercise 722 - 2,909 - - - 2,909
Stock-based compensation 128 - 1,022 - - - 1,022
Issuance of common stock, net
of
expenses of $1,554 33,205 3 18,651 - - - 18,654
Warrant expense incurred in
connection with the issuance
Of common stock - - (706) - - - (706)
Stock subscription receivable - - (1,613) - - (1,613)
Balance at December 31, 2006 69,463 7 49,683 (1,613) - (48,126) (49)
Net loss - - - - - (24,676) (24,676)
Other comprehensive loss
Cumulative translation
adjustment - - - - (133) - (133)
Comprehensive loss
(24,858)
Payment received on stock
subscription
receivable - - - 1,613 - - 1,613
Issuance of common stock
on note conversions 4,246 - 11,165 - - - 11,165
Warrant exercise 1,200 - 711 - - - 711
Warrant compensation - - 12,396 - - - 12,396
Stock-based compensation - - 1,523 - - - 1,523
Issuance of common stock, net
of
expenses of $1,571 16,471 2 26,244 - - - 26,246
Stock subscription receivable - - - (3,261) - - (3,261)
Balance at December 31, 2007 91,380 $ 9 $ 101,722 $ (3,261) $ (133) $ (72,802) $ 25,535
The accompanying notes are an integral part of these consolidated financial statements.
Solar Integrated Technologies, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Years Ended December 31
2007 2006
Operating activities
Net loss $ (24,676) $ (22,882)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,027 785
Amortization of loan fees and discount on convertible Note 4,877 3,106
Loss on debt conversion 4,777
-
Loss on sale of assets 29
-
Provision for losses on accounts receivable 65
-
Provision for losses on inventory 224 175
Impairment - related party receivable - 3,273
Impairment - capitalized legal fees - 974
Stock-based compensation 1,523 1,022
Warrant compensation 12,396 -
Change in fair value of warrant liability 907 (4,727)
Changes in operating assets and liabilities:
Accounts receivable (7,651) 1,309
Unbilled accounts receivable (1,858) -
Lease receivables 2,571 (10,778)
Inventories (2,966) 2,719
Prepaid expenses and other assets (935) 787
Trade and other payables 7,308 (4,458)
Accrued expenses 1,095 501
Progress billings (3,422) 5,016
Unearned income (45) 1,331
Net cash used in operating activities (4,754) (21,847)
Investing activities
Acquisition of property and equipment (602) (183)
Proceeds from sale of assets 22 -
Loans to related party - (1,028)
Net cash used in investing activities (580) (1,211)
Solar Integrated Technologies, Inc.
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Years Ended December 31
2007 2006
Financing activities
Borrowing on credit facility $ 2,544 $ -
Cash paid for loan origination and structured finance fees (297)
-
Increase in restricted cash (469) (432)
Proceeds of structured finance payable 15,981
-
Repayment of structured finance payable (2,575) (7,083)
Convertible debt retirement (16,692) -
Proceeds from exercise of warrants 711 2,207
Proceeds from exercise of stock options 431
-
Issuance of common stock 26,246 17,041
Net cash provided by financing activities 9,765 27,848
Effect of exchange rate changes on cash and cash
equivalents (133) -
Net increase in cash and cash equivalents 4,298 4,790
Cash and cash equivalents at beginning of year 6,984 2,194
Cash and cash equivalents at end of year $ 11,282 $ 6,984
Supplemental disclosure of cash flow information
Cash paid during the year
Interest $ 3,395 $ 3,440
Disclosure of noncash investing and financing activities:
Conversion of convertible notes to common stock $ 6,875 $ 1,920
Issuance of stock subscription receivable 3,261 1,613
Increase in loan fees due to repricing of warrants - 866
Conversion of warrant liability to additional paid-in capital - 702
Warrants issued in connection with issuance of common stock - 706
The accompanying notes are an integral part of these consolidated financial statements.
Solar Integrated Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2007
1. Description of Business and Basis of Presentation
Solar Integrated Technologies, Inc. (the Company) was established and
incorporated in the State of Delaware in the United States of America on January
24, 2002. The Company designs, manufactures and installs building-integrated
photovoltaic, or BIPV, roofing systems for customers with non-residential
buildings that have flat or low-slope rooftops. The Company provides its
customers with an integrated BIPV roofing solution that meets both their roofing
and their onsite solar power generation requirements. The Company is based in
Los Angeles, California, and maintains an office in Mainz, Germany. The
Company's customers are primarily located in the United States and Europe.
These consolidated financial statements include the accounts of the Company and
its subsidiaries which are 100% wholly owned as follows: Solar Integrated
Technologies GMBH, Solar Power & Electric I, LLC and Solar Integrated
Technologies Limited (collectively, known as "Subsidiaries"). All intercompany
transactions and balances have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
The accompanying financial statements as of and for the years ended December 31,
2007 and 2006 have been presented in accordance with U.S. generally accepted
accounting principles (US GAAP). These financial statements are presented in
U.S. dollars, which is considered the functional currency as that is the
currency in which a majority of the Company's transactions are denominated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
made by the Company include the "percentage of completion" for certain projects,
allowances for potentially uncollectible accounts receivable, warranty
provisions, provisions for obsolete inventory and valuation allowances.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
Fair Values of Financial Instruments
The fair value of a financial instrument is the amount for which an asset could
be exchanged, or a liability settled, between knowledgeable, willing parties in
an arm's-length transaction. At the balance sheet date, the fair values of the
Company's financial assets and financial liabilities approximate their carrying
values. Derivative instruments are recorded on the balance sheets at fair value
in accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivatives and Hedging Activities, as amended. These derivatives
include warrants issued in connection with our credit facilities and other
freestanding warrants that were issued in connection with the issuance of our
common stock in December 2006.
