UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
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(Mark
one)
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R
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2007
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OR
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£
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
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For
the transition period from _____________ to
_____________
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Commission
file number: 001-33695
AKEENA
SOLAR, INC.
(Name
of
Small Business Issuer in Its Charter)
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Delaware
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90-0181035
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(State
or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S.
Employer
Identification No.) |
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16005
Los Gatos Boulevard
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Los
Gatos, California
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95032
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(408)
402-9400
(Issuers
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act:
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Common
Stock, par value $0.001 per
share
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The
NASDAQ Stock Market
LLC
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(Title
of Class)
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(Name
of Exchange)
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Securities
registered under Section 12(g) of the Exchange Act:
None
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. £
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been
subject to such filing requirements for the past 90 days. Yes R
No
£
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £
No
R
The
registrant’s revenues for the fiscal year ended December 31, 2007 were
$32,211,761.
The
aggregate market value of the common stock of the registrant as of March 10,
2008 (based upon the $5.76 per share closing price of the common stock at that
date as reported on the NASDAQ), excluding 7,758,000 outstanding shares
beneficially owned by directors and executive officers, was
$118,868,746.
As
of
March 10, 2008, 28,394,935 shares of common stock of the registrant were
outstanding.
Transitional
Small Business Disclosure Format (check one): Yes £
No
R
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1.
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Description
of Business and Risk Factors
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3
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Item
2.
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Description
of Property
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18
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Item
3.
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Legal
Proceedings
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18
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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18
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PART
II
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Item
5.
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Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity Securities
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19
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Item
6.
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Management’s
Discussion and Analysis or Plan of Operation
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19
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Item
7.
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Financial
Statements
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25
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Item
8.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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46
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Item
8A.
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Controls
And Procedures
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46
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Item
8A(T).
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Controls And Procedures |
46
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Item
8B.
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Other
Information
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47
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PART
III
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Item
9.
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Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange Act
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48
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Item
10.
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Executive
Compensation
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51
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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54
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Item
12.
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Certain
Relationships and Related Transactions, and Director
Independence
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56
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Item
13.
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Exhibits
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57
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Item
14.
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Principal
Accountant Fees and Services
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58
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| SIGNATURES |
59
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| Exhibit Index |
60
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2
PART
I
As
used
in this Annual Report on Form 10-KSB, unless otherwise indicated, the terms
“we,” “us,” “our” and “the Company” refer to Akeena Solar, Inc. and its
subsidiaries.
Our
Annual Report on Form 10-KSB for 2007, and information we provide in our Annual
Report to Stockholders, press releases, telephonic reports and other investor
communications, including those on our website, may contain forward-looking
statements with respect to anticipated future events and our projected financial
performance, operations and competitive position that are subject to risks
and
uncertainties that could cause our actual results to differ materially from
those forward-looking statements and our expectations.
Forward-looking
statements can be identified by the use of words such as “expects,” “plans,”
“will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and
other words of similar meaning. These statements constitute forward-looking
statements within the meaning of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. These statements are subject to risks
and uncertainties that may cause actual results to differ materially from those
expressed or implied by these forward-looking statements. These forward-looking
statements reflect our then current beliefs, projections and estimates with
respect to future events and our projected financial performance, operations
and
competitive position.
Such
risks and uncertainties include, without limitation, our ability to raise
capital to finance our operations, the effectiveness, profitability and the
marketability of our services, our ability to protect our proprietary
information, general economic and business conditions, the impact of
technological developments and competition, adverse results of any legal
proceedings, the impact of current, pending or future legislation and regulation
of the solar power industry, our ability to enter into acceptable relationships
with one or more manufacturers for solar panel components and the ability of
such contract manufacturers to manufacture products or components of an
acceptable quality on a cost-effective basis, our ability to attract or retain
qualified senior management personnel, including sales and marketing and
technical personnel and other risks detailed from time to time in our filings
with the SEC, including those described at the end of Item 1 below. We do not
undertake any obligation to update any forward-looking statements.
Item
1. Description
of Business.
Overview
We
are a
designer, integrator and installer of solar power systems. We market, sell,
design and install systems for residential and commercial customers, sourcing
components (such as solar panels and inverters) from manufacturers such as
Fronius, Kyocera, Sharp, SunPower and Suntech. We currently serve customers
in
California, New York, New Jersey, Pennsylvania and Connecticut. According to
data compiled by the California Energy Commission, the Solar Electric Power
Association and the New Jersey Clean Energy Program, over the past four years
we
have been one of the largest national integrators of residential and commercial
solar electric power systems in the United States. We are a member of the Solar
Energy Industry Association, the California Solar Energy Industries Association,
the Northern California Solar Energy Association, the Independent Power
Providers, the Solar Energy Business Association of New England, and the New
York Solar Energy Industries Association. To date, we have installed over 1,300
solar power systems and since the commencement of our operations in 2001, our
sales have steadily grown to approximately $32.2 million in 2007.
We
were
formed as a Nevada corporation on July 29, 2005, under the name Fairview Energy
Corporation, Inc. (“Fairview”), and on August 4, 2006, were reincorporated in
the State of Delaware. On August 11, 2006, we consummated a reverse merger
(the
“Merger”) with a privately-held company called Akeena Solar, Inc.
(“Akeena-Private”), pursuant to which the privately-held company, renamed Akeena
Corp., became a wholly-owned subsidiary of ours and we renamed our company
Akeena Solar, Inc. We had been in the development stage since our inception
and
had not commenced business operations prior to the Merger. Akeena-Private was
incorporated in the State of California on February 23, 2001 under the name
Akeena, Inc., and on June 2, 2006, was reincorporated in the State of Delaware
under the name Akeena Solar, Inc. As a result of the Merger, we succeeded to
Akeena-Private’s line of business as our sole line of business.
As
of
March 10, 2008, we had ten offices. Our offices are located in Los Gatos, Fresno
(Clovis), Lake Forest, Bakersfield, Manteca, Santa Rosa, Palm Springs, San
Diego
and Thousand Oaks (Westlake Village), California, as well as Fairfield, New
Jersey. Our corporate headquarters are located at 16005 Los Gatos Boulevard,
Los
Gatos, California 95032. We maintain installation offices at all of our
facilities.
Our
telephone number is (408) 402-9400. Additional information about our
company is available on our website at http://www.akeena.com. The
information on our web site is not incorporated herein by
reference.
3
Strategy
Our
philosophy is simple: “we believe that producing clean electricity directly from
the sun is the right thing to do for our environment and economy.” Since our
founding, we have concentrated on serving the solar power needs of residential
and commercial customers tied to the electric power grid.
The
solar
power industry is at an early stage of its growth and is highly fragmented
with
many smaller companies. The prospects for long-term worldwide demand for solar
power have attracted many new solar panel manufacturers, as well as a multitude
of design/integration companies in our market segment. We expect the
manufacturing segment of the industry to consolidate when and if the current
silicon shortage mitigates and more solar panel manufacturing capacity comes
online. We also expect there to be consolidation in the design/integration
segment of the industry based mostly on branding, development of new technology
and business process improvements.
Accordingly,
our growth strategy primarily includes:
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Developing
and commercializing our solar panel technology optimized for the
residential and commercial markets.
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Reducing
installation costs and improving the aesthetics and performance of
solar
systems compared to ordinary, commercially available solar
equipment.
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Promoting
and enhancing our company's brand
name and reputation.
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Developing
and utilizing a process-driven approach to sell and install our solar
power systems in diverse geographic
markets.
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Based
on
our experience as a solar power designer and integrator over the past seven
years, we believe we understand certain areas in which costs for installations
can be significantly reduced. We have introduced a new “plug and play” solar
panel technology (“Andalay”) which we believe will significantly reduce the
installation time, parts and costs, as well as provide superior reliability
and aesthetics for customers, when compared to other solar panel mounting
products and technology.
We
believe the proceeds (before commissions and expenses) from our 2007 private
placements will enhance our ability to purchase equipment on favorable terms
from international manufacturers, accelerating our introduction of this panel
technology to our customers. We also believe that being a public company will
improve our ability to grow both internally and by means of expansions, enhance
our reputation in the minds of customers and enhance our ability to attract
and
retain experienced management.
Industry
Electric
power is 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. As our energy supply and
distribution mix changes, electricity is likely to be used more for local
transportation (electric vehicles) and space/water heating needs. According
to
the Edison Electric Institute, the electric power industry in the U.S. is over
$218 billion in size, and will continue to grow with our economy.
According
to the U.S. Department of Energy (DOE), electricity is generated from the
following: coal - 51%, nuclear -21%, gas - 16%, hydro - 6%, and oil - 3%, with
renewable energy contributing 3%. “Renewable Energy” typically refers to
non-traditional energy sources, including solar energy. Due to continuously
increasing energy demands, we believe the electric power industry faces the
following challenges:
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·
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Limited
Energy Supplies. The
primary fuels that have supplied this industry, fossil fuels in the
form
of oil, coal and natural gas, are limited. Worldwide demand is increasing
at a time that industry experts have concluded that supply is limited.
Therefore, the increased demand will probably result in increased
prices,
making it more likely that long-term average costs for electricity
will
continue to increase.
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4
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Generation,
Transmission and Distribution Infrastructure Costs.
Historically, electricity has been generated in centralized power
plants
transmitted over high voltage lines, and distributed locally through
lower
voltage transmission lines and transformer equipment. As electricity
needs
increase, these systems will need to be expanded. Without further
investments in this infrastructure, the likelihood of power shortages
(“brownouts” and “blackouts”) may
increase.
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·
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Stability
of Suppliers. Since
many of the major countries who supply fossil fuel are located in
unstable
regions of the world, purchasing oil and natural gas from these countries
may increase the risk of supply shortages and cost
increases.
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·
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Environmental
Concerns and Climate Change.
Concerns about global warming and greenhouse gas emissions has resulted
in
the Kyoto Protocol various states enacting stricter emissions control
laws
and utilities in several states being required to comply with Renewable
Portfolio Standards, which require the purchase of a certain amount
of
power from renewable sources.
|
Solar
energy is the underlying energy source for renewable fuel sources, including
biomass fuels and hydroelectric energy. By extracting energy directly from
the
sun and converting it into an immediately usable form, either as heat or
electricity, intermediate steps are eliminated. We believe, in this sense,
solar
energy is one of the most direct and unlimited energy sources.
Solar
energy can be converted into usable forms of energy either through the
photovoltaic effect (generating electricity from photons) or by generating
heat
(solar thermal energy). Solar thermal systems include traditional domestic
hot
water collectors (DHW), swimming pool collectors, and high temperature thermal
collectors (used to generate electricity in central generating systems). DHW
thermal systems are typically distributed on rooftops so that they generate
heat
for the building on which they are situated. High temperature thermal collectors
typically use concentrating mirror systems and are typically located in remote
sites.
According
to SolarBuzz, a research and consulting firm, the global solar power market,
as
defined by solar power system installations, had an estimated $17.2 billion
in
revenue in 2007. The U.S. solar power installation market comprised
approximately 8% of the total global market installations, reaching
approximately 220 megawatts installed during 2007. According to Solarbuzz,
the residential and small commercial market segments represent approximately
65%
of the U.S. market and are expected to continue to do so through
2010.
Anatomy
of a Solar Power System
Solar
power systems convert the energy in sunlight directly into electrical energy
within solar cells based on the photovoltaic effect. Multiple solar cells,
which
produce DC power, are electrically interconnected into solar panels. A typical
180 watt solar panel may have 72 individual solar cells. Multiple solar panels
are electrically wired together. The number of solar panels installed on a
building are generally selected to meet that building’s annual electrical usage,
or selected to fill available unshaded roof or ground space. Solar panels are
electrically wired to an inverter, which converts the power from DC to AC and
interconnects with the utility grid. The following diagram schematically shows
a
typical solar power system:
5
Solar
Electric Cells. Solar
electric cells convert light energy into electricity at the atomic level. The
conversion efficiency of a solar electric cell is defined as the ratio of the
sunlight energy that hits the cell divided by the electrical energy that is
produced by the cell. By improving this efficiency, we believe solar electric
energy becomes competitive with fossil fuel sources. The earliest solar electric
devices converted about 1%-2% of sunlight energy into electric energy. Current
solar electric devices convert 5%-25% of light energy into electric energy
(the
overall efficiency for solar panels is lower than solar cells because of the
panel frame and gaps between solar cells), and current mass produced panel
systems are substantially less expensive than earlier systems. Effort is the
industry is currently being directed towards the development of new solar cell
technology to reduce per watt costs and increase area efficiencies.
Solar
Panels. Solar
electric panels are composed of multiple solar cells, along with the necessary
internal wiring, aluminum and glass framework, and external electrical
connections. Although panels are usually installed on top of a roof or on an
external structure, certain designs include the solar electric cells as part
of
traditional building materials, such as shingles and rolled out roofing. Solar
electric cells integrated with traditional shingles is usually most compatible
with masonry roofs and, while it may offset costs for other building materials
and be aesthetically appealing, it is generally more expensive than traditional
panels.
Inverters.
Inverters
convert the DC power from solar panels to the AC power used in buildings.
Grid-tie inverters synchronize to utility voltage and frequency and only operate
when utility power is stable (in the case of a power failure these grid-tie
inverters shut down to safeguard utility personnel from possible harm during
repairs). Inverters also operate to maximize the power extracted from the solar
panels, regulating the voltage and current output of the solar array based
on
sun intensity.
Monitoring.
There
are
two basic approaches to access information on the performance of a solar power
system. We believe that the most accurate and reliable approach is to collect
the solar power performance data locally from the inverter with a hard-wired
connection and then transmit that data via the internet to a centralized
database. Data on the performance of a system can then be accessed from any
device with a web browser, including personal computers and cell phones. As
an
alternative to web-based remote monitoring, most commercial inverters have
a
digital display on the inverter itself that shows performance data and can
also
display this data on a nearby personal computer with a hard-wired or wireless
connection.
Net
Metering. The
owner
of a grid-connected solar electric system may not only buy, but may also sell,
electricity each month. This is because electricity generated by the solar
electric system can be used on-site or fed through a meter into the utility
grid. Utilities are required to buy power from owners of solar electric systems
(and other independent producers of electricity) under the Public Utilities
Regulatory Policy Act of 1978 (PURPA). California’s net metering law provides
that all utilities must allow customers with solar electric systems rated up
to
1.5 megawatts (“ mW”) to interconnect with the local utility grid and receive
retail value for the electricity produced. When a home or business requires
more
electricity than the solar power array is generating (for example, in the
evening), the need is automatically met by power from the utility grid. When
a
home or business requires less electricity than the solar electric system is
generating, the excess is fed (or sold) back to the utility and the electric
meter actually spins backwards. Used this way, the utility serves as a backup
to
the solar electric similar to the way in which batteries serve as a backup
in
stand-alone systems.