SFAS No. 133 as amended, defines derivative instruments whose value is "derived"
from an underlying instrument or index such as a future, forward, swap, option
contract or other financial instrument with similar characteristics, including
certain derivative instruments embedded in other contracts (embedded
derivatives) and for hedging activities. As a matter of policy, the Company does
not invest in separable financial derivatives or engage in hedging transactions.
However, since the Company's common stock is traded on the AIM Market in London,
England, the exercise price of the Company's warrants is denominated in pounds
sterling which is different than that of the Company's functional currency (US
$).
Derivatives are measured at fair value and adjusted through earnings, as
required by SFAS 133. For the years ended December 31, 2007 and 2006, the
financial statements reflect the fair value of these warrants on the Company's
consolidated balance sheets and the unrealized changes in the values of these
warrants in the Company's consolidated statement of operations as "Change in
fair value of warrant liability."
Cash and Cash Equivalents
Cash and cash equivalents comprise current bank accounts and other bank deposits
free of encumbrances and having original maturities of less than three months.
At times, cash balances held at financial institutions are in excess of
federally insured limits. At December 31, 2007 and 2006, the Company had
balances in bank accounts outside of the United States that are denominated in
Euros totaling $2,273,000 (€1,554,000) and $1,002,000 (€759,000), respectively.
Restricted Cash
In connection with certain structured financing arrangements with GE Commercial
Finance Energy Financial Services (GE EFS), a unit of General Electric Capital
Corporation, the Company was required to deposit a portion of the proceeds from
the borrowings with GE EFS. If necessary, GE EFS may use such amounts to offset
any shortfall in payments required from the Company under the structured finance
arrangement. In addition, payments received from customers under sales type
lease agreements are deposited directly into restricted bank accounts. Amounts
deposited into restricted bank accounts are used to fund the debt owed under the
structured finance arrangement with GE EFS. At December 31, 2007 and 2006, the
Company held approximately $1,209,000 and $740,000 in restricted cash,
respectively.
Foreign Operations
For the Company's wholly-owned foreign subsidiaries, the local currency is the
functional currency. Monetary assets and liabilities denominated in currencies
other than the U.S. dollar are translated into U.S. dollars at the period-ending
exchange rate. Nonmonetary assets are translated at historic rates of exchange.
Revenues and expense items denominated in currencies other than U.S. dollars are
translated into U.S. dollars at the average rate of exchange for the period,
except for depreciation and amortization which are translated at historic
rates. The cumulative foreign currency translation adjustment was $133,000 as of
December 31, 2007 and is included in the consolidated balance sheet in "
Accumulated other comprehensive loss". The cumulative foreign currency
translation was not material as of December 31, 2006. Gains and losses resulting
from foreign currency transactions are included in the consolidated statements
of operations in "Foreign exchange gain" caption and amounted to a net gain of
approximately $1,333,000 for the year ended December 31, 2007. Foreign currency
transaction gains and losses were not material in 2006. The carrying amount of
net assets of the foreign subsidiaries was approximately $9,225,000 and
$2,551,000 at December 31, 2007 and 2006, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk are primarily limited to trade and lease receivables. The Company
performs credit evaluations of its customers' financial condition whenever
deemed necessary and generally does not require collateral. The Company
maintains an allowance for doubtful accounts receivable based upon the expected
collectibility of all accounts receivable, which takes into consideration an
analysis of historical bad debts, specific customer creditworthiness and current
economic trends.
Inventories
Inventories are valued at the lower of market. The Company uses the standard
cost method for valuing inventory, which approximates actual cost on a first-in,
first-out basis. Cost comprises invoice value plus applicable landing charges in
the case of raw materials, packing materials, spares and consumables. Finished
goods comprise cost of materials plus attributable labor and overhead charges
that have been incurred in bringing the inventories to their present location
and condition. The Company's products have a long life cycle and obsolescence
has not historically been a significant factor in the valuation of inventories.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over their
respective estimated useful lives as follows:
Machinery and equipment 7 Years
Furniture, fixtures and office equipment 5 Years
Leasehold improvements Term of lease or life of the asset,
whichever is shorter.
Depreciation is charged on these assets from the date on which they are placed
in service.
Long-Lived Assets
Long-lived assets are reviewed for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Long-lived assets are grouped at the lowest level for which
identifiable cash flows are largely independent, when testing for and measuring
impairment. Impairment losses are recorded when the carrying amount of
long-lived assets exceed the sum of undiscounted cash flows expected to result
from their use and eventual disposition and are measured as the amounts by which
the long-lived assets' carrying amounts exceed their fair value. There were no
adjustments to the carrying value of long-lived assets during the years ended
December 31, 2007 and 2006.
Revenue Recognition
Revenue is recognized when there is persuasive evidence of an arrangement, the
goods have been delivered, the fee is fixed or determinable, and collection is
reasonably assured. The Company records revenues under various methods depending
on project size, duration, and scope of work.
Installed Solar Systems & Traditional Roofing: The Company had historically
recorded revenue under the completed contract method for both installed solar
systems and traditional roofing projects. However, effective January 1, 2007,
the Company changed its method of accounting to percentage of completion as
projects sizes and durations have been growing significantly. The Company
believes adopting the percentage of completion method under AICPA Statement of
Position 81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," more accurately reflects periodic results of
operations and conforms to revenue recognition practices predominant in the
industry. Under this method, revenue arising from installed solar systems and
traditional roofing projects is recognized as work is performed based on the
percentage of incurred costs to estimated total forecasted costs at completion
utilizing the most recent estimates of forecasted costs. The change has not been
applied to prior periods, as the Company believes it is not material to prior
year but will be material to future periods as the contract size and duration
increases.
For smaller projects of shorter durations, generally three months or less, the
Company will continue to record revenue under the completed contract method when
the project is complete or near completion based on the costs incurred compared
to the project budget. When customer acceptance clauses are considered to be
substantive, recognition of revenue is deferred until customer acceptance is
received.