6
Solar
Power Benefits
The
direct conversion of light into energy offers the following benefits compared
to
conventional energy sources:
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Economic
—
Once a solar power system is installed, the cost of generating electricity
is fixed over the lifespan of the system. There are no risks that
fuel
prices will escalate or fuel shortages will develop. In addition,
cash
paybacks for systems range from 5 to 25 years, depending on the level
of
state and federal incentives, electric rates, annualized sun intensity
and
installation costs. Solar power systems at customer sites generally
qualify for net metering to offset a customer’s highest electric rate
tiers, at the retail, as opposed to the wholesale, electric
rate.
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·
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Convenience
—
Solar power systems can be installed on a wide range of sites, including
small residential roofs, the ground, covered parking structures and
large
industrial buildings. Solar power systems also have few, if any,
moving
parts and are generally guaranteed to operate for 25 years resulting,
we
believe, in low maintenance and operating costs and reliability compared
to other forms of power generation.
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·
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Environmental
—
We believe solar power systems are one of the most environmentally
friendly way of generating electricity. There are no harmful greenhouse
gas emissions, no wasted water, no noise, no waste generation and
no
particulates. Such benefits continue for the life of the
system.
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·
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Security
—
Producing solar power improves energy security both on an international
level (by reducing fossil energy purchases from hostile countries)
and a
local level (by reducing power strains on local electrical transmission
and distribution systems).
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·
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Infrastructure
—
Solar power systems can be installed at the site where the power
is to be
used, thereby reducing electrical transmission and distribution costs.
Solar power systems installed and operating at customer sites may
also
save the cost of construction of additional energy infrastructure
including power plants, transmission lines, distribution systems
and
operating costs.
|
7
We
believe escalating fuel costs, environmental concerns and energy security make
it likely that the demand for solar power systems will continue to grow. The
federal government, and several states (primarily California and New Jersey),
have put a variety of incentive programs in place that directly spur the
installation of grid-tied solar power systems, so that customers will “purchase”
their own power generating system rather than “renting” power from a local
utility. These programs include:
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·
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Rebates
—
to customers (or to installers) to reduce the initial cost of the
solar
power system, generally based on the size of the system. California,
New
Jersey, New York, Connecticut and other states have rebates that
can
substantially reduce initial costs.
|
|
·
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Tax
Credits —
federal and state income tax offsets, directly reducing ordinary
income
tax. New York and California currently offer state tax credits. There
is
currently a 10% federal tax credit up to $2,000 for residential systems,
and a 30% federal tax credit (with no cap) for business
systems.
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|
·
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Accelerated
Depreciation —
solar power systems installed for businesses (including applicable
home
offices) are generally eligible for accelerated
depreciation.
|
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·
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Net
Metering —
provides a full retail credit for energy generated.
|
|
·
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Feed-in
Tariffs —
are additional credits to consumers based on how much energy their
solar
power system generates. Feed-in Tariffs set at appropriate rates
have been
successfully used in Europe to accelerate
growth.
|
|
·
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Renewable
Portfolio Standards —
require utilities to deliver a certain percentage of power generated
from
renewable energy sources.
|
|
·
|
Renewable
Energy Credits (RECs) —
are additional credits provided to customers based on the amount
of
renewable energy they produce.
|
|
·
|
Solar
Rights Acts —
state laws to prevent unreasonable restrictions on solar power systems.
California’s Solar Rights Act has been updated several times in past years
to make it easier for customers of all types and in all locations
to
install a solar power system.
|
|
·
|
PPA's
—
Power Purchase Agreements, or agreements between a solar power
system
purchaser and an electricity user under which electricity is
sold/purchased on a long-term
basis.
|
According
to PV News, California and New Jersey account for approximately 90% of the
U.S.
residential market. We believe this is largely attributable to the fact that
they currently have the most attractive incentive programs. The California
Solar
Initiative provides $3.2 billion of incentives toward solar development over
11
years. In addition, recently approved regulations in New Jersey require solar
photovoltaic power to provide 2% of New Jersey’s electricity needs by 2020,
requiring the installation of 1,500 megawatts of solar electric power. According
to DSIRE (the Database of State Incentives for Renewable Energy) at least 18
other states also have incentive programs. We expect that such programs, as
well
as Federal tax rebates and other incentives, will continue to drive growth
in
the solar power market for the near future.
Challenges
Facing The Solar Power Industry
We
believe the solar power industry faces three key challenges:
|
·
|
Improve
Customer Economics —
In most cases, the cost to customers for electricity produced by
a solar
power system at the customer’s site is comparable to conventional,
utility-generated power. We believe lower equipment (primarily solar
panels) and installation costs would reduce the total cost of a system
and
increase the potential market for solar
power.
|
|
·
|
Increase
System Performance and Reliability —
We believe that a design that incorporates factory assembly of an
integrated solar power system versus field assembly provides a more
reliable solution. A system with these characteristics will deliver
improved system performace and allow the customer to achieve the
shortest
possible payback.
|
|
·
|
Improve
Aesthetics —
We believe that customers prefer solar panels that blend into existing
roof surfaces with fewer shiny parts, mounted closely to the roof
surface
and have more of a “skylight” appearance than the traditional rooftop
metal framed solar panels raised off the
roof.
|
8
Competition
The
solar
power design and integration industry is in its early stages of development
and
is highly fragmented, consisting of many small privately-held companies with
limited operating histories and information available to us. We believe our
major competitors in the California market include, SPG (formerly SunPower
and
Geothermal), ReGrid, Borrego and Solarcity. Several companies have expanded
their market share in the California market by opening multiple offices within
the state. Rather than expand within California, we decided in 2003 to expand
into New Jersey. We believe our major competitors in the New Jersey market
include: Trinity Heating and Air, NJ Solar Power, The Solar Center, Energy
Enterprises, 1st Light Energy, GeoGenix, SunFarm, and Advanced Solar Products.
We believe our major national competitors include REC Solar (formerly Renewable
Energy Concepts), Suntechnics and PowerLight.
We
believe the principal competitive factors in the solar power services industry
include:
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·
|
quality
of service;
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·
|
price;
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company
reputation;
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·
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installation
technology; and
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·
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responsiveness
to customer needs
|
We
believe that our competitive advantages as a national designer and integrator
of
solar power systems include:
|
·
|
Reduced
System Installation Costs.
Our proprietary panel technology enables us to simplify and reduce
the
cost of installation.
|
|
·
|
Brand
Recognition.
According to a Solar Electric Dealer study conducted in 2004, we
ranked as
the best known installation brand in northern California. We believe
that
the strength of the Akeena brand and reputation along with being
a public
company are key factors in the decision process as consumers consider
solutions to their solar power
needs.
|
|
·
|
Experienced
Management Team.
Our management has been involved in solar power development since
the
1970s and has been in the solar power industry since its infancy.
We
believe this experience enables us to anticipate trends and identify
superior products and technologies for our
customers.
|
|
·
|
Superior
Product. We
have introduced our Andalay technology which we believe will significantly
reduce the installation time, parts and costs, as well as provide
superior
reliability and aesthetics for customers when compared to other solar
panel mounting products and technology. The advantages to the customer
are
(i) an integrated system (factory installed versus field installed),
(ii)
reliable grounding and (iii) aesthetically pleasing. The Company
benefits
from a faster installation time as there is less time spent on the
roof.
|
9
Our
Services and Products
A
solar
power system generally includes companies specializing in the
following:
|
·
|
Silicon
Refiners — companies that produce refined silicon, a material that has
historically been used as the primary ingredient for solar panels.
In
light of the current shortage of silicon, it is possible that other
materials may be used as the primary ingredient in the
future.
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Wafer
and Cell Manufacturers — companies that manufacture the electricity
generating solar cells.
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Panel
Manufacturers — companies that assemble solar cells into solar panels,
generally laminating the cells between glass and plastic film, and
attaching the wires and panel
frame.
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Distributors
— companies that purchase from manufacturers and resell to designers/
integrators and other equipment
resellers.
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|
Designer/Installer
— companies that sell products to end user
customers.
|
We
are
active in the solar power industry as a designer and installer.
Solar
Power System Design and Installation
We
provide marketing, sales, design, construction, installation, maintenance,
support and related solar power system services to residential and small
commercial customers in the United States in locations in which the economics
are favorable to solar power. We provide our customers with a single point
of
contact for their system design, engineering work, building permit, rebate
approval, utility hookup and subsequent maintenance. We use our own crews or
contractors, and perform engineering and design work with in-house staff and
outside engineering firms. We concentrate on solar power systems.
We
concentrate on the design and installation of grid-tied solar power systems.
These systems are electrically connected to the utility grid so that excess
energy produced during the day flows backwards through the utility’s electric
meter, actually running the electric meter backwards. The meter will run
backwards when the power produced by the solar system is greater than the power
needs of the building. During the evenings or on cloudy days, energy is drawn
from the grid normally and the meter runs forwards. Most utilities serving
the
areas in which we install systems allow for “net metering.” Customers on net
metering only pay for the net amount of energy they consume during the year,
essentially getting full retail credit for the energy they transmit back onto
the utility grid during the day. We typically do not install off-grid systems
(systems in which there is no utility service, such as a remote cabin), nor
do
we typically install battery backup systems or solar thermal
systems.
Andalay
Solar Panel Technology
Based
on
our experience as a solar power designer and integrator over the past seven
years, we believe we understand certain areas in which costs for installations
can be significantly reduced. We have introduced a new “plug and play” solar
panel technology (“Andalay”) which we believe will significantly reduce the
installation time and costs, as well as provide superior reliability and
aesthetics, when compared to other solar panels. Andalay offers the following
features: (i) mounts closer to the roof with less space in between panels;
(ii)
all black appearance with no unsightly racks underneath or beside panels; (iii)
built-in wiring connections; (iv) 70% fewer roof-assembled parts and 50% less
labor required; (v) 25% fewer roof attachment points; (vi) complete compliance
with the National Electric Code and UL wiring and grounding requirements. We
have applied for U.S. and international patents for Andalay.
Installation
costs for a solar power system are generally proportional to the area of panels
installed. Thin film and amorphous solar cell technologies, although less
expensive on a cost per watt basis, are generally less efficient (producing
fewer watts per square foot) and more expensive to install. Therefore, we
believe that Andalay becomes even more useful for the new generation of less
expensive but lower efficiency solar panels. Andalay is generally applicable
to
all framed rooftop solar cell technologies, including silicon, amorphous, thin
film and concentrators.
10
Customers
Our
current residential customers are generally highly educated, high-income
professionals who are concerned about the environment and also have the
disposable income to install a solar power system. We have installed solar
power
systems in some of the most affluent counties in California and New Jersey.
Installation sizes range from 1.5 kW up to 35 kW. Average residential size
systems are approximately 5 kW.
Our
current commercial customers are owner occupied businesses, including wineries
and small commercial offices in California. We have or are in the process of
installing commercial systems ranging in size from 10 kW to 300
kW.
Suppliers
The
components used in our systems are purchased from a limited number of
manufacturers. Kyocera, Sharp, SunPower and Suntech accounted for over 90%
of
our purchases of photovoltaic panels during 2007. Pursuant to our agreement
with
Suntech Power Holdings Co. Ltd. (“Suntech”), Suntech will provide us with volume
manufacturing and delivery of our Andalay product. We are subject to market
price fluctuations for the components that we purchase for our installations.
We
also entered into an agreement with Kyocera Solar Inc. (“Kyocera”) during March
2008. Under the Kyocera agreement, Kyocera will manufacture Andalay panels
utilizing their high efficiency solar cells and will deliver approximately
1.6
megawatts of panels to us during 2008. Kyocera will be our preferred supplier
for our commercial installations.
Sales
and Marketing
Our
sales
and marketing program incorporates a mix of print, web and radio advertisements
as well as participation in industry trade shows and individual consultations
with prospective customers. In addition, we rely heavily on the skill of our
sales team. Our residential sales staff are trained to design a system that
best
meets a customer’s needs, taking into account the unique installation and
economic requirements for each location. Our commercial sales people take a
more
consultative, long-term selling approach to meet the varying needs of larger
customers. Our sales process typically includes, a determination that a
potential customer’s site has the required exposure for solar power, a site
visit and a survey with our proprietary software that analyzes current utility
rate options, current electric rates, system performance, tax rate scenarios,
equipment costs, installation costs, incentives and other factors applicable
to
a specific customer’s circumstances.
We
currently provide a five-year and ten-year guarantee on a system
installation other than solar panels and inverters, which are covered under
the
manufacturer’s warranty (generally 25 years and 10 years,
respectively).
We
regularly evaluate the effectiveness of our sales team and marketing efforts
using sales management software and make tactical marketing and sales changes
as
indicated to achieve and maintain cost effectiveness. Solar system design work
is facilitated by our proprietary software which provides certain controls
on
price, margins, performance estimates, financial analyses and contract terms
so
that we can standardize our product offerings while still customizing a system
for each application.
Intellectual
Property
Andalay
Solar Panel
We
have
applied for patent protection relating to technology included in our integrated
Andalay solar panel. Our application is currently pending with the United States
Patent and Trademark Office. However, we have been notified by the United States
Patent and Trademark Office that certain claims of our application directed
to
the mounting system are allowable and have responded by accepting those
allowable claims. Therefore, we expect to receive a Notice of Allowance to
receive patents for those claims shortly.
Trademarks
We
have
registered the trademark “Akeena” with the United States Patent and Trademark
Office for providing consulting services in the field of energy systems and
technical information via a global computer network in the field of renewable
energy systems. We have applied to expand the class of goods for the trademark
“Akeena” to include renewable energy systems, namely, photovoltaic systems
composed of photovoltaic solar panels, batteries, voltage regulators, inverters,
racks and electrical controls, as well as the installation of such systems.
This
application is currently pending.