As of December 31, 2007, the asset "Unbilled accounts receivable", which
represents revenues recognized in excess of amounts billed, was $1,858,000. The
Company capitalized $3,394,000 and $5,685,000 for costs incurred from
uncompleted contracts as of December 31, 2007 and 2006, respectively.
Product Sales: For sales of BIPV product where the customer does not contract
the Company to install the system, revenue is typically recognized at time of
shipment according to the contractual arrangements with the customer.
Sales Type Lease: During 2006, the Company offered a structured finance offering
that is considered a leasing type transaction for certain BIPV system projects.
These transactions transfer substantially all of the risks and rewards of
ownership to the customer and are classified as sales-type leases and are
recorded as equipment revenue as a result of meeting the criteria established in
Statement on Financial Accounting Standards (SFAS) No. 13, Accounting for
Leases. Revenue associated with sales-lease type transactions is equal to the
present value of all payments, net of executory costs and the related cost of
the BIPV system projects is charged to cost of revenue. During the year ended
2006, approximately $16.0 million of the Company's revenue was recognized under
sales-type lease arrangements. The Company did not enter into any sales-type
lease transactions in 2007.
Income Taxes
The Company accounts for income taxes in accordance with guidance issued by the
Financial Accounting Standards Board (FASB) in Statement of Financial Accounting
Standards No. 109 (SFAS), Accounting for Income Taxes, which requires the use of
the liability method of accounting for income taxes.
The liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax base of assets and liabilities and their reported amounts in the
financial statements. The resulting asset or liability is adjusted to reflect
changes in the tax laws as they occur. A valuation allowance is provided to
reduce deferred tax assets when it is more likely than not that a portion of the
deferred tax asset will not be realized.
Realization of deferred tax assets is dependent upon the Company's ability to
generate sufficient future taxable income. The Company has experienced large net
operating losses and has recorded a full valuation allowance against the
deferred tax asset due to the lack of historical profits.
Warranty Provisions
The Company typically provides a 20-year roof membrane warranty, a 20-year power
warranty and a ten-year warranty on inverters. These warranties are typically
matched by back-to-back warranties from suppliers or the Company assigns the
warranty of the supplier to the end customer. In addition, the Company typically
provides a 20-year product warranty on its BIPV product. Provisions for warranty
costs are recognized at the date of sale of the relevant products, at
management's best estimate of the expenditure required to settle the liability,
taking into account the specific arrangements of the transaction and past
history.
Research and Development
Research and development costs incurred by the Company are expensed as incurred.
Basic and Diluted Net Loss per Share
Basic net loss per share is based upon the weighted-average number of shares of
common stock outstanding. Diluted net loss per share is based on the assumption
that options and warrants are included in the calculation of diluted net loss
per share, except when their effect would be anti-dilutive. Dilution is computed
by applying the treasury stock method. Under this method, options and warrants
are assumed to be exercised at the beginning of the period (or at the time of
actual issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the period. The
following options and warrants (in thousands) have been excluded from the
computation of diluted loss per share as the effect would be anti-dilutive.
December 31
2007 2006
(In Thousands)
Warrants 14,609 15,809
Options 7,300 6,920
Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123R which revises SFAS
No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. The Company applied the provisions
of SFAS No. 123R on a prospective basis as the Company continues to apply
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), to any portion of awards outstanding at January 1, 2006.
SFAS No. 123R prohibits the continued disclosure of pro-forma disclosures
required by SFAS No. 123 for outstanding awards accounted for under the
intrinsic value method of APB 25.
Stock-based compensation cost recognized for the years ended December 31, 2007
and 2006 includes compensation cost for all stock-based payments granted or
modified subsequent to January 1, 2006. The stock-based compensation expense
recorded in accordance with FAS 123R was $1,523,000 and $1,022,000 for the years
ended December 31, 2007 and 2006, respectively. These amounts are included in
Selling, general, and administrative expenses in the Company's consolidated
statements of operations.
Recently Issued Accounting Principles
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a
recognition threshold and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken in a tax return
in accordance with SFAS No. 109, Accounting for Income Taxes. Tax positions must
meet a more-likely-than-not recognition threshold at the effective date to be
recognized upon the adoption of FIN 48 and in subsequent periods. The accounting
provision of FIN 48 will be effective for the Company beginning December 30,
2007. The Company has not yet completed its evaluation of the impact of adoption
on the Company's financial position or results of operations.
In September 2006, the FASB issued FASB Statement No. 157, Fair Value
Measurements (SFAS No. 157), which defines fair value, establishes a framework
for measuring fair value and requires enhanced disclosures about fair value
measurements. SFAS No. 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy, as defined.
SFAS No. 157 may require companies to provide additional disclosures based on
that hierarchy. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The Company does not believe adoption of this statement will have
a material effect on its financial condition or results of operations.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Liabilities-including an amendment of FASB Statement No. 115 (SFAS
159). SFAS 159 expands the use of fair value accounting but does not affect
existing standards which requires assets or liabilities to be carried at fair
value. The objective of SFAS 159 is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. Under SFAS 159, a company may elect
to use fair value to measure eligible items at specified election dates and
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date. Eligible items
include, but are limited to, accounts and loans receivable, available-for-sale
and held-to-maturity securities, equity method investments, accounts payable,
guarantees, issued debt and firm commitments. If elected, SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact adoption of SFAS 159 may have on our consolidated
financial statements, if any.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141(R)). SFAS 141(R) establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. SFAS 141(R) is effective for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
potential impact, if any, of the adoption of SFAS 141(R) on its consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS
160 changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. This new consolidation method significantly changes the accounting for
transactions with minority interest holders. SFAS 160 is effective for fiscal
years beginning after December 15, 2008 with early application prohibited. The
Company is currently evaluating the impact of adopting SFAS 160, if any, on its
consolidated financial statements.
3. Trade Receivables
December 31
2007 2006
(In Thousands)
Trade receivables $ 14,483 $ 7,314
Less: Allowance for doubtful accounts (77) (12)
Trade receivables, net $ 14,406 $ 7,302
At December 31, 2007, 61% of the Company's trade receivable balance was due from
four customers while at December 31, 2006, 40% of the trade receivable balance
was due from six customers. These customers represented 5.7% and 7.6% of total
revenues as of the years ended December 31, 2007 and 2006, respectively. Based
on the Company's knowledge of the financial condition of its customers, an
allowance for uncollectible balances was established at December 31, 2007 and
2006.
4. Lease Receivables
Sales Type Leases
December 31
2007 2006
(In Thousands)
Total minimum lease payments receivable $ 19,542 $ 22,113
Less: Unearned income (3,648) (3,851)
Net investment in sales type leases $ 15,894 $ 18,262
Executory costs included in total minimum lease payments were not significant.
In addition, no value was assigned to the estimated residual value of the leased
equipment due to the 20- year lease term. Future minimum receivables under all
noncancelable sales type leases as of December 31, 2007, are as follows:
(In Thousands)
2008 $
946
2009 965
2010 984
2011 1,003
2012 1,023
Thereafter 14,621
$ 19,542
5. Inventories
December 31
2007 2006
(In Thousands)
Raw materials $ 6,242 $ 921
Work-in-progress 4,115 6,303
Finished goods 11,204 12,490
$ 21,561 $ 19,714
6. Related Party Transactions
SCR Group, Inc.
The Co-Founders of the Company are also joint owners of SCR Group, Inc. (SCR).
SCR assisted the Company in arranging for early credit agreements. SCR also was
a subcontractor for some of the Company's projects providing technical service
and installation. In 2006, the Company became the direct employer for the
remaining technical service and installation employees. The Company incurred
installation labor costs payable to SCR in the normal course of operations in an
amount of $4,639,000 for the year ended December 31, 2006.
Throughout 2006 and 2005, the Company paid various costs of SCR in connection
with a Company cross-guarantee on previously established credit arrangements and
related to SCR's activities as a subcontractor for the Company which SCR was not
able to pay, resulting in a total account receivable from SCR of $3.3 million to
the Company. The Company recorded an impairment charge for the entire amount of
this receivable in 2006. This decision was taken after considering various
factors, including the financial position of SCR, the fact that SCR had
negligible assets remaining, and the expected wind-up of SCR, and reflected the
unlikely recoverability from SCR of the amount owing under the SCR Promissory
Note.
Under the terms of a separation agreement entered into in December 2006 between
one of the co-founders and the Company, the Company was provided a conditional
personal guarantee (the BMK Guarantee) pursuant to which the proceeds of any
future sale of the co-founder's common shares of the Company would be used to
pay to the Company all amounts outstanding from SCR. In May 2007, in connection
with the sale of shares of the Company held by the co-founder, the Company was
paid $3.3 million and the SCR Promissory Note and the BMK Guarantee were
satisfied in full.
UPC Commercial Agreements
The Company has various agreements with UPC Energy Group (UPC), whose partners
are members of the Company's board of directors. In April 2007, the Company
entered into a preferred supply and cooperation agreement with UPC Solar
Management LLC (UPC Solar), an affiliate of UPC, to develop solar energy
projects in the United States. Under the agreement, the Company will be the
preferred supplier to UPC Solar of BIPV roofing systems and certain other thin
film solar products, solar roofing installation services, and renewable energy
management software systems for solar installations. UPC Solar will be the
Company's preferred developer for solar energy projects in the United States.
6. Related Party Transactions (continued)
During 2007, the Company completed 6 projects with UPC Solar for a total of $9.7
million. Two of these solar power projects were installed on the roofs of two
Coca-Cola Bottling Company facilities in Orange and Montebello, California.
These two projects previously were classified as "Solar systems held for sale".
As a result, no revenue had been recorded on these two lease arrangements as the
equipment has not been placed into service as of December 31, 2006. In
connection with these two installations, the Company had collected rebates from
local utility agencies for renewable energy construction totaling $2,109,000 in
December 2005. The rebate had been reflected as "Deferred revenue" on the
accompanying balance sheet as of December 31, 2006.
7. Property and Equipment
Property and equipment consisted of the following:
December 31
2007 2006
(In Thousands)
Leasehold improvements $ 1,287 $ 1,144
Computer equipment 371 354
Plant, machinery and equipment 4,342 3,964
6,000 5,462
Less: accumulated depreciation (3,646) (2,632)
Property and equipment, net $ 2,354 $ 2,830
Depreciation expense was $1,027,000 and $785,000 for the years ended December
31, 2007 and 2006, respectively.
8. Warranty Reserves
The warranty provision represents management's best estimate of the liability
under warranties granted on transactions to date. The activity for the years
ended December 31, 2007 and 2006 was as follows:
Balance at December 31, 2005 $ 1,743
Warranty expense 305
Amounts charged against the warranty provision (342)
Balance at December 31, 2006 1,706
Warranty expense 2,547
Amounts charged against the warranty provision (2,028)
Balance at December 31, 2007 $ 2,225
9. Credit Facilities
The Company maintains a loan and security agreement with an affiliate of GE
Energy Financial Services relating to an asset-based revolving line of credit
for up to $20 million. The credit facility bears interest at LIBOR plus 3.0%
(7.75% at December 31, 2007). The outstanding balance at December 31, 2007 was
$2.5 million. The term of the facility is for up to five years, with an initial
30-month term and a 30-month extension at the lender's discretion upon
satisfaction of certain conditions. Borrowings under the credit facility are
guaranteed by the Company and its subsidiaries and are secured by a pledge of
all of the Company's assets, including the stock of the Company's subsidiaries
and the assets of the Company's subsidiaries. The Company is required to pay a
commitment fee of 0.50% per annum on the unused portion of the credit facility,
quarterly maintenance fees, as well as customary letter of credit fees.