11
We
have
also registered the trademarks “Double Your Power” and “Andalay” with the United
States Patent and Trademark Office for two goods classes: providing computer
software for photovoltaic systems for evaluating electric consumption,
determining system sizing, estimating electrical output, estimating customer
costs, and estimating financial life cycle savings, for use by consumers and
businesses; and, installation of renewable energy systems, namely photovoltaic
systems composed of solar panels, batteries, voltage regulators, inverters,
racks and electrical controls. Additionally, we have applications currently
pending with the United States Patent and Trademark Office to expand the goods
classes for “Double Your Power” and “Andalay,” and to register the trademark
“Run Your Electric Meter Backwards,” which we have used in conjunction with our
logo since we established our business.
Proprietary
Design Software
We
have
developed solar design proprietary software to perform the necessary site
survey, initial design work, system performance, financial analysis, report
generation and contract preparation required for installation of a solar power
system in a single visit, for most residential customers. This software analyzes
current utility rate options, current electric rates, system performance, tax
rate scenarios, equipment costs, installation costs, incentives and other
factors applicable to a specific customer’s circumstances. By using this
software, we are able to standardize our product offerings, improve consistency
in our project pricing, improve accuracy and consistency in cost estimates,
and
differentiate our customer presentations from that of our
competitors.
Employees
As
of
February 29, 2008, Akeena Solar has 207 employees: 101 operations employees,
85
sales and marketing employees, 16 general and administrative employees and
5
research and development employees. Of our total employees, 199 are full-time
employees.
RISK
FACTORS
Our
business faces numerous risks, known and unknown. If any of these risks actually
occurs, our business, financial condition or results of operations may be
materially adversely affected. In that case, the trading price of our common
stock could decline and investors in our common stock could lose all or part
of
their investment.
Our
Annual Report on Form 10-KSB for 2007, and information we provide in our press
releases, telephonic reports and other investor communications, may contain
forward-looking statements with respect to anticipated future events and our
projected financial performance, operations and competitive position that are
subject to risks and uncertainties that could cause our actual results to differ
materially from those forward-looking statements and our expectations. Future
economic and industry trends that could potentially impact revenue,
profitability, and growth remain difficult to predict. The factors underlying
our forecasts forward-looking statements are dynamic and subject to change.
As a
result, any forecasts or forward-looking statements speak only as of the date
they are given and do not necessarily reflect our outlook at any other point
in
time.
Risks
Relating to Our Business
The
success of our business depends on the continuing contributions
of Barry
Cinnamon and other key personnel who may terminate their employment
with us
at any time, and we will need to hire additional qualified
personnel.
We
rely
heavily on the services of Barry Cinnamon, our Chief Executive Officer, as
well
as several other management personnel. Loss of the services of any of such
individuals would adversely impact our operations. In addition, we believe
our
technical personnel represent a significant asset and provide us with a
competitive advantage and that our future success will depend upon our ability
to retain these key employees and our ability to attract and retain other
skilled financial, engineering, technical and managerial personnel. None of
our
key personnel are party to any employment agreements with us, other than at-will
employment offer letters, and management and other employees may voluntarily
terminate their employment at any time. We do not currently maintain any “key
man” life insurance with respect to any of such individuals.
12
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 silicon and other raw materials used in
solar panels.
Key
components used in our systems are purchased from a limited number of
manufacturers. In particular, Kyocera, Sharp, SunPower and Suntech account
for
over 90% of our purchases of solar panels. Pursuant to our Suntech agreement,
Suntech will provide us with volume manufacturing and delivery of our Andalay
product used in our solar systen installations. 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 services. Our suppliers are dependent
upon the availability and pricing of silicon, one of the main materials used
in
manufacturing solar panels. The world market for solar panels recently
experienced a shortage of supply due to insufficient availability of silicon.
This shortage caused the prices for solar panels to increase. 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 panels 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.
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 in our current or other geographic markets,
or
we may open offices in the geographical markets we desire to operate within.
We
face challenges in managing expanding product and service offerings and in
integrating acquired businesses with our own. We commenced operations in six
new
offices during 2007 and we currently intend to seek additional locations for
expansion. 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/contracts or successfully
integrate acquired businesses/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:
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Failure
of the expansion efforts to achieve expected results;
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Diversion
of management’s attention and resources to expansion efforts;
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Failure
to retain key customers or personnel of the acquired businesses;
and
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Risks
associated with unanticipated events, liabilities or
contingencies.
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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, unfavorable accounting charges and difficulties in successfully
managing our business.
Our
limited operating history, including the uncertainty of our
future performance
and ability to maintain or improve our financial and
operating systems,
makes it difficult to evaluate our business.
We
were
organized in February 2001. Our limited operating history makes it difficult
to
evaluate our business. In addition, the limited performance history of our
management and sales team and the uncertainty of our future performance and
ability to maintain or improve our financial, sales and operating systems,
procedures and controls increase the risk that we may be unable to continue
to
successfully operate our business. In the event that we are not able to manage
our growth and operate as a public company due to our limited experience, our
business may suffer uncertainty and failures, which makes it difficult to
evaluate our business.
We
may be unable to attain profitability or increase net sales, expand
the range
of our services or enter new markets.
Various
factors, including demand for our solar panel systems and services and our
ability to expand the range of our product and service offerings and to
successfully enter new markets, may affect our ability to maintain or increase
the net sales of our business or any subsequently acquired businesses. There
can
be no assurance that we will be able to attain profitability and/or expand
the
sales of our business or any subsequently acquired businesses.
13
Because
our industry is highly competitive and has low barriers to
entry, we
may lose market share to larger companies that are better equipped
to weather
a deterioration in market conditions due to increased
competition.
Our
industry is highly competitive and fragmented, is subject to rapid change and
has low barriers to entry. We may in the future compete for potential customers
with solar and HVAC systems installers and servicers, electricians, 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:
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the
ability of our competitors to hire, retain and motivate qualified
technical personnel;
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the
ownership by competitors of proprietary tools to customize systems
to the
needs of a particular customer;
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the
price at which others offer comparable services and equipment;
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the
extent of our competitors’ responsiveness to client needs;
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risk
of local economy decline; and
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installation
technology.
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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.
Our
failure to meet a client’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, including harassment, theft of client property, criminal
activity and other claims.
Our
profitability depends, in part, on our success on brand
recognition and
we could lose our competitive advantage if we are not able to protect
our trademark
against infringement, and 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 registered the trademark “Akeena” with the United
States Patent and Trademark Office for providing consulting services in the
field of energy systems and technical information via a global computer network
in the field of renewable energy systems. We have also registered the trademarks
“Double Your Power” and “Andalay” with the United States Patent and Trademark
Office for two goods classes: providing computer software for photovoltaic
systems for evaluating electric consumption, determining system sizing,
estimating electrical output, estimating customer costs, and estimating
financial life cycle savings, for use by consumers and businesses; and,
installation of renewable energy systems, namely photovoltaic systems composed
of photovoltaic solar panels, batteries, voltage regulators, inverters, racks
and electrical controls. 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 could
be time consuming and costly.
14
If
we are unable to attract, train and retain highly qualified
personnel, the
quality of our services may decline and we may not successfully execute
our internal
growth strategies.
Our
success depends in large part upon our ability to continue to attract, train,
motivate and retain highly skilled and experienced employees, including
technical personnel. Qualified technical employees periodically are in great
demand and may be unavailable in the time frame required to satisfy our
customers’ requirements. While we currently have available technical expertise
sufficient for the requirements of our business, expansion of our business
could
require us to employ additional highly skilled technical personnel. We expect
competition for such personnel to increase as the market for solar power systems
expands. There can be no assurance that we will be able to attract and retain
sufficient numbers of highly skilled technical employees in the future. The
loss
of personnel or our inability to hire or retain sufficient personnel at
competitive rates of compensation could impair our ability to secure and
complete customer engagements and could harm our business.
Unexpected
warranty expenses or service claims could reduce our
profits.
We
maintain a warranty reserve on our balance sheet for potential warranty or
service claims that could occur in the future. This reserve is adjusted based
on
our ongoing operating experience with equipment and installations. It is
possible, perhaps due to bad supplier material or defective installations,
that
we would have actual expenses substantially in excess of the reserves we
maintain. Our failure to accurately predict future warranty claims could result
in unexpected profit volatility.
Our
Panel technology is untested and may not be effective or
patentable or
may encounter other unexpected problems, which could adversely affect
our business
and results of operations.
Our
Andalay technology is new and has not been tested in installation settings
for a
sufficient period of time to prove its long-term effectiveness and benefits.
Problems may occur with Andalay that are unexpected and could have a material
adverse effect on our business or results of operations. We have applied for
patent protection for our integrated Andalay solar panel technology. Our
application is currently pending with the United States Patent and Trademark
Office. However, we have been notified by the United States Patent and Trademark
Office that certain claims of our application directed to the mounting system
are allowable and have responded by accepting those allowable claims. Therefore,
we expect to receive a Notice of Allowance to receive patent protection of
those
claims shortly. A patent may not be issued on such technology or we may not
be
able to realize the benefits from any patent that is issued.
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 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.
Our
obligations under our credit facility are secured by all of
our assets,
so if the lender forecloses on its security interest, we may have
to liquidate
some or all of our assets, which may cause us to cease
operations.
Our
obligations under the 2007 loan and security agreement with Comerica Bank are
secured by all of our assets. (See “Management’s Discussion and Analysis or Plan
of Operation — Liquidity and Capital Resources). If we default under the credit
facility we could be required to repay all of our borrowings thereunder. In
addition, Comerica could foreclose its security interest and liquidate some
or
all of our assets, which could cause us to cease operations.
15
We
are subject to restrictive covenants in connection with our
credit facility
that may limit our ability to borrow additional funds or to
raise additional
equity as may be required to fund our future
operations.
The
terms
of the 2007 credit facility with Comerica may limit our ability, without
Comerica’s consent, to, among other things, enter into certain transactions and
create additional liens on our assets and could adversely affect our liquidity
and our ability to attract additional funding if required for our
business.
Risks
Relating to Our Industry
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 (and the alternative energy industry, in general) 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.
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. 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 and other fossil fuels, could cause the demand
for solar power systems to decline, which would have a negative impact on our
profitability. Changes in utility electric rates or net metering policies could
also have a negative effect on our business.
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.
Installation
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 about these
requirements on a national, state, and local level, and must design 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 exist metering caps
in
certain jurisdictions which effectively limit the aggregate amount of power
that
may be sold by solar power generators into the power grid.
Our
business depends on the availability of rebates, tax credits and
other financial
incentives; reduction or elimination of which would reduce the
demand for
our services.
Many
states, including California and New Jersey, offer substantial incentives to
offset the cost of solar power systems. These systems can take many forms,
including direct rebates, state tax credits, system performance payments and
Renewable Energy Credits (RECs). Moreover, the Federal government currently
offers a 30% tax credit for the installation of solar power systems scheduled
to
expire at the end of 2008 (unlimited for businesses, capped at $2,000 for
residences) unless extended. Businesses may also elect to accelerate the
depreciation on their system over five years. Reduction in or elimination of
such incentives or delays or interruptions in the implementation of favorable
federal or state laws could substantially increase the cost of our systems
to
our customers, resulting in significant reductions in demand for our services,
which would negatively impact our sales.
16
If
solar power technology is not suitable for widespread adoption
or sufficient
demand for solar power products does not develop or takes longer
to develop
than we anticipate, our sales would decline and we would be unable
to achieve
or sustain profitability.
The
market for solar power products is emerging and rapidly evolving, and its future
success is uncertain. Many factors will influence the widespread adoption of
solar power technology and demand for solar power products,
including:
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cost
effectiveness of solar power technologies as compared with conventional
and non-solar alternative energy
technologies;
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performance
and reliability of solar power products as compared with conventional
and
non-solar alternative energy
products;
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capital
expenditures by customers that tend to decrease if the U.S. economy
slows;
and
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availability
of government subsidies and incentives.
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If
solar
power technology proves unsuitable for widespread commercial deployment or
if
demand for solar power products fails to develop sufficiently, we would 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.
Risks
Relating to our Common Stock
Our
stock price may be volatile, which could result in substantial losses
for investors.
The
market price of our common stock is likely to be highly volatile and could
fluctuate widely in response to various factors, many of which are beyond our
control, including the following:
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technological
innovations or new products and services by us or our
competitors;
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announcements
or press releases relating to the energy sector or to our business
or
prospects;
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additions
or departures of key personnel;
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regulatory,
legislative or other developments affecting us or the solar power
industry
generally;
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our
ability to execute our business plan;
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operating
results that fall below expectations;
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volume
and timing of customer orders;
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industry
developments;
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economic
and other external factors; and
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period-to-period
fluctuations in our financial results.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of
particular companies. These market fluctuations may also significantly affect
the market price of our common stock.
17
Risks
Relating to Our Company
Our
Chief Executive Officer, Barry Cinnamon, beneficially owns a significant number
of shares of our common stock, which gives him significant influence over
decisions on which our stockholders may vote and which may discourage
an acquisition
of the Company.
Barry
Cinnamon, our Chief Executive Officer, beneficially owns, in the aggregate,
approximately 26.8% of our outstanding common stock. The interests of our Chief
Executive Officer may differ from the interests of other stockholders. As a
result, Mr. Cinnamon’s voting power may have a significant influence on the
outcome of virtually all corporate actions requiring stockholder approval,
irrespective of how our other stockholders may vote, including the following
actions:
|
·
|
election
of our directors;
|
|
·
|
the
amendment of our Certificate of Incorporation or By-laws;
|
|
·
|
the
merger of our company or the sale of our assets or other corporate
transaction; and
|
|
·
|
the
outcome of any other matter submitted to the stockholders for
vote.
|
Mr.
Cinnamon’s stock ownership may discourage a potential acquirer from seeking to
acquire shares of our common stock or otherwise attempting to obtain control
of
our company, which in turn could reduce our stock price or prevent our
stockholders from realizing a premium over our stock price.
We
are subject to the reporting requirements of the federal
securities laws,
which impose additional burdens on us.
We
are a
public reporting company and, accordingly, subject to the information and
reporting requirements of the Exchange Act and other federal securities laws,
including compliance with the Sarbanes-Oxley Act of 2002. As a public company,
we expect these rules and regulations to result in increased compliance costs
in
2008 and beyond and to make certain activities more time consuming and
costly.
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.
Item
2. Description
of Property
As
of
March 10, 2008, we had ten offices. Our offices are located in Los Gatos, Fresno
(Clovis), Lake Forest, Bakersfield, Manteca, Santa Rosa, Palm Springs, San
Diego
and Thousand Oaks (Westlake Village), California, as well as Fairfield, New
Jersey. Our corporate headquarters are located at 16005 Los Gatos Boulevard,
Los
Gatos, California 95032.
We
maintain installation offices at all of our facilities. The following table
indicates the approximate square footage for each of our leased office
locations.
|
Property
Location
|
Approximate
Square Footage
|
|||
|
Los
Gatos, California
|
27,000
|
|||
|
Fresno
(Clovis), California
|
10,300
|
|||
|
Lake
Forest, California
|
2,400
|
|||
|
Bakersfield,
California
|
1,500
|
|||
|
Manteca,
California
|
3,000
|
|||
|
Santa
Rosa, California
|
2,900
|
|||
|
Palm
Springs, California
|
3,200
|
|||
|
San
Diego, California
|
3,000
|
|||
Item
3. Legal
Proceedings.
We
are
not presently a party to any material pending litigation.
Item
4. Submission
of Matters to a Vote of Security Holders.
No
matters were submitted during the fourth quarter of 2007 to a vote of our
stockholders.
18
PART
II
Item
5. Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities.
Our
common stock has been quoted on the NASDAQ capital market since September 2007
under the symbol AKNS and was previously quoted on the OTC Bulletin Board since
August 31, 2006 under the symbol AKNS.OB. Prior to that date, there was no
active market for our common stock. The following table sets forth the high
and
low bid prices for our common stock for the periods indicated, as reported
by
the NASDAQ and the OTC Bulletin Board. The OTC Bulletin Board quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
|
High
|
Low
|
||||||
|
Fiscal
Year 2006
|
|||||||
|
Third
Quarter (from August 31, 2006)
|
$
|
4.45
|
$
|
2.10
|
|||
|
Fourth
Quarter
|
$
|
3.21
|
$
|
1.95
|
|||
|
Fiscal
Year 2007
|
|||||||
|
First
Quarter
|
$
|
3.07
|
$
|
1.85
|
|||
|
Second
Quarter
|
$
|
3.95
|
$
|
2.44
|
|||
|
Third
Quarter (Represents both OTC Bulletin Board and NASDAQ
Quotations)
|
$
|
8.40
|
$
|
3.87
|
|||
|
Fourth
Quarter
|
$
|
10.05
|
$
|
4.00
|
|||
The
last
reported sale price of our common stock on the NASDAQ on March 14, 2008, was
$6.14 per share. As of March 14, 2008, there were approximately 175 holders
of
record of our common stock.
We
have
not declared or paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future.
We
currently expect to retain future earnings, if any, for the development of
our
business. Dividends may be paid on our common stock only if and when declared
by
our board of directors.
Equity
Compensation Plan Information
We
maintain a 2006 Incentive Stock Plan (the “Stock Plan”). As of December 31,
2007, we have granted 1,011,150
shares
of restricted stock under the Stock Plan, of which restrictions have lapsed
as
to 381,984
shares.
As of December 31, 2007 2,065,000 non-qualified stock options have been
granted under the Stock Plan of which none are vested (See “Executive
Compensation — Stock Incentive Plan” for a detailed description of our equity
compensation plan.)
Recent
Sales of Unregistered Securities
During
the period covered by this Annual Report, we have issued the following
unregistered securities which have not been previously reported. None of these
transactions involved any underwriters, underwriting discounts or commissions,
except as specified below, or any public offering, and we believe that each
transaction was exempt from the registration requirements of the Securities
Act
by virtue of Section 4(2) thereof and/or Regulation D promulgated
thereunder.
During
January 2007, we issued 54,621 shares of our common stock pursuant to the terms
of an Account Purchase agreement. We believe that this issuance did not involve
any public offering and was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof and/or Regulation D promulgated
thereunder.
On
October 7, 2007, we issued an aggregate of 5,000 shares of our restricted common
stock under our Stock Plan to certain of our consultants. The securities were
not sold for cash and were issued to persons who had provided services to us.
Because each recipient of the restricted common stock is or was an employee
or
other service provider to the Company, we believe that each issuance did not
involve any public offering and was exempt from the registration requirements
of
the Securities Act by virtue of Section 4(2) thereof and/or
Regulation D promulgated thereunder.
The
information under Item 11 of this Annual Report on Form 10-KSB under the caption
“Equity Compensation Plan Information as of December 31, 2007” is incorporated
herein by reference.
Item
6. Management’s
Discussion and Analysis or Plan of Operation.
The
following discussion highlights what we believe are the principal factors that
have affected our financial condition and results of operations as well as
our
liquidity and capital resources for the periods described. This discussion
should be read in conjunction with our financial statements and related notes
appearing elsewhere in this Annual Report. This discussion contains
“forward-looking statements,” which can be identified by the use of words such
as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,”
“intends,” “estimates” and other words of similar meaning. These forward-looking
statements are subject to risks and uncertainties that may cause actual results
to differ materially from those expressed or implied by these forward-looking
statements. Such risks and uncertainties include, without limitation, the risks
described on page 1 of this Annual Report, and the risks described at the end
of
Item 1 above.
19
Company
Overview
We
are a
designer, integrator and installer of solar power systems. We market, sell,
design and install systems for residential and commercial customers, sourcing
components (such as solar panels and inverters) from manufacturers such as
Fronius, Kyocera, Sharp, SunPower and Suntech. We currently serve customers
in
California, New York, New Jersey, Pennsylvania and Connecticut. According
to
data compiled by the California Energy Commission, the Solar Electric Power
Association and the New Jersey Clean Energy Program, over the past four years
we
have been one of the largest national integrators of residential and commercial
solar electric power systems in the United States. We are a member of the
Solar
Energy Industry Association, the California Solar Energy Industries Association,
the Northern California Solar Energy Association, the Independent Power
Providers, the Solar Energy Business Association of New England, and the
New
York Solar Energy Industries Association. To date, we have installed over
1,300
solar power systems and since the commencement of our operations in 2001,
our
sales have steadily grown to approximately $32.2 million in 2007.
Akeena
Solar was formed in February 2001 as a California corporation under the
name “Akeena, Inc.” and reincorporated as a Delaware corporation in
June 2006, at which time its name was changed to “Akeena Solar, Inc.” As of
March 10, 2008, we had ten offices. Our offices are located in Los Gatos,
Fresno
(Clovis), Lake Forest, Bakersfield, Manteca , Santa Rosa, Palm Springs, San
Diego and Thousand Oaks (Westlake Village), California, as well as Fairfield,
New Jersey. Our Corporate headquarters are located at 16005 Los Gatos Boulevard,
Los Gatos, California 95032. We maintain installation offices at all of our
facilities. Our telephone number is (408) 402-9400. Additional information
about
Akeena Solar is available on our website at http://www.akeena.com. The
information on our web site is not incorporated herein by
reference.
On
August 11, 2006, we entered into a reverse merger transaction (the
“Merger”) with Fairview Energy Corporation, Inc. (“Fairview”). Since the
stockholders of Akeena Solar owned a majority of the outstanding shares of
Fairview common stock immediately following the Merger, and the management
and
board of Akeena Solar became the management and board of Fairview immediately
following the Merger, the Merger was accounted for as a reverse merger
transaction and Akeena Solar was deemed to be the acquirer.
During
September 2007, we introduced our new solar panel technology (“Andalay”), which
we believe will significantly reduce the installation time and costs, as well
as
provide superior reliability and aesthetics, when compared to other solar panel
mounting products and technology. Andalay offers the following features: (i)
mounts closer to the roof with less space in between panels; (ii) all black
appearance with no unsightly racks underneath or beside panels; (iii) built-in
wiring connections; (iv) 70% fewer roof-assembled parts and 50% less roof-top
labor required; (v) 25% fewer roof attachment points; (vi) complete compliance
with the National Electric Code and UL wiring and grounding
requirements. Pursuant
to an agreement with Suntech Power Holdings Co. Ltd. (“Suntech”), Suntech will
provide us with volume manufacturing and delivery of our Andalay product used
in
our solar systen installations. During January 2008, we also entered into a
Licensing Agreement with Suntech. The terms of the Licensing Agreement authorize
Suntech to distribute our Andalay product in Europe, Japan, and Australia
commencing in January 2008.
During
November 2007, we raised approximately $26.1 million through a private
placement offering to accredited investors. We will utilize portions of this
additional working capital to fund our growth objectives and inventory needs
relating to Andalay.
20
Results
of Operations
The
following table sets forth, for the periods indicated, certain information
related to our operations as a percentage of our net sales:
|
Year
Ended December 31,
|
|||||||||||||
|
2007
|
%
|
2006
|
%
|
||||||||||
|
Net
sales
|
$
|
32,211,761
|
100.0
|
%
|
$
|
13,390,139
|
100.0
|
%
|
|||||
|
Cost
of sales
|
25,372,691
|
78.8
|
%
|
10,444,539
|
78.0
|
%
|
|||||||
|
Gross
profit
|
6,839,070
|
21.2
|
%
|
2,945,600
|
22.0
|
%
|
|||||||
|
Operating
Expenses
|
|||||||||||||
|
Sales
and marketing
|
5,978,799
|
18.5
|
%
|
1,562,732
|
11.7
|
%
|
|||||||
|
General
and administrative
|
11,941,700
|
37.1
|
%
|
3,124,454
|
23.3
|
%
|
|||||||
|
Total
operating expenses
|
17,920,499
|
55.6
|
%
|
4,687,186
|
35.0
|
%
|
|||||||
|
Loss
from operations
|
(11,081,429
|
)
|
(34.4
|
)%
|
(1,741,586
|
)
|
(13.0
|
)%
|
|||||
|
Other
income (expense)
|
|||||||||||||
|
Interest
income (expense), net
|
34,650
|
0.1
|
%
|
(67,655
|
)
|
(0.5
|
)%
|
||||||
|
Total
other income (expense)
|
34,650
|
0.1
|
%
|
(67,655
|
)
|
(0.5
|
)% | ||||||
|
Loss
before provision for income taxes
|
(11,046,779
|
)
|
(34.3
|
)%
|
(1,809,241
|
)
|
(13.5
|
)%
|
|||||
|
Provision
for income taxes
|
—
|
0.0
|
%
|
—
|
0.0
|
%
|
|||||||
|
Net
loss
|
$
|
(11,046,779
|
)
|
(34.3)
|
% |
$
|
(1,809,241
|
)
|
(13.5)
|
% | |||
Year
Ended December 31, 2007 as compared to Year Ended December 31,
2006
Net
sales
Net
sales
totaled $32.2 million for the year ended December 31, 2007, as compared to
$13.4
million in 2006, or an increase of 140.6%. The increase was due to a higher
volume of both residential and commercial installations for the year ended
December 31, 2007 as compared to 2006. The increased volume reflects both
widening acceptance of photovoltaic technology on the consumer level, and a
steadily accelerating pace of installation throughout the year ended December
31, 2007.
At
December 31, 2007, we were operating eight offices in California and one office
in New Jersey, as compared to two offices in California and one office in New
Jersey at December 31, 2006.
Cost
of sales
Cost
of
sales, including all installation expenses, during the year ended December
31,
2007 was 78.8% of sales, as compared to 78.0% in 2006. Gross profit for the
year
ended December 31, 2007 was 21.2% of net sales, as compared to 22.0% in 2006.
This slight decline over the same period of the prior year is the result of
higher panel costs and parts and supplies costs as a percentage of revenue.
Our
average sales price decreased to approximately $7,900 per kilowatt installed
for
2007 as compared to approximately $8,700 per kilowatt installed during
2006.
Sales
and marketing expenses
Sales
and
marketing expenses for the year ended December 31, 2007 were 18.5% of net sales
as compared to 11.7% of net sales during the prior year. Sales and marketing
expenses were approximately $6.0 million for the year ended December 31, 2007
as
compared to approximately $1.6 million in 2006. This increase is mainly due
to
higher sales and marketing payroll and sales commissions related to 55
additional sales and marketing employees hired during 2007 to support our
increased sales levels. Advertising, public relations, internet marketing
expenditures, trade shows, conferences and marketing expenditures also increased
over 2006. We added an additional 55 sales and marketing employees during 2007
in order to support our increased sales levels.
General
and administrative expenses
General
and administrative expenses for the year ended December 31, 2007 were 37.1%
of
net sales as compared to 23.3% of net sales during the prior year. General
and
administrative expenses increased to approximately $11.9 million in 2007
compared to approximately $3.1 million for the year ended December 31, 2006.
We
increased our general and administrative headcount by 10 positions during 2007
and payroll expenses increased by approximately $2.8 million. Stock-based
compensation increased approximately $2.3 million during the year ended December
31, 2007. Research and development costs increased by $958,000 for the year
ended December 31, 2007 as compared to the prior year. General and
administrative expenses for legal, accounting and other professional services
increased approximately $830,000 due primarily to investor relations costs
and
costs associated with Sarbanes-Oxley implementation costs. Rent expense
increased by $441,000 as a result of expanding our infrastructure and opening
six additional offices during the year ended December 31, 2007.
21
Interest
expense, net
A
credit
line of $25.0 million is available to us under our credit facility with Comerica
Bank (the “2007 Credit Facility”), as evidenced by a loan and security agreement
with Comerica Bank, entered into on January 29, 2007 and subsequently amended.
Interest expense was approximately $112,000 for the year ended December 31,
2007, related primarily to our 2007 Credit Facility, including credit facility
loan fees of approximately $4,000. Interest expense was offset by interest
income of approximately $147,000 during the year ended December 31, 2007.
Interest expense was approximately $68,000 during the same period in 2006,
which
related primarily to our previous credit facility with Citibank (West)
FSB.
Income
taxes
During
the years ended December 31, 2007 and 2006, there was no income tax expense
or
benefit for federal and state income taxes in the Company’s consolidated
statements of operations due to the Company’s net loss and a valuation allowance
on the resulting deferred tax asset
Liquidity
and Capital Resources
In
connection with the Merger, we completed the closing of a private placement
of
our common stock in which we sold an aggregate of 128.7 units to accredited
investors (the “Merger Private Placement”). Each unit consisted of 25,000 shares
of our common stock. As a result of the Merger Private Placement, we issued
a
total of 3,217,500 shares of our common stock. Some units were offered by
Westminster Securities Corporation, pursuant to the terms of a placement agent
agreement dated July 21, 2006. The placement agent received (i) a cash fee
of $61,500 (representing 6% of the gross proceeds of the units sold by it in
the
Merger Private Placement) and (ii) three-year warrants to purchase an
aggregate of 61,500 shares of our common stock (representing 6% of the shares
sold by it in the Merger Private Placement) at an exercise price of $1.00 per
share, of which warrants to purchase 27,675 shares were exercised. We realized
gross proceeds of approximately $3.2 million from the Merger Private Placement
before commissions and expenses.