The loan and security agreement contains customary financial and non-financial
covenants, and customary events of default, including a provision that an event
of default will exist if the Company defaults under the note purchase agreement
governing the Company's convertible notes, as amended.
During 2006, pursuant to an amendment to the Company's loan and security
agreement and a master agreement for standby letters of credit, the Company
obtained a $3,000,000 standby letter of credit sub-facility as part of the $20
million credit facility. The standby letter of credit sub-facility was increased
to $5,000,000 in April 2007.
10. Long-Term Debt
Long-term debt consists of the following:
December 31
2007 2006
(In Thousands)
Convertible notes $ 8,000 $ 31,080
Structured financing 13,796 16,372
Total 21,796 47,452
Less: Amounts due within one year (723) (2,418)
Total long-term debt $ 21,073 $ 45,034
Structured Financing
In April 2005, the Company through a subsidiary entered into a Master Purchase
and Lease Agreement and related agreements with a subsidiary of GE Commercial
Finance Energy Financial Services (GE EFS), a unit of General Electric Capital
Corporation, to provide structured financing for the installation of the
Company's BIPV projects on certain buildings owned by certain qualified
customers. During the year ended December 31, 2007, the Company completed no
projects under this structured financing arrangement and during 2006, the
Company completed 12 projects under this structured financing arrangement, which
in aggregate totaled $16.0 million or 41.8% of the Company's fiscal 2006
revenue.
Under the Company's Energy Services Agreements (ESA), customers agree to pay the
Company, on a monthly basis over a 20-year period, for the electricity generated
from the BIPV roofing systems installed on customers' buildings. These
transactions with customers are considered sales-type lease transactions under
US GAAP. The Company records a lease receivable to reflect the future stream of
energy services payments from customers over the 20-year period.
Upon completion of a project with a customer, the Company entered into an
agreement with GE EFS to provide financing to the Company collateralized by the
lease receivables for an amount equal to the then net present value of the
future lease receivables from the customer.
Financing and consulting costs incurred by the Company associated with the
establishment of the structured financing arrangement were $1,001,000 which had
been capitalized and was being amortized over the expected term. The Company
does not anticipate funding any future projects under this arrangement beyond
2006. Therefore, the Company recorded an impairment charge of $974,000 to write
off the remaining structured finance transaction fees which was charged to
interest expense as of December 31, 2006.
Refinancing of Convertible Notes
In December 2007, the Company completed a refinancing which resulted in an
aggregate principal amount of $8 million outstanding of 6.5% convertible notes
due November 1, 2010. As of December 31, 2006, the Company had an aggregate
principal amount of $31.1 million of convertible notes outstanding. These notes
were originally issued as part of a private placement of 6.5% convertible notes
due November 1, 2010 in the aggregate principal amount of $37.0 million.
The original terms of the convertible notes included the following:
Y Interest was payable semiannually in cash on May 1st and November 1st of
each year beginning May 1, 2006.
Y The notes were convertible at any time prior to their maturity into shares
of the Company's common stock at the conversion price of $3.392 per share,
subject to certain adjustments.
Y In the event a holder elected to convert its notes prior to November 1,
2008 or elected to convert its notes in connection with a fundamental change of
control, such note holder will receive in addition to the shares issuable upon
conversion, a make-whole payment in cash equal to the present value of the
remaining interest obligation on the notes from the date of such conversion
through November 1, 2008, subject to certain adjustments.
Y These convertible notes contained a put feature whereby the holders of the
convertible notes were entitled to demand payment of the principal amount of the
outstanding convertible notes plus accrued interest if the Company did not
consummate a qualified U.S. public offering by November 1, 2008.
As the Company did not consummate a qualified U.S. public offering by May 1,
2007, under the terms of the convertible notes: (i) the interest rate on the
notes increased from 6.5% to 8.5% per year effective as of May 1, 2007, and (ii)
the holders of outstanding convertible notes could have required the Company to
repurchase for cash, on November 1, 2008, all or a portion of their notes at a
repurchase price equal to 100% of the face amount, plus accrued interest.
In December 2007, the Company completed a placing of 16,471,000 shares of common
stock at a price of 85p ($1.69) per share for aggregate gross proceeds of £14.0
million ($27.8 million) (the 2007 Placing). In connection with the 2007 Placing,
the Company also entered into arrangements with the holders of the convertible
notes, which had an aggregate principal amount of $31.1 million outstanding,
whereby:
Y $16.2 million of aggregate principal amount of convertible notes were
redeemed at a premium of 3% to nominal value, together with accrued interest to
redemption date, at an aggregate cost of approximately $17.0 million;
Y $6.9 million of aggregate principal amount of convertible notes were
converted into equity at the 85p ($1.69) per share placing price at a premium of
5% to nominal value, resulting in the issue of 4,246,000 new common shares; and
Y the remaining $8.0 million of convertible notes, held by one institutional
investor, were restructured to reduce the interest rate from 8.5% to 6.5% and is
now payable, at the Company's election, in cash or stock. Other changes in
terms include the reduction in the conversion price from $3.392 to $2.00, and
the removal of both the November 2008 put option and the conversion make-whole
payment.
At December 31, 2007 and 2006, the Company was in compliance with its covenants
under the convertible notes.
At the original date of issuance, the Company determined that a beneficial
conversion feature existed as a result of the "make whole" interest feature. The
beneficial conversion feature was recorded as a debt discount with the
corresponding credit to additional paid-in capital. During 2007, $23.1 million
of the convertible notes were retired or converted into common stock leaving an
outstanding principal amount of $8.0 million as of December 31, 2007. The
convertible notes are reflected net of the debt discount of $585,000 in 2006.
The debt discount was written off as the remaining debt of $8.0 million was
considered new debt for accounting purposes.
The following is a summary of aggregate maturities of long-term debt for each of
the next five years, and thereafter as of December 31:
(In Thousands)
2008 $
723
2009 583
2010 8,598
2011 616
2012 642
Thereafter 10,634
21,796
Less current portion (723)
Long-term debt $ 21,073
11. Commitments and Contingencies
Operating Leases
The Company leases land, buildings and equipment under noncancelable operating
leases expiring in various years through 2012. Several of the leases have
renewal options providing for additional lease periods. Future minimum
obligations under all noncancelable operating leases as of December 31, 2007 are
as follows:
(In Thousands)
2008 $ 1,246
2009 919
2010 129
2011 32
2012 27
Thereafter -
$ 2,353
Total rent expense for all operating leases was approximately $1,564,000 and
$1,426,000 for the years ended December 31, 2007 and 2006, respectively.
12. Income Taxes
The provision (benefit) for income taxes at December 31 is as follows:
2007 2006
(In Thousands)
Current:
State $ 3 $ 2
Federal - -
3 2
Deferred:
State (1,529) (1,941)
Federal (5,977) (7,039)
(7,506) (8,980)
Change in valuation allowance 7,506 8,980
Total income tax expense (included in general
and administrative expenses in 2007 and 2006) $ 3 $ 2
The reconciliation of income tax provision computed at federal statutory rates
to income tax expense is as follows:
December 31
2007 2006
Tax at U.S. federal statutory rates 34.00% 34.00%
State taxes, net of federal benefit 4.65 5.82
Various permanent items (0.03) (0.02)
Loss on debt conversion (6.58) -
Foreign income/loss (0.26) -
Change in valuation allowance (31.78) (40.51)
Portion of valuation allowance pertaining to - 0.71
additional paid-in-capital
Total (0.00)% (0.00)%
Net deferred tax assets at December 31 are as follows:
2007 2006
(In Thousands)
Current:
Allowance for doubtful accounts
$ 33 $ 5
Accrued expenses 405 454
Construction in progress (1,637) (2,324)
Inventory obsolescence 554 75
Impairment of related party receivable - 1,402
Other accruals 545 1,035
Stock-based compensation 6,353 438
State tax (582) (193)
Unearned revenue - progress billings 913 2,379
6,584 3,271
Noncurrent:
Capital loss carryforward 835 835
Change in fair value of warrants and (389) (2,279)
embedded derivatives
Difference in basis of fixed assets (636) (691)
Amortization of capitalized fees 386
Warranty reserve 289 731
Deferred revenue - 903
Unearned income 1,563 1,650
Net operating loss carryforwards 17,875 14,449
State tax (1,321) (1,190)
18,602 14,408
Net deferred tax asset 25,186 17,679
Less: Valuation allowance (25,186) (17,679)
Carrying value of the deferred tax asset $ - $ -
The Company has recorded a full valuation allowance against the deferred tax
asset at December 31, 2007 and 2006. At December 31, 2007, the Company had net
operating loss carryforwards for federal and state income tax purposes of
$41,839,000 and $41,289,000, respectively. The federal carryforwards expire
beginning in 2024 while the state carryforwards expire beginning in 2014. The
utilization of net operating carryforwards may be limited by changes in
ownership.
13. Stock Option Plans
The Company implemented a stock option plan (the Plan) in April 2004 as amended.
Under the Plan, options may be granted by the board of directors to eligible
employees, officers, directors, consultants and independent contractors of the
Company for the purchase of common shares. Options under the Plan are granted at
a price fixed by the board of directors, which price may not be less than the
fair market value of a share at the time of the grant. The term of outstanding
options is determined by the board of directors but may not be greater than ten
years.
The following table summarizes stock option grants outstanding as of January 1,
2006, as well as activity during 2006 and 2007.
Stock Options Shares Weighted-
Average
Exercise
Price
Outstanding at January 1, 2006 2,290,000 $ 2.99
Granted 9,145,000 1.39
Exercised 200,000 2.49
Expired or forfeited (4,315,000) 2.56
Outstanding at December 31, 2006 6,920,000 1.16
Exercisable at December 31, 2006 710,000 2.89
Granted 390,000 1.86
Exercised - -
Expired or forfeited (10,000) 0.96
Outstanding at December 31, 2007 7,300,000 1.20
Exercisable at December 31, 2007 2,777,000 $ 1.46
For fiscal years 2007 and 2006, the weighted-average grant-date fair value of
options granted was $0.70 and $0.70, respectively. For fiscal year 2006, the
total intrinsic value of options exercised was $410,000. The intrinsic value of
a stock option is the amount by which the market value of the underlying stock
exceeds the exercise price of the option, determined as of the date of the
option exercise.
A summary of outstanding options and exercisable options is shown below:
Outstanding Options Exercisable Options
Range of Number Weighted- Weighted- Aggregate Number Weighted- Aggregate
Exercise Average Average Intrinsic Average Intrinsic
Price Remaining Exercise Value Exercise Value
Contractual Price Price
Life (Years)
$0.68 - $1.37 6,280,000 5.0 $ 0.96 $ - 2,147,000 $ 0.96 $ -
$1.57 - $1.92 390,000 5.3 1.84 - - - -
$1.96 - $2.61 330,000 7.1 2.56 - 330,000 2.56 -
$3.08 - $3.63 300,000 3.0 3.63 - 300,000 3.63 -
Totals 7,300,000 5.0 $ 1.20 $ 1,456,000 2,777,000 $ 1.44 $ 553,000
As of December 31, 2007, the trading price of the Company's common stock
exceeded the exercise price for certain of the options outstanding. The Company
expects that substantially all of the stock options outstanding at December 31,
2007 will vest.