On
December 19, 2006, we issued a master revolving note between us and Comerica
Bank (the “Master Revolving Note”, or the “2006 Credit Facility”). On January
29, 2007, we replaced the 2006 Credit Facility with the 2007 Credit Facility.
Using proceeds from the 2007 Credit Facility, we satisfied all of our
outstanding obligations under the Master Revolving Note resulting in the
termination of the Master Revolving Note and related security agreement.
The
2007
Credit Facility is evidenced by a loan and security agreement with Comerica
Bank, entered into on January 29, 2007 and subsequently amended (the “Security
Agreement”). Borrowings under the 2007 Credit Facility bear interest at
prime minus 0.5%, payable on the first of each month. The
2007
Credit Facility matures on July 1, 2009, at which time all outstanding
amounts will become due and payable. The Security Agreement grants Comerica
Bank
a first priority security interest in all of our assets, now owned or later
acquired, to secure timely repayment of the 2007 Credit Facility. As
of
December 31, 2007, nothing was outstanding under the 2007 Credit Facility and
approximately $24.8 million in additional borrowing capacity was available
at
December 31, 2007.
On
March 8, 2007, we closed a private placement offering to accredited
investors (the “March 2007 Private Placement”) in which we realized gross
proceeds of approximately $4.1 million, before commissions and expenses. In
connection with the March 2007 Private Placement closing, we issued to investors
an aggregate of 2,062,304 shares of common stock and (i) three-year
warrants to purchase 206,230 shares of common stock with an exercise price
of
$2.75 per share, and (ii) three-year warrants to purchase 206,230 shares of
common stock with an exercise price of $3.00 per share. Empire Financial Group,
Inc. acted as placement agent with respect to the offering and received
(i) a cash fee of $149,250
and
(ii) a three-year warrant to purchase 53,250 shares of common stock at an
exercise price of $2.75 per share. The Westly Group acted as a finder with
respect to the offering and received (i) a cash fee of $35,000 and
(ii) a three-year warrant to purchase 15,000 shares of common stock at an
exercise price of $2.75 per share. Westminster Securities Corporation also
received a finder’s fee of $21,000 and a three-year warrant to purchase 11,726
shares of common stock at an exercise price of $1.97 per share. On April 6,
2007
we filed a registration statement with the SEC covering the shares of common
stock issued in the March 2007 Private Placement and the shares of common stock
issuable upon exercise of the warrants issued in the March 2007 Private
Placement. Such registration statement became effective on April 16, 2007.
22
On
June
4, 2007, we closed a private placement offering to accredited investors (the
“June 2007 Private Placement”) in which we realized gross proceeds of
approximately $12.6 million, before commissions and expenses. In connection
with
the closing of the June 2007 Private Placement, we issued to investors an
aggregate of 4,567,270 shares of common stock and three-year warrants to
purchase 913,455 shares of common stock with an exercise price of $3.95 per
share. Empire Financial Group, Inc. acted as placement agent with respect to
the
June 2007 Private Placement and received (i) a cash fee of $633,850 and
(ii) a three-year warrant to purchase 376,800 shares of common stock at an
exercise price of $3.95 per share. Westminster Securities Corporation also
received a finder’s fee of $21,000 and a three-year warrant to
purchase 9,164 shares of common stock at an exercise price of $2.75 per
share. On July 3, 2007, we filed a registration statement with the SEC covering
the shares of common stock sold in the June 2007 Private Placement and shares
of
common stock underlying the warrants issued in the June 2007 Private Placement.
Such registration statement was declared effective on July 24, 2007.
On
November 6, 2007, we closed a private placement offering to accredited investors
(the “November 2007 Private Placement”) in which we realized gross proceeds of
approximately $26.1 million, before commissions and expenses. In connection
with
the November 2007 Private Placement, we issued to investors an aggregate of
3,728,572 shares of common stock and five-year warrants to purchase 745,716
shares of common stock with an exercise price of $10.08 per share. Cowen and
Company, LLC acted as the sole placement agent with respect to the November
2007
Private Placement and received (i) a cash fee of $1,246,500 which included
a placement agent fee of $1,171,500 and $75,000 for legal and out-of-pocket
expenses and (ii) a three-year warrant to purchase 83,679 shares of common
stock at an exercise price of $10.08 per share. Empire Financial Group, Inc.
received (i) a cash fee of $460,250 and (ii) a five-year warrant to
purchase 197,250 shares of common stock at an exercise price of $10.08 per
share
as a finder’s fee in connection with the November 2007 Private Placement. On
November 29, 2007, we filed a registration statement on Form S-3 with the SEC
covering the shares of common stock sold in the November 2007 Private Placement
and shares of common stock underlying the warrants issued in the November 2007
Private Placement. Such registration statement was declared effective on
December 14, 2007.
Cash
paid
for placement agent fees and finders fees for the March 2007 Private Placement
were $180,250. Cash paid for placement agent fees and finders fees for the
June
2007 Private Placement were $654,850. Cash paid for placement agent fees and
finders fees for the November 2007 Private Placement were $1,706,750. Cash
paid
for other direct professional and registration fees incurred relating to the
March 2007 Private Placement, the June 2007 Private Placement, the November
2007
Private Placement and other registration statements totaled $484,196 during
the
year ended December 31, 2007. In connection with the Merger, we also completed
a
private placement during 2006. Cash paid for placement agent fees during 2006
were $61,500.
Our
primary capital requirement is to fund purchases of solar panels and inverters.
Significant sources of liquidity are cash on hand, cash flows from operating
activities, working capital, borrowings from our revolving line of credit and
equity proceeds raised. As of December 31, 2007 we had approximately $22.3
million in cash on hand and approximately $24.8 million in additional borrowing
capacity was available under our 2007 Credit Facility at December 31,
2007.
Cash
flows used in operating activities were approximately $18.8 million and
approximately $2.3 million for the years ended December 31, 2007 and 2006,
respectively. Large purchases of solar panel inventory occurred during 2007
in
preparation for installation on various residential and commercial jobs, in
addition to an increase in our overall state rebates receivable balances.
Similarly, accounts payable rose in response to the increase in inventory
purchases as a result of the increase in overall revenue levels. We believe
a
high level of inventory is a significant benefit in our industry. Panels may
be
difficult to procure and are generally immediately fungible.
Cash
flows used in investing activities were approximately $1.8 million and
approximately $174,000, respectively, for the years ended December 31, 2007
and
2006. During the year ended December 31, 2007, we acquired vehicles, office
equipment, office furniture and other fixed assets primarily for our new
corporate office location and for our most recently added Lake Forest,
Bakersfield, Manteca, Santa Rosa, Palm Springs and San Diego office
locations.
Cash
flows provided by financing activities were approximately $41.9 million and
approximately $3.2 million, respectively, for the year ended December 31, 2007
and 2006. During the year ended December 31, 2007, we raised proceeds of
approximately $42.7 million, before cash paid for placement agent fees and
registration fees of approximately $3.0 million, from the issuance of our common
stock under three private placements. We received proceeds of approximately
$2.0
million during 2007 from the exercise of warrants for shares of our common
stock. In addition, we repaid $500,000 under our 2007 Credit Facility during
the
year ended December 31, 2007. During the year ended December 31, 2006, we raised
proceeds of approximately $3.2 million from the issuance of our common stock
under a private placement.
23
Contractual
obligations
|
|
Payments
Due
|
|||||||||||||||
|
Obligation
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
4-5
years
|
|
More
than
5
years
|
|
||||||
|
Operating
leases
|
|
$
|
1,948,056
|
|
$
|
773,011
|
|
$
|
1,097,995
|
|
$
|
77,050
|
|
$
|
—
|
|
|
Capital
leases
|
70,799
|
24,130
|
46,669
|
—
|
—
|
|||||||||||
|
$
|
2,018,855
|
$
|
797,141
|
$
|
1,144,664
|
$
|
77,050
|
$
|
—
|
|||||||
Application
of critical accounting policies and estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires estimates and assumptions
that
affect the reporting of assets, liabilities, sales and expenses, and the
disclosure of contingent assets and liabilities. Note 2 to our consolidated
financial statements for the years ending December 31, 2007 and 2006 as filed
in
this Annual Report on Form 10-KSB provides a summary of our significant
accounting policies, which are all in accordance with generally accepted
accounting policies in the United States. Certain of our accounting policies
are
critical to understanding our consolidated financial statements, because their
application requires management to make assumptions about future results and
depends to a large extent on management’s judgment, because past results have
fluctuated and are expected to continue to do so in the future.
We
believe that the application of the accounting policies described in the
following paragraphs is highly dependent on critical estimates and assumptions
that are inherently uncertain and highly susceptible to change. For all these
policies, we caution that future events rarely develop exactly as estimated,
and
the best estimates routinely require adjustment. On an ongoing basis, we
evaluate our estimates and assumptions, including those discussed
below.
Revenue
recognition.
Revenue
from sales of products is recognized when: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred or services have been
rendered, (3) the sale price is fixed or determinable, and (4) collection
of the related receivable is reasonably assured. We recognize revenue upon
completion of a system installation for residential installations and we
recognize revenue under the percentage-of-completion method for commercial
installations.
Long-lived
assets.
We
periodically review our property and equipment and identifiable intangible
assets for possible impairment whenever facts and circumstances indicate that
the carrying amount may not be fully recoverable. Assumptions and estimates
used
in the evaluation of impairment may affect the carrying value of long-lived
assets, which could result in impairment charges in future periods. Significant
assumptions and estimates include the projected cash flows based upon estimated
revenue and expense growth rates and the discount rate applied to expected
cash
flows. In addition, our depreciation and amortization policies reflect judgments
on the estimated useful lives of assets.
Goodwill
and other intangible assets.
We do
not amortize goodwill, but rather test goodwill for impairment at least
annually. A customer list is being amortized over the estimated useful life
of
the list, which was determined to be eighteen months.
Stock-based
compensation.
We
measure the cost of services received in exchange for equity-based awards based
on the grant date fair value. Pre-vesting forfeitures are estimated at the
time
of grant and we periodically revise those estimates in subsequent period if
actual forfeitures differ from those estimates. Equity-based compensation is
recognized for equity-based awards expected to vest.
Warranty
Provision. We
warrant our products for various periods against defects in material or
installation workmanship. The manufacturer warranty on the solar panels and
the
inverters have a warranty period range of 5-25 years. We assist the customer
in
the event that the manufacturer warranty needs to be used to replace a defective
panel or inverter. We provide for a 5-year warranty on the installation of
a
system and all equipment and incidental supplies other than solar panels and
inverters that are covered under the manufacturer warranty. We record a
provision for the installation warranty, within cost of sales, based on
historical experience and future expectations of the probable cost to be
incurred in honoring its warranty commitment.
24
Seasonality
Our
quarterly installation and operating results may vary significantly from quarter
to quarter as a result of seasonal changes in weather as well as state or
Federal subsidies . Historically, sales are highest during the third and fourth
quarters as a result of good weather and robust bookings in the second
quarter.
Item
7. Financial
Statements.
See
the
Company’s Financial Statements beginning on page 26.
25
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
of
Akeena
Solar, Inc.
We
have
audited the accompanying consolidated balance sheets of Akeena Solar, Inc.
and
its subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in stockholders’ 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 consolidated 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. The Company is not required to
have, nor have we been engaged to perform an audit of the Company’s internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Akeena Solar, Inc. and
its
subsidiaries as of December 31, 2007 and 2006, 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/
Burr,
Pilger and Mayer LLP
San
Francisco, CA
March
17,
2008
26
AKEENA
SOLAR, INC.
Consolidated
Balance Sheets
December
31, 2007 and 2006
|
2007
|
2006
|
||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
22,313,717
|
$
|
992,376
|
|||
|
Accounts
receivable, net
|
9,465,055
|
3,434,569
|
|||||
|
Other
receivables
|
278,636
|
5,000
|
|||||
|
Inventory
|
8,848,467
|
1,791,816
|
|||||
|
Prepaid
expenses and other current assets, net
|
3,055,787
|
833,192
|
|||||
|
Total
current assets
|
43,961,662
|
7,056,953
|
|||||
|
Property
and equipment, net
|
1,796,567
|
194,867
|
|||||
|
Due
from related party
|
—
|
21,825
|
|||||
|
Customer
list, net
|
84,698
|
230,988
|
|||||
|
Goodwill
|
318,500
|
—
|
|||||
|
Other
assets
|
162,880
|
24,751
|
|||||
|
Total
assets
|
$
|
46,324,307
|
$
|
7,529,384
|
|||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
6,716,475
|
$
|
2,053,567
|
|||
|
Customer
rebate payable
|
346,097
|
1,196,363
|
|||||
|
Accrued
liabilities
|
1,431,880
|
622,184
|
|||||
|
Accrued
warranty
|
647,706
|
508,655
|
|||||
|
Common
stock issuable
|
—
|
175,568
|
|||||
|
Deferred
purchase price payable
|
20,000
|
—
|
|||||
|
Deferred
revenue
|
1,442,834
|
981,454
|
|||||
|
Credit
facility
|
—
|
500,000
|
|||||
|
Current
portion of capital lease obligations
|
24,130
|
12,205
|
|||||
|
Current
portion of long-term debt
|
191,845
|
17,307
|
|||||
|
Total
current liabilities
|
10,820,967
|
6,067,303
|
|||||
|
Capital
lease obligations, less current portion
|
46,669
|
42,678
|
|||||
|
Long-term
debt, less current portion
|
644,595
|
28,673
|
|||||
|
Total
liabilities
|
11,512,231
|
6,138,654
|
|||||
|
Commitments,
contingencies and subsequent events (Notes 17 and 20)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock, $0.001 par value; 1,000,000 shares authorized; none issued
and
outstanding
|
—
|
—
|
|||||
|
Common
stock, $0.001 par value; 50,000,000 shares authorized; 27,410,684
and
15,877,751 shares issued and outstanding at December 31, 2007 and
December
31, 2006, respectively
|
27,411
|
15,878
|
|||||
|
Additional
paid-in capital
|
47,412,518
|
2,955,926
|
|||||
|
Accumulated
deficit
|
(12,627,853
|
)
|
(1,581,074
|
)
|
|||
|
Total
stockholders’ equity
|
34,812,076
|
1,390,730
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
46,324,307
|
$
|
7,529,384
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
27
AKEENA
SOLAR, INC.