Stock-Based Compensation Expense
During the year ended December 31, 2006, the Company granted 9,145,000 stock
options to officers and employees of the Company with a weighted average fair
value of $1.39 as of the date of grant. During the year ended December 31, 2007,
the Company granted 390,000 stock options to officers and employees of the
Company with a weighted-average fair value of $1.86 as of the date of grant. All
of the stock options granted during 2007 and 2006 were granted at a strike price
that was equal to the market price on the date of grant. In general, stock
options granted have six-year terms and vest at the rate of 33% per year. The
weighted-average exercise price of the options outstanding as of December 31,
2007 and 2006, was $1.20 and $1.16, respectively.
Stock options issued during the years ended December 31, 2007 and 2006 were
valued using the Black-Scholes option pricing model with the following
assumptions:
December 31
2007 2006
Risk-free interest rate (%) 4.6% 4.7%
Expected volatility (%) 48.2% 48.2%
Expected life (in years) 4 4
Expected dividends - -
Expected volatility is based upon the historical trends of the Company's stock.
14. Shareholders' Equity
Shares of Common Stock
The Company has one class of shares of common stock. The Company issued 1,000
common shares on the date of incorporation. On May 4, 2004, the shareholders
passed a resolution to amend the Certificate of Incorporation so as to effect a
24,933 forward stock split, pursuant to which each of the 1,000 common shares
fully paid were divided into 24,933 fully paid shares of common stock with no
par value. Following the stock split, there were 24,933,000 shares of common
stock outstanding. Additionally, the par value per common share was amended from
$0.00 to $0.0001 as well as the authorized number of shares which increased from
1,500 common shares to 50,000,000 common shares. On August 24, 2006, the
Company's articles were amended to increase the maximum authorized number of
shares of common stock to 250,000,000 shares. The Company has 10,000,000 shares
and 14,609,000 shares reserved for issuance under the Company's stock option
plan and for warrants outstanding as of December 31, 2007.
On May 12, 2004, following admission of its common shares to AIM, the Company
placed 7,217,000 common shares at $3.15. In addition, 1,312,000 shares were
issued to the Company's financial advisor in connection with the placing of the
Company's shares on AIM.
Issuances of Common Stock in 2006 and 2007
2006 Issuances
During 2006, the Company issued a total of 34,821,000 shares of common stock in
various transactions. Of this amount, 34,127,000 shares were issued for cash,
realizing aggregate gross proceeds of $22.1 million, and 566,000 shares were
issued pursuant to the conversion of convertible notes with a face amount of
$1,920,000.
Of the 34,127,000 shares of common stock issued for cash during 2006, (i)
33,333,000 shares were issued in connection with the Company's placement in
December 2006 at a placement price of $0.59 (£0.30) per share for aggregate
gross proceeds of $19.5 million ($18.7 million after cash expenses), (ii)722,000
shares were issued for net proceeds of $2,207,000, pursuant to the exercise of
warrants, and (iii) 200,000 shares were issued for net proceeds of $431,000 as a
result of the exercise of options by employees.
2007 Issuances
During 2007, the Company issued a total of 21,917,000 shares of common stock in
various transactions. Of this amount, 17,671,000 shares were issued for cash,
realizing aggregate gross proceeds of $28.5 million, and 4,246,000 shares were
issued pursuant to the conversion of convertible notes with a face amount of
$6,875,000.
Of the 17,671,000 shares of common stock issued for cash during 2007, (i)
16,471,000 shares were issued in connection with the Company's placement in
December 2007 at a placement price of $1.69 (£0.85) per share for aggregate
gross proceeds of $27.8 million ($26.2 million after cash expenses), and (ii)
1,200,000 shares were issued for net proceeds of $711,000 pursuant to the
exercise of warrants.
Warrants
Warrants outstanding as of December 31, 2007, are as follows:
Fair Number
Value of Shares
UPC $ 12,395,715 11,000,000
GE Energy Financial Services 2,257,627 2,617,353
KBC Peel Hunt 246,627 166,666
Mirabaud Securities 151,745 500,000
Crestview Capital Funds 37,391 325,000
$ 15,089,105 14,609,019
The Company has determined that the warrants issued to UPC Energy Group are
compensatory and has recorded such warrants as expense through the vesting date
under the provisions of SFAS 123R and EITF 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction With Selling Goods or Services.
The Company has determined the warrants issued to GE Energy Financial Services,
KBC Peel Hunt, Mirabaud Securities and Crestview Capital did not meet the
definition of an equity instrument and therefore was required to be classified
as a liability at fair value. The change in the fair value of these warrants
issued is recorded as a component of net loss.
UPC
Additionally, in December 2006, a strategic investment of $1.5 million
(£750,000) was made by UPC Energy Group, and the Company granted UPC Energy
Group five-year warrants over 7,700,000 common shares with an exercise price of
$0.59 (£0.30) (Tranche A Warrants), and over a further 3,300,000 common shares
with an exercise price of $4.91 (£2.50) (Tranche B Warrants). 50% of the Tranche
A Warrants and 50% of the Tranche B Warrants may be exercised in full or in part
at any time within the period falling between one and five years following the
date of grant, and the remaining 50% for each such grant may be exercised in
full or in part at any time within the period falling between two and five years
following the date of grant. All of these warrants granted were dependent on UPC
maintaining seats on the board of directors of the Company. These warrants vest
automatically on a change of control, or in the event that the UPC
representatives of the board are removed from the board other than for just
cause or in the event that any replacement nominee approved by the board is not
approved by the shareholders of the Company.