Consolidated
Statements of Operations
Years
Ended December 31, 2007 and 2006
|
2007
|
2006
|
||||||
|
Net
sales
|
$
|
32,211,761
|
$
|
13,390,139
|
|||
|
Cost
of sales
|
25,372,691
|
10,444,539
|
|||||
|
Gross
profit
|
6,839,070
|
2,945,600
|
|||||
|
Operating
expenses
|
|||||||
|
Sales
and marketing
|
5,978,799
|
1,562,732
|
|||||
|
General
and administrative
|
11,941,700
|
3,124,454
|
|||||
|
Total
operating expenses
|
17,920,499
|
4,687,186
|
|||||
|
Loss
from operations
|
(11,081,429
|
)
|
(1,741,586
|
)
|
|||
|
Other
income (expense)
|
|||||||
|
Interest
income (expense), net
|
34,650
|
(67,655
|
)
|
||||
|
Total
other income (expense)
|
34,650
|
(67,655
|
)
|
||||
|
Loss
income before provision for income taxes
|
(11,046,779
|
)
|
(1,809,241
|
)
|
|||
|
Provision
for income taxes
|
—
|
—
|
|||||
|
Net
loss
|
$
|
(11,046,779
|
)
|
$
|
(1,809,241
|
)
|
|
|
Loss
per common and common equivalent share:
|
|||||||
|
Basic
|
$
|
(0.52
|
)
|
$
|
(0.16
|
)
|
|
|
Diluted
|
$
|
(0.52
|
)
|
$
|
(0.16
|
)
|
|
|
Weighted
average shares used in computing loss per common and common equivalent
share:
|
|||||||
|
Basic
|
21,117,399
|
11,193,143
|
|||||
|
Diluted
|
21,117,399
|
11,193,143
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
28
AKEENA
SOLAR, INC.
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
Common
Stock
|
Additional
|
|
|
||||||||||||
|
|
Number
of
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Stockholders’
Equity
|
|||||||
|
Balance
at January 1, 2006
|
8,000,000
|
$
|
8,000
|
$
|
(7,000
|
)
|
$
|
(519
|
)
|
$
|
481
|
|||||
|
Net
equity of Fairview Energy Corporation, Inc. at date of reverse
merger
|
3,656,466
|
3,656
|
3,015
|
—
|
6,671
|
|||||||||||
|
Proceeds
from issuance of common stock at $1.00 under private placement, $0.001
par
value
|
3,217,500
|
3,218
|
3,214,282
|
—
|
3,217,500
|
|||||||||||
|
Total
placement agent fees
|
—
|
—
|
(131,539
|
)
|
—
|
(131,539
|
)
|
|||||||||
|
Warrants
issued to placement agent
|
—
|
—
|
70,039
|
—
|
70,039
|
|||||||||||
|
Stock-based
compensation expense
|
3,785
|
4
|
37,815
|
—
|
37,819
|
|||||||||||
|
Distribution
to stockholder
|
—
|
—
|
—
|
(11,000
|
)
|
(11,000
|
)
|
|||||||||
|
Reclassification
of S corporation accumulated deficit to additional paid-in
capital
|
—
|
—
|
(239,686
|
)
|
239,686
|
—
|
||||||||||
|
Exercise
of warrants for common shares at an exercise price of $0.01, $0.001
par
value
|
1,000,000
|
1,000
|
9,000
|
—
|
10,000
|
|||||||||||
|
Net
loss
|
—
|
—
|
—
|
(1,809,241
|
)
|
(1,809,241
|
)
|
|||||||||
|
Balance
at December 31, 2006
|
15,877,751
|
15,878
|
2,955,926
|
(1,581,074
|
)
|
1,390,730
|
||||||||||
|
Proceeds
from issuance of common stock at $1.97 under private placement, $0.001
par
value
|
2,062,304
|
2,062
|
4,060,677
|
—
|
4,062,739
|
|||||||||||
|
Proceeds
from issuance of common stock at $2.75 under private placement, $0.001
par
value
|
4,567,270
|
4,567
|
12,555,426
|
—
|
12,559,993
|
|||||||||||
|
Proceeds
from issuance of common stock at $7.00 under private placement, $0.001
par
value
|
3,728,572
|
3,729
|
26,096,275
|
—
|
26,100,004
|
|||||||||||
|
Total
placement agent fees and registration fees
|
—
|
—
|
(5,462,376
|
)
|
—
|
(5,462,376
|
)
|
|||||||||
|
Warrants
issued to placement agent and warrants issued for finders
fees
|
—
|
—
|
2,436,330
|
—
|
2,436,330
|
|||||||||||
|
Issuance
of common shares at $3.21, as per an account purchase agreement,
$0.001
par value
|
54,621
|
55
|
175,513
|
—
|
175,568
|
|||||||||||
|
Issuance
of common shares at $3.14, as per an asset purchase agreement, $0.001
par
value
|
100,000
|
100
|
313,900
|
—
|
314,000
|
|||||||||||
|
Exercise
of warrants for common shares, $0.001 par value
|
641,967
|
642
|
2,033,129
|
—
|
2,033,771
|
|||||||||||
|
Release
of restricted common shares, $0.001 par value, and stock-based
compensation expense
|
378,199
|
378
|
2,247,718
|
—
|
2,248,096
|
|||||||||||
|
Net
loss
|
—
|
—
|
—
|
(11,046,779
|
)
|
(11,046,779
|
)
|
|||||||||
|
Balance
at December 31, 2007
|
27,410,684
|
$
|
27,411
|
$
|
47,412,518
|
$
|
(12,627,853
|
)
|
$
|
34,812,076
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
29
AKEENA
SOLAR, INC.
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2007 and 2006
|
|
2007
|
2006
|
|||||
|
Cash
flows from operating activities
|
|||||||
|
Net
loss
|
$
|
(11,046,779
|
)
|
$
|
(1,809,241
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operations
|
|||||||
|
Depreciation
|
201,245
|
36,953
|
|||||
|
Amortization
of customer list and customer contracts
|
319,233
|
101,391
|
|||||
|
Bad
debt expense
|
53,677
|
41,743
|
|||||
|
Non
cash stock-based compensation expense
|
2,248,096
|
37,819
|
|||||
|
Loss
on asset disposal
|
1,388
|
—
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(6,084,163
|
)
|
(1,798,123
|
)
|
|||
|
Other
receivables
|
(273,636
|
)
|
(4,249
|
)
|
|||
|
Inventory
|
(7,056,651
|
)
|
(1,251,948
|
)
|
|||
|
Prepaid
expenses and other current assets
|
(2,221,538
|
)
|
(452,681
|
)
|
|||
|
Other
assets
|
(138,129
|
)
|
(20,824
|
)
|
|||
|
Accounts
payable
|
4,662,908
|
914,584
|
|||||
|
Customer
rebate payable
|
(850,266
|
)
|
878,178
|
||||
|
Accrued
liabilities and accrued warranty
|
939,747
|
560,243
|
|||||
|
Deferred
revenue
|
461,380
|
507,422
|
|||||
|
Net
cash used in operating activities
|
(18,783,488
|
)
|
(2,258,733
|
)
|
|||
|
Cash
flows from investing activities
|
|||||||
|
Acquisition
of property and equipment
|
(1,680,661
|
)
|
(88,585
|
)
|
|||
|
Acquisition
of customer list
|
(77,000
|
)
|
(101,618
|
)
|
|||
|
Cash
acquired in reverse merger transaction
|
—
|
16,871
|
|||||
|
Increase
(decrease) in amount due from related party
|
21,825
|
(800
|
)
|
||||
|
Acquisition
of Alternative Energy, Inc.
|
(80,000
|
)
|
—
|
||||
|
Net
cash used in investing activities
|
(1,815,836
|
)
|
(174,132
|
)
|
|||
|
Cash
flows from financing activities
|
|||||||
|
Borrowing
on long-term debt
|
819,468
|
21,084
|
|||||
|
Repayment
of long-term debt
|
(90,542
|
)
|
(17,661
|
)
|
|||
|
Repayments
on line of credit, net
|
(500,000
|
)
|
—
|
||||
|
Distributions
to stockholder
|
—
|
(11,000
|
)
|
||||
|
Payment
of capital lease obligations
|
(38,722
|
)
|
(3,228
|
)
|
|||
|
Issuance
of common stock under private placement
|
42,722,736
|
3,217,500
|
|||||
|
Proceeds
from exercise of warrants
|
2,033,771
|
10,000
|
|||||
|
Payment
of placement agent fees and registration fees
|
(3,026,046
|
)
|
(61,500
|
)
|
|||
|
Net
cash provided by financing activities
|
41,920,665
|
3,155,195
|
|||||
|
Net
increase in cash and cash equivalents
|
21,321,341
|
722,330
|
|||||
|
Cash
and cash equivalents
|
|||||||
|
Beginning
of year
|
992,376
|
270,046
|
|||||
|
End
of year
|
$
|
22,313,717
|
$
|
992,376
|
|||
|
Supplemental
cash flows disclosures:
|
|||||||
|
Cash
paid during the year for Interest
|
$
|
112,474
|
$
|
59,129
|
|||
|
Non
cash investing and financing activities
|
|||||||
|
Issuance
of common stock warrants for placement agent fees and finders
fees
|
$
|
2,436,330
|
$
|
70,039
|
|||
|
Issuance
of common stock under an account purchase agreement
|
$
|
175,568
|
$
|
—
|
|||
|
Issuance
of common stock for purchase of net assets under an asset purchase
agreement
|
$
|
314,000
|
$
|
—
|
|||
|
Common
stock issuable pursuant to an account purchase agreement
|
$ |
—
|
$
|
175,568
|
|||
|
Assets
acquired under capital lease
|
$
|
54,638
|
$
|
58,111
|
|||
|
Vehicle
loans assumed under asset purchase agreement
|
$
|
61,534
|
$
|
—
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
30
AKEENA
SOLAR, INC.
Notes
to Consolidated Financial Statements
December
31, 2007 and 2006
1.
Description of Business
Akeena
Solar, Inc. (the “Company” or “Akeena Solar”) was incorporated in February 2001
as a Subchapter S corporation in the State of California. During June 2006,
the
Company became a C corporation in the State of Delaware. On August 11, 2006,
the
Company entered into a reverse merger transaction (the “Merger”) with Fairview
Energy Corporation, Inc. (“Fairview”). Pursuant to the merger agreement, the
stockholders of Akeena Solar received one share of Fairview common stock for
each issued and outstanding share of Akeena Solar common stock, which totaled
8,000,000 shares. Akeena Solar’s common shares were also adjusted from $0.01 par
value to $0.001 par value at the time of the Merger. Subsequent to the closing
of the Merger, the closing of a private placement of 3,217,500 shares of the
Company’s common stock (the “2006 Private Placement”) at an issue price of $1.00
per share for a total of $3,217,500, net of placement agent fees of $131,539,
and the cancellation of 3,877,477 shares of Fairview common stock, the former
stockholders of Akeena Solar held a majority of Fairview’s outstanding common
stock. The $131,539 of placement agent fees were comprised of $61,500 in cash
fees paid and warrants to purchase 61,500 shares of the Company’s common stock
valued at $70,039 (see Note 14). Since the stockholders of Akeena Solar own
a
majority of the outstanding shares of Fairview common stock immediately
following the Merger, and the management and board of Akeena Solar became the
management and board of Fairview immediately following the Merger, the Merger
is
being accounted for as a reverse merger transaction and Akeena Solar is deemed
to be the acquirer. The assets, liabilities and the historical operations prior
to the Merger are those of Akeena Solar. Subsequent to the Merger, the
consolidated financial statements include the assets and liabilities of Akeena
Solar and Fairview, and the historical operations of Akeena Solar and the
operations of Fairview from the closing date of the Merger.
The
Company is engaged in the design and installation of solar panel systems to
residential and commercial markets.
2.
Summary of Significant Accounting Policies
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of three months
or less, when purchased, to be cash equivalents. The Company maintains cash
and
cash equivalents which consist principally of demand deposits with high credit
quality financial institutions. At certain times, such amounts exceed FDIC
insurance limits. The Company has not experienced any losses on these
investments.
Accounts
Receivable
The
Company regularly evaluates the collectibility of its accounts receivable.
An
allowance for doubtful accounts is maintained for estimated credit losses,
and
such losses have been minimal and within management’s expectations. When
estimating credit losses, the Company considers a number of factors including
the aging of a customer’s account, creditworthiness of specific customers,
historical trends and other information. Accounts receivable consist of trade
receivables and amounts due from state agencies for rebates on state-approved
solar systems installed. These rebate amounts are passed on to the customer,
either at the time the customer is billed, or when the money is received from
the states by the Company. Included within customer rebate payable at December
31, 2007 and 2006 is approximately $346,000 and approximately $1.2 million,
respectively, of rebates payable to customers. Usually, the various states
remit
the rebate amounts to the Company within 90-120 days.
Inventory
Inventory
is stated at the lower of cost (on an average basis) or market value.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are provided for using the straight-line method
over the estimated useful lives of the respective assets.
31
Estimated
useful lives are as follows:
|
Category
|
Useful
Lives
|
|
|
Furniture
and Fixtures
|
7-10
years
|
|
|
Office
Equipment
|
3-10
years
|
|
|
Vehicles
|
5
years
|
|
|
Leasehold
Improvements
|
5
years
|
Maintenance
and repairs are expensed as incurred. Expenditures for significant renewals
or
betterments are capitalized. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or loss is
reflected in current operations.
Long-Lived
Assets
The
Company reviews long-lived assets for impairment whenever events or changes
in
circumstances indicate that the carrying value of a long-lived asset may not
be
recoverable. The Company periodically evaluates whether events and circumstances
have occurred that may warrant revision of the estimated useful lives of its
long-lived assets or whether the remaining balance of long-lived assets should
be evaluated for possible impairment. The Company does not believe that there
were any indicators of impairment that would require an adjustment to such
assets or their estimated periods of recovery at December 31, 2007 and
2006.
Goodwill
and Other Intangible Assets
The
Company does not amortize goodwill, but rather tests goodwill for impairment
at
least annually. The
Company does not believe that there were any indicators of impairment that
would
require an adjustment at December 31, 2007. A
customer list is being amortized over the estimated useful life of the list,
which was determined to be eighteen months.
Manufacturer
and Installation Warranties
The
Company warrants its products for various periods against defects in material
or
installation workmanship. The manufacturer warranty on the solar panels and
the
inverters have a warranty period range of 5-25 years. The Company assists the
customer in the event that the manufacturer warranty needs to be used to replace
a defective panel or inverter. The Company provides for a 5-year warranty on
the
installation of a system and all equipment and incidental supplies other than
solar panels and inverters that are covered under the manufacturer warranty.
The
Company records a provision for the installation warranty, within cost of sales,
based on historical experience and future expectations of the probable cost
to
be incurred in honoring its warranty commitment. The provision for the
installation warranty of approximately $648,000 and approximately $509,000
at
December 31, 2007 and 2006, respectively, is included within “Accrued warranty”
in the accompanying consolidated balance sheets.
Fair
Value of Financial Instruments
The
carrying values reported for cash equivalents, accounts receivable, 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.
Revenue
Recognition and Deferred Revenue
Revenue
from installation of a system is recognized when (1) persuasive evidence of
an
arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the sales price is fixed or determinable, and (4) collection of the related
receivable is reasonably assured. The Company recognizes revenue for residential
installations upon completion of a system installation. The Company utilizes
the
percentage-of-completion method to recognize revenue on commercial
installations.
Defective
solar panels or inverters are covered under the manufacturer warranty. In the
event that a panel or inverter needs to be replaced, the Company will replace
the defective item within the manufacturer’s warranty period (between 5-25
years). See the “Manufacturer and installation warranties” discussion
above.
Deferred
revenue consists of installations initiated but not completed within the
reporting period.
32
Stock-based
Compensation
The
Company applies the fair value method under Statement of Financial Accounting
Standards (“SFAS”) No. 123(revised 2004), “Share-Based Payment” (“SFAS 123R”) in
accounting for its Stock Incentive Plan. Under SFAS 123R, compensation cost
is
measured at the grant date based on the fair value of the equity instruments
awarded and is recognized over the period during which an employee is required
to provide service in exchange for the award, or the requisite service period,
which is usually the vesting period. The fair value of the equity award granted
is estimated on the date of the grant.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense, included
in
“Sales and marketing expenses,” for the years ended December 31, 2007 and 2006
was approximately $1.0 million and $150,000, respectively.
Shipping
and Handling Costs
Shipping
and handling costs associated with inbound freight are included in cost of
inventory and expensed as cost of sales when the related inventory is sold.
Amounts billed to customers for shipping and handling are recorded as revenue
and were not significant for the years ended December 31, 2007 and
2006.
Income
Taxes
As
the
Company was a Subchapter S corporation until June 2006, any taxable income
or
loss of the S corporation through June 2006 was included within the sole
stockholder’s income for federal and state income tax purposes.
Deferred
income taxes arise from timing differences resulting from income and expense
items reported for financial accounting and tax purposes in different periods.
A
deferred tax asset valuation allowance is recorded when it is more likely than
not that deferred tax assets will not be realized. Utilization of net operating
loss carryforwards may be subject to a substantial annual limitation due to
ownership change limitations provided by the Internal Revenue Code. The annual
limitation may result in the expiration of net operating loss carryforwards
before utilization.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”), on January 1, 2007. Previously, the Company had accounted for tax
contingencies in accordance with SFAS No. 5, Accounting
for Contingencies.
As
required by Interpretation 48, which clarifies SFAS No. 109, Accounting
for Income Taxes,
the
Company recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting this standard, the
amount recognized in the financial statements is the largest benefit that has
a
greater than 50 percent likelihood of being realized upon ultimate settlement
with the relevant tax authority. At the adoption date, the Company applied
Interpretation 48 to all tax positions for which the statute of limitations
remained open. The adoption of FIN 48 did not have a material impact in the
consolidated financial statements during the year ended December 31,
2007.
Earnings
Per Share
Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period presented. Diluted
earnings per share is computed using the weighted average number of common
shares outstanding during the periods plus the effect of dilutive securities
outstanding during the periods. For the years ended December 31, 2007 and 2006,
basic earnings per share is the same as diluted earnings per share as a result
of the Company’s common stock equivalents being anti-dilutive due to the
Company’s net loss.
At
December 31, 2007, warrants to purchase 2,238,033 shares of the Company’s common
stock and 623,166 non-vested restricted shares, net of forfeitures (see Notes
13
and 14), are dilutive securities that may dilute future earnings per share.
At
December 31, 2006, warrants to purchase 61,500 shares of the Company’s common
stock and 354,622 non-vested restricted shares, net of forfeitures (see Notes
13
and 14), are dilutive securities that may dilute future earnings per
share.
33
The
weighted-average number of common shares outstanding were 21,117,399 and
11,193,143 for the years ended December 31, 2007 and 2006, respectively. The
weighted-average number of common shares used to calculate basic earnings per
share for the year ended December 31, 2006 includes 1,000,000 contingently
issuable warrants to purchase shares of the Company’s common stock in accordance
with SFAS No. 128, “Earnings Per Share.” The 1,000,000 warrants were exercised
for 1,000,000 common shares during 2006.
Segment
Reporting
The
Company has determined it operates in one operating segment. Operating segments,
are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to allocate
resources and in assessing performance. The Company’s chief operating decision
maker assesses the Company’s performance, and allocates its resources as a
single operating segment.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Akeena
Solar and Fairview, pursuant to the Merger as described in Note 1. The Company
also has two wholly-owned subsidiaries as of December 31, 2007. Akeena Corp.
is
a wholly-owned subsidiary of Akeena Solar and Andalay Solar, Inc. is a
wholly-owned subsidiary of Akeena Solar. All inter-company accounts have been
eliminated in consolidation.
Reclassifications
Certain
prior year amounts have been reclassified to conform with the current year
presentation.
Recent
Accounting Pronouncements
In
July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109, Accounting for Income
Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
de-recognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. The interpretation applies to
all
tax positions related to income taxes subject to FASB Statement No. 109. FIN
48
is effective for fiscal years beginning after December 15, 2006.
Differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
should be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. The adoption of FIN 48 did not have
a
material impact on the Company’s consolidated financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines
fair value, establishes a framework for measuring fair value in accordance
with
GAAP, and expands disclosures about fair value measurements. This statement
does
not require any new fair value measurements in accounting pronouncements where
fair value is the relevant measurement attribute. However, for some entities,
the application of this statement will change current practice for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of the adoption of SFAS 157 on its
definition and measurement of fair value and disclosure
requirements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows
entities the option to measure eligible financial instruments at fair value
as
of specified dates. Such election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007, and early application
is allowed under certain circumstances. The Company does not expect the adoption
of SFAS 159 to have a material impact on its consolidated financial position
or
consolidated results of operations.
34
In
June 2007, the FASB’s Emerging Issues Task Force reached a consensus on
EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for
Goods or Services to Be Used in Future Research and Development Activities” that
would require nonrefundable advance payments made by the Company for future
R&D activities to be capitalized and recognized as an expense as the goods
or services are received by the Company. The Company does not expect EITF Issue
No. 07-3 to have a material impact on the Company’s consolidated results of
operations or financial condition.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”) which replaces SFAS No. 141. SFAS 141R retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized
in
the purchase accounting. It also changes the recognition of assets acquired
and
liabilities assumed arising from contingencies, requires the capitalization
of
in-process research and development at fair value, and requires the expensing
of
acquisition-related costs as incurred. SFAS 141R is effective for the Company
beginning March 31, 2009 and will apply prospectively to business combinations
completed on or after that date. The Company does not expect the adoption of
SFAS 141R to have a material impact on its consolidated financial position
or
consolidated results of operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51” (“SFAS 160”) which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as noncontrolling interests and will be reported as
a
component of equity separate from the parent’s equity, and purchases or sales of
equity interests that do not result in a change in control will be accounted
for
as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the
face
of the income statement and, upon a loss of control, the interest sold, as
well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for the Company beginning
March 31, 2009 and will apply prospectively, except for the presentation and
disclosure requirements, which will apply retrospectively. The
Company does not expect the adoption of SFAS 160 to have a material impact
on
its consolidated financial position or consolidated results of
operations.
In
December 2007, the FASB ratified the Emerging Issues Task Force consensus
on EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” that
discusses how parties to a collaborative arrangement (which does not establish
a
legal entity within such arrangement) should account for various activities.
The
consensus indicates that costs incurred and revenues generated from transactions
with third parties (i.e., parties outside of the collaborative arrangement)
should be reported by the collaborators on the respective line items in their
income statements pursuant to EITF Issue No. 99-19, “Reporting Revenue
Gross as a Principal Versus Net as an Agent.” Additionally, the consensus
provides that income statement characterization of payments between the
participants in a collaborative arrangement should be based upon existing
authoritative pronouncements; analogy to such pronouncements if not within
their
scope; or a reasonable, rational, and consistently applied accounting policy
election. EITF Issue No. 07-1 is effective beginning January 1, 2009
and is to be applied retrospectively to all periods presented for collaborative
arrangements existing as of the date of adoption. The Company is currently
evaluating the impacts and disclosures of this standard, but would not expect
EITF Issue No. 07-1 to have a material impact on the Company’s consolidated
results of operations or financial condition.
3. Accounts
Receivable
Accounts
receivable consists of the following:
|
|
December 31,
2007
|
December 31,
2006
|
|||||
|
State
rebates receivable
|
$
|
5,121,754
|
$
|
1,746,975
|
|||
|
Trade
accounts
|
4,389,425
|
1,671,237
|
|||||
|
Rebate
receivable assigned to vendor
|
30,135
|
44,939
|
|||||
|
Other
accounts receivable
|
21,000
|
15,000
|
|||||
|
Less:
Allowance for doubtful accounts
|
(97,259
|
)
|
(43,582
|
)
|
|||
|
|
$
|
9,465,055
|
$
|
3,434,569
|
|||
35
4. Inventory
Inventory
consists of the following:
|
|
December 31,
2007
|
December 31,
2006
|
|||||
|
Work
in process
|
$
|
394,280
|
$
|
—
|
|||
|
Finished
goods
|
8,464,519
|
1,791,816
|
|||||
|
Less:
provision for obsolete inventory
|
(10,332
|
)
|
—
|
||||
|
|
$
|
8,848,467
|
$
|
1,791,816
|
|||
5. Property
and Equipment, Net
Property
and equipment, net consist of the following:
|
|
December 31,
2007
|
December
31,
2006
|
|||||
|
Vehicles
|
$
|
1,278,507
|
$
|
272,785
|
|||
|
Office
equipment
|
519,750
|
4,089
|
|||||
|
Leasehold
improvements
|
224,247
|
4,013
|
|||||
|
Furniture
and fixtures
|
74,191
|
13,284
|
|||||
|
|
2,096,695
|
294,171
|
|||||
|
Less:
Accumulated depreciation and amortization
|
(300,128
|
)
|
(99,304
|
)
|
|||
|
|
$
|
1,796,567
|
$
|
194,867
|
|||
Depreciation
expense for the years ended December 31, 2007 and 2006 was approximately
$201,000 and $37,000, respectively. Accumulated
depreciation related to approximately $94,000 of assets under capital leases
was
approximately $16,000 at December 31, 2007. Accumulated
depreciation related to approximately $64,000 of assets under capital leases
was
approximately $4,000 at December 31, 2006.
36
6. Assets
Acquired
On
September 29, 2006, the Company executed an Account Purchase Agreement (the
“Purchase Agreement”), whereby the Company purchased customer contracts, fixed
assets and a customer listing from an individual (the “Seller”) who, subsequent
to the execution of the Purchase Agreement, became an employee of the Company.
This employee was hired to expand the Company’s operations into Fresno,
California. The customer contracts of approximately $109,000 are included within
“Prepaid expenses and other current assets, net” in the accompanying
consolidated balance sheets at December 31, 2007 and 2006, net of accumulated
amortization of approximately $109,000 at December 31, 2007 and approximately
$55,000 at December 31, 2006. The customer contracts were amortized over the
period during which the respective installations were completed. Fixed assets
purchased of approximately $37,000 are included within “Property and equipment,
net” at December 31, 2007 and 2006. A
customer listing valued at approximately $354,000 is included within “Customer
list, net” in the accompanying consolidated balance sheets at December 31, 2007,
net of accumulated amortization of approximately $269,000 at December 31, 2007
and approximately $46,000 at December 31, 2006. The
customer list is being amortized over an eighteen month period. Upon execution
of the Purchase Agreement, the Seller received approximately $196,000 and during
January 2007, received approximately $176,000 in the Company’s common stock,
based upon the weighted-average closing price of the shares. The
$176,000 was settled in 54,621 shares of the Company’s common stock.
The
total
assets purchased under the Purchase Agreement were approximately $500,000 which
consisted of the customer contracts valued at approximately $109,000, property
and equipment of approximately $37,000, and a customer list valued at
approximately $354,000. Customer
deposit liabilities of approximately $51,000 were assumed by the Company at
the
time of the purchase of the customer contracts, fixed assets and a customer
list.
Additionally,
under the terms of the Purchase Agreement, the Seller received cash of $77,000
during April 2007. Certain revenue milestone amounts were attained during
2007 and the Seller received 29,481 shares of the Company’s common stock during
January 2008 (see Note 20). If certain revenue milestone amounts are attained
during 2008, then the Seller may receive 27,143 shares of the Company’s common
stock. Additionally, per the terms of the Purchase Agreement, the Seller is
entitled to receive 14,286 shares of the Company’s common stock on
December 31, 2008, as long as the Seller remains employed by the Company at
that time. The 29,481 shares of the Company’s common stock are treated as
compensation expense during the year ended December 31, 2007. The additional
shares of the Company’s common stock that may be issued to the Seller based upon
the Seller’s attainment of certain revenue milestone amounts will be treated as
compensation expense and are limited to a maximum of 200,000 shares pursuant
to
the terms of the Purchase Agreement.
Concurrent
with the execution of the Purchase Agreement, the Company entered into an
employment agreement with the Seller which provides for, among other things,
an
annual base salary of $120,000 and expires December 31, 2008. There are
automatic one-year renewals unless written notice is given within 30 days
of the end of the term by either party. Under the terms of the employment
agreement, the Seller has also agreed not to compete with the Company in Fresno,
California, in the solar installation business for one year upon termination
of
employment.