In December 2007, 50% of the Tranche A Warrants and 50% of the Tranche B
Warrants vested in accordance with their terms. In December 2007, the board of
directors agreed to amend the terms of the warrants to provide that the
remaining unvested 50% of the Tranche A Warrants and Tranche B Warrants vest in
December 2007. In connection with this amendment, the terms of the Tranche A
Warrants were amended such that all but not less than all of the Tranche A
Warrants may be exercised as of December 20, 2007.
GE Energy Financial Services
Effective December 30, 2005, the Company issued 2,000,000 warrants to purchase
common shares with an aggregate value of $4,523,000 to GE Energy Financial
Services in connection with its credit facility. Each warrant was exercisable
for one common share of the Company at a price of $3.392 per share subject to
adjustment in certain circumstances. The fair value of the common share purchase
warrants issued amounted to $4,523,000 and was determined using the
Black-Scholes pricing model with a risk-free rate of 6.11%, a five-year term and
a volatility of 48.7%. The fair value of the warrants totaling $4,523,000 was
recorded as loan fees in long-term assets on the accompanying balance sheet and
is being amortized over the initial term of the credit facility (30 months). The
warrants vested immediately upon issue and have a term expiring initially in 30
months with a 30-month extension through December 30, 2010. In connection with
these warrants, the Company also granted certain demand and piggyback
registration rights. The warrants also include certain put and call provisions.
Upon the occurrence of certain events (including a change of control, the
failure of the Company to consummate a qualified U.S. initial public offering
prior to November 1, 2008, the commitment termination date or an event of
default under the credit facility), the warrant-holder has the right to require
that the Company (i) purchase all or any part of the warrants issued to it for
the difference between the market value for the underlying warrant shares at the
time of the put and the aggregate warrant exercise price, (ii) any shares
underlying the warrants, for the market price of the warrants shares at the time
of the put, and (iii) any other of the of the Company's securities then owned by
the holder, for the market price of such securities at the time of the put.
In August 2006, pursuant to a waiver and amendment, the credit facility with GE
Energy Financial Services was amended to provide the Company with access to more
capital under the borrowing base eligibility criteria and to provide the Company
with more flexibility relating to the facility's financial covenants. As partial
consideration for GE Energy Financial Services agreeing to the waiver and
amendment, the Company adjusted the strike price of the 2,000,000 warrants
previously issued to GE Energy Financial Services to a strike price of $1.122
per share, subject to adjustment in certain circumstances. In connection with
the repricing of the 2,000,000 warrants, the Company recorded an additional
$866,000 of loan fees that are being amortized over the remaining term of the
credit facility.
In December 2006, in accordance with the anti-dilution and re-pricing provisions
of the 2,000,000 warrants previously issued to GE Energy Financial Services, the
Company adjusted the strike price of the 2,000,000 warrants to $0.59 (£0.30) per
share, subject to adjustment in certain circumstances, and the Company issued to
GE Energy Financial Services an additional 617,000 warrants with a strike price
of $0.59 (£0.30) per share, subject to adjustment in certain circumstances.
KBC Peel Hunt
As partial consideration for its nominated advisor services in connection with
the Placing, KBC Peel Hunt was granted warrants over 167,000 common shares of
the Company with an exercise price of $0.59 (£0.30). All of these warrants may
be exercised in part or in full at any time within a three-year period from the
date of grant.
Mirabaud
As consideration for its services as a broker in connection with the Placing, in
December 2006, Mirabaud Securities was granted warrants over 1,200,000 common
shares of the Company with an exercise price of $0.59 (£0.30) and over an
additional 500,000 common shares of the Company with an exercise price of $4.91
(£2.50). In April 2007, Mirabaud Securities exercised 1,200,000 warrants and the
Company realized net proceeds of $711,000.
Crestview Capital
In connection with a $4 million bridge financing with Crestview Capital Funds in
September 2005, the Company issued warrants to Crestview to purchase up to
325,000 shares of the Company's common stock at an exercise price of $2.82. The
warrants expire on September 30, 2008. The Company determined that the warrants
issued to Crestview did not qualify as an equity instrument under the relevant
U.S. accounting guidance and therefore was recorded as a liability. The warrants
are reflected as a liability as of December 31, 2006 and 2007 at estimated fair
value. The Company also granted certain registration rights for the shares
issuable upon exercise of the warrants.
15. Financial instruments: Credit, Interest Rate and Exchange Rate Risk
Exposures
The Company's activities expose it to a variety of financial risks, primarily
credit risk and interest rate risk. Risk management is carried out by the
Company's Chief Financial Officer. Currently management does not use any
derivative financial instruments or forward contracts as part of its risk
management policies. The Company does have policies to manage customer credit
risk that typically limit the amount of credit exposure to a single customer.
The Company's interest rate risk arises from bank borrowings which typically
carry floating interest rates. Historically, the Company has not attempted to
manage its interest rate risk by using interest rate swaps or by using fixed
rate instruments on its borrowings.
a. Credit risk. The Company's credit risk is primarily attributable to trade
receivables. At December 31, 2007 and 2006, the Company's maximum exposure to
credit risk from one customer amounted to $2,374,000 and $923,000, respectively.
The credit risk on cash and cash equivalents and the certificate of deposit is
limited as the counterparties are banks with high credit ratings.
b. Interest rate risk. Term loans and other bank borrowings are at floating
rates of interest generally obtained within the United States of America, which
are negotiated with the banks at various indexes plus negotiated margins.
Amounts due to related parties currently carry no interest charges.
c. Exchange rate risk. The Company currently has operations based in the
United States and Europe, with a significant portion of its revenues and
expenses in U.S. dollars and in Euros. As a result, the Company has exposure to
fluctuations in foreign exchange rates.
16. Subsequent Events
In January 2008, the Company received $3.2 million in cash related to the stock
subscription receivable as of December 31, 2007.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SDFESSSASESD
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