7. Acquisitions
On
May 3, 2007, the Company purchased customer contracts and fixed assets, and
assumed certain liabilities, from Alternative Energy, Inc. (“AEI”), a California
corporation, pursuant to an asset purchase agreement with AEI and its principal
shareholders (the “Asset Purchase Agreement”) for approximately $100,000 and
100,000 shares of the Company’s common stock (see Note 12).
The
assets acquired were determined to have all inputs and processes necessary
for
the transferred assets to continue to conduct normal operations after
acquisition; accordingly, the purchase was treated as a business combination
pursuant to SFAS No. 141, “Business Combinations.” The Company assumed AEI
vehicle loans and leases and also assumed an operating lease for AEI’s offices
located in Santa Rosa, California, which expires in September 2008 and provides
for monthly rent payments of approximately $2,600. As per the terms of the
Asset
Purchase Agreement, the Company purchased fixed assets valued at approximately
$102,000 and customer contracts valued at approximately $97,000. The Company
recorded approximately $319,000 of goodwill acquired in connection with the
AEI
transaction. The Company assumed approximately $94,000 in vehicle loans and
leases, which includes approximately $31,000 for a capital lease, and also
assumed customer deposit liabilities of approximately $9,000 relating to the
customer contracts purchased. Fixed assets purchased of approximately $102,000
are included within “Property and equipment, net” in the accompanying
consolidated balance sheets at December 31, 2007. Customer contracts of
approximately $97,000 are included within “Prepaid expenses and other current
assets, net” in the accompanying consolidated balance sheets at December 31,
2007, net of accumulated amortization of approximately $42,000. The customer
contracts are being amortized over the period during which the respective
installations are completed, which will range from 3-12 months from the
purchase date of these contracts. Goodwill of approximately $319,000 is included
within “Goodwill” in the accompanying consolidated balance sheets at December
31, 2007.
37
Concurrent
with the execution of the business combination under the Asset Purchase
Agreement, the Company entered into a two-year employment agreement with one
of
the principal shareholders of AEI, as regional sales manager of its Santa Rosa,
California office. The employment agreement, which expires on June 1, 2009,
provides for an annual base salary of $120,000, performance-based bonus
compensation if certain sales goals are achieved payable in shares of our common
stock and severance payments. This Santa Rosa regional sales manager has also
agreed not to compete with the Company in the solar installation business for
four years in Marin, Lake and Sonoma counties, and parts of Napa and Mendocino
counties, in the State of California. As this transaction with AEI does not
meet
the significant asset test, pro forma financial information is not being
provided within this Form 10-KSB.
8. Accrued
Liabilities
Accrued
liabilities consist of the following:
|
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Accrued
salaries, wages and benefits
|
$
|
600,742
|
$
|
72,048
|
|||
|
Customer
deposits
|
362,390
|
308,802
|
|||||
|
Accrued
accounting and legal fees
|
146,000
|
35,200
|
|||||
|
Other
accrued liabilities
|
322,748
|
206,134
|
|||||
|
|
$
|
1,431,880
|
$
|
622,184
|
|||
9. Credit
Facility
On
December 19, 2006, the Company entered into a master revolving note with
Comerica Bank (the “2006 Credit Facility”), with a maturity date of
January 1, 2008, to replace the Company’s previous credit facility with
Citibank West FSB dated August 31, 2005. On January 29, 2007, the
Company entered into a Loan and Security Agreement (the “Loan Agreement”) with
Comerica Bank for a $2.0 million line of credit (the “2007 Credit
Facility”) to replace the Company’s 2006 Credit Facility dated December 19,
2006. On June 26, 2007, the 2007 Credit Facility was amended to, among other
things, (i) increase the line of credit from $2.0 million to $7.5 million,
(ii)
reduce the interest rate to the prime rate (“Prime”) minus 0.5% and (iii) change
the maturity date of the 2007 Credit Facility from January 1, 2008 to August
1,
2008, at which time all amounts under the 2007 Credit Facility will become
due
and payable. Effective December 31, 2007, the Second Modification to Loan and
Security Agreement (the “Second Modification”) to the Credit Facility (i)
increased the Company’s line of credit from $7.5 million to $25.0 million and
(ii) changed the maturity date of the 2007 Credit Facility to July 1, 2009.
Pursuant to the amended terms, the first $17.5 million borrowed under the 2007
Credit Facility will not be governed by any formula restrictions but is subject
to satisfaction by the Company of a cash collateral balance requirement.
Additional borrowing above $17.5 million will be subject to the same borrowing
formula as set forth in the Loan Agreement, except that 80% of the Company’s
Prefiling Rebates (as such term is defined in the Second Modification) are
now
eligible under the borrowing formula.
As
of
December 31, 2007, nothing was borrowed under the 2007 Credit Facility and
$24.8
million of additional borrowing capacity was available at December 31, 2007.
Under the amended terms of the 2007 Credit Facility, the Company can borrow
up
to $17.5 million with no formula restriction. Borrowing above $17.5 million
would be limited to 80% of Eligible Accounts Receivable plus 55% of Inventory
Availability (as such terms are defined in the monthly borrowing base report
provided to Comerica Bank as per the terms of the 2007 Credit Facility), up
to a
maximum amount of $7.5 million that is governed by the borrowing formula.
As of December 31, 2007, 80% of the Company’s Eligible Accounts Receivable was
approximately $5.6 million, and 55% of Inventory Availability was
approximately $4.6 million. All of the existing property and assets of the
Company are pledged as collateral for the 2007 Credit Facility.
38
10. Capital
Lease Obligations
The
Company’s capital lease obligations consist of three forklifts and two vehicles
under capital leases. The Company’s scheduled principal maturities relating to
capital lease obligations at December 31, 2007 are as follows:
|
2008
|
$
|
24,130
|
||
|
2009
|
23,292
|
|||
|
2010
|
18,476
|
|||
|
2011
|
4,901
|
|||
|
2012
|
—
|
|||
|
$
|
70,799
|
|||
|
Less:
current portion
|
(24,130
|
)
|
||
|
$
|
46,669
|
11. Long-Term
Debt
The
Company’s long-term debt consists of thirty-six vehicle loans. The interest
rates on these vehicle loans range from 1.9%
to
10.5%.
The
scheduled principal maturities of long-term debt at December 31, 2007 are as
follows:
|
2008
|
$
|
191,845
|
||
|
2009
|
195,821
|
|||
|
2010
|
197,170
|
|||
|
2011
|
164,148
|
|||
|
2012
|
84,945
|
|||
|
2013
|
2,511
|
|||
|
$
|
836,440
|
|||
|
Less:
current portion
|
(191,845
|
)
|
||
|
$
|
644,595
|
12. Stockholders’
Equity
The
Company was incorporated in 2001 as a Subchapter S corporation. During June
2006, the Company became a C corporation in the State of Delaware. On August
11,
2006, the Company entered into a reverse merger transaction with Fairview as
discussed in Note 1. Pursuant to the Merger, the stockholders of Akeena Solar
received one share of Fairview common stock for each issued and outstanding
share of Akeena Solar common stock, which totaled 8,000,000 shares. In addition,
in connection with the reverse merger, the Company’s 1,000,000 outstanding
warrants were exchanged for warrants of Fairview. The warrants to purchase
1,000,000 shares of the Company’s common stock were exercised and 1,000,000
shares of common stock were issued during 2006 at the exercise price of $0.01,
for approximately $10,000. Akeena Solar’s common shares were also adjusted from
$0.01 par value to $0.001 par value at the time of the Merger. Subsequent to
the
closing of the Merger, the closing of the 2006 Private Placement of 3,217,500
shares of the Company’s common stock at an issue price of $1.00 per share for a
total of $3,217,500, net of placement agent fees of $131,539, and the
cancellation of 3,877,477 shares of Fairview common stock, the former
stockholders of Akeena Solar held a majority of Fairview’s outstanding common
stock. The $131,539 of placement agent fees were comprised of $61,500 in cash
fees paid and warrants to purchase 61,500 shares of the Company’s common stock
valued at $70,039 (see Note 14). Since the stockholders of Akeena Solar own
a
majority of the outstanding shares of Fairview common stock immediately
following the Merger, and the management and board of Akeena Solar became the
management and board of Fairview immediately following the Merger, the Merger
is
being accounted for as a reverse merger transaction and Akeena Solar is deemed
to be the acquirer. The assets, liabilities and the historical operations prior
to the Merger are those of Akeena Solar. Subsequent to the Merger, the
consolidated financial statements include the assets and liabilities of Akeena
Solar and Fairview, and the historical operations of Akeena Solar and the
operations of Fairview from the closing date of the Merger.
During
January 2007, 54,621 shares of the Company’s common stock were issued at a
value of approximately $176,000 in accordance with the terms of the Purchase
Agreement as described in Note 5. During March 2007, the Company issued
2,062,304 shares of common stock and raised approximately $4.1 million
under a private placement offering (the “March 2007 Private Placement”).
Placement agent fees and registration fees relating to the March 2007
Private Placement include warrants to purchase 79,976 shares of the Company’s
common stock valued at $122,308 (see Note 14). During May 2007, 100,000 shares
of the Company’s common stock were issued at a value of approximately $314,000
in accordance with the terms of the business combination under the Asset
Purchase Agreement as described in Note 7. During June 2007, the Company issued
4,567,270 shares of common stock and raised approximately $12.6 million under
a
private placement offering (the “June 2007 Private Placement”). Placement agent
fees and registration fees relating to the June 2007 Private Placement include
warrants to purchase 385,964 shares of the Company’s common stock valued at
$880,219 (see Note 14). Placement agent fees and registration fees relating
to
the March 2007 Private Placement and the June 2007 Private Placement include
cash fees paid of approximately $1.0 million.
39
On
November 6, 2007, the Company closed a private placement offering to accredited
investors (the “November 2007 Private Placement”) in which approximately $26.1
million of gross proceeds were raised, before commissions and expenses. In
connection with the November 2007 Private Placement, 3,728,572 shares of common
stock were issued to investors and five-year warrants to purchase 745,716 shares
of common stock with an exercise price of $10.08 per share were issued to
investors. Cowen and Company, LLC acted as the sole placement agent with respect
to the November 2007 Private Placement and received (i) a cash fee of
$1,246,500 which included a placement agent fee of $1,171,500 and $75,000 for
legal and out-of-pocket expenses and (ii) a three-year warrant valued at
$361,805 to purchase 83,679 shares of common stock at an exercise price of
$10.08 per share. Empire Financial Group, Inc. received (i) a cash fee of
$460,250 and (ii) a five-year warrant valued at $1,071,999 to purchase
197,250 shares of common stock at an exercise price of $10.08 per share as
a
finder’s fee in connection with the November 2007 Private
Placement.
If
the
registration statements covering the March 2007 Private Placement and the June
2007 Private Placement cease for any reason to remain continuously effective
for
up to two years, or if the holders of the securities covered by the registration
statements are otherwise not permitted to utilize the prospectus’ included in
the registration statements to resell any securities covered by the registration
statements for more than 15 consecutive calendar days or more than 20 calendar
days during any 12-month period (which need not be consecutive calendar days),
then each investor in the March 2007 Private Placement and the June 2007 Private
Placement will be entitled to liquidated damages equal to 1% of the aggregate
subscription amount paid by that investor, and an additional 1% for each month
of delinquency. In no event, however, will liquidated damages exceed 9% of
the
gross proceeds of the March 2007 Private Placement and the June 2007 Private
Placement. The Company believes it is unlikely to incur any liquidated damages
and has not made an accrual for such damages.
13.
Stock Option Plan and Stock Incentive Plan
The
Company’s 2001 Stock Option Plan (the “2001 Plan”) provides for the issuance of
incentive stock options and non-statutory stock options. The Company’s Board of
Directors, which, subject to the terms of the 2001 Plan, determines to whom
grants are made, and the vesting, timing, amounts and other terms of such
grants. Incentive stock options may be granted only to employees of the Company,
while non-statutory stock options may be granted to the Company’s employees,
officers, directors, consultants and advisors. Options under the Plan vest
as
determined by the Board of Directors, but in no event at a rate less than
20%
per year. The term of the options granted under the 2001 Plan may not exceed
10
years and the maximum aggregate shares that may be issued upon exercise of
such
options is 4,000,000 shares of common stock. No options were granted under
the
2001 Plan as of December 31, 2007 and 2006.
On
August 8, 2006, Akeena Solar adopted the Akeena Solar, Inc. 2006 Stock
Incentive Plan (the “Stock Plan”) pursuant to which 450,000 shares of common
stock were available for issuance to employees, directors and consultants under
the Stock Plan as restricted stock and/or options to purchase common stock.
On
December 20, 2006, the Stock Plan was amended to increase the number of
shares available for issuance under the Stock Plan from 450,000 shares to
1,000,000 shares. On August 24, 2007, the Stock Plan was amended to increase
the
number of shares available for issuance under the Stock Plan from 1,000,000
shares to 4,000,000 shares.
Restricted
stock and options to purchase common stock may be issued under the Stock Plan.
The restriction period on the restricted shares granted shall generally expire
at a rate of 25% a year over four years, unless decided otherwise by the
Company’s Compensation Committee. Upon the lapse of the restriction period, the
restricted stock grantee shall become entitled to receive a stock certificate
evidencing the common shares, and the restrictions shall cease to exist.
The
Company recognized stock-based compensation expense of approximately $2.3
million and approximately $38,000 during the years ended December 31, 2007
and
2006, respectively, relating to compensation expense calculated in accordance
with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) for
restricted stock and stock options granted under the Stock Plan.
The
following table sets forth a summary of restricted stock activity for the years
ended December 31, 2007 and 2006:
|
|
Number
of
Restricted
Shares
2007
|
Number
of
Restricted
Shares
2006
|
|||||
|
Outstanding
and not vested beginning balance
|
354,622
|
—
|
|||||
|
Granted
during the year
|
761,488
|
407,305
|
|||||
|
Forfeited/cancelled
during the year
|
(114,745
|
)
|
(48,898
|
)
|
|||
|
Released/vested
during the year
|
(378,199
|
)
|
(3,785
|
)
|
|||
|
Outstanding
and not vested at December 31, 2007 and 2006
|
623,166
|
354,622
|
|||||
40
The
restricted stock is valued at the grant date fair value of the common stock
and
expensed over the requisite service period or vesting period. SFAS 123R requires
the estimation of forfeitures when recognizing compensation expense and that
this estimate of forfeitures be adjusted over the requisite service period
should actual forfeitures differ from such estimates. At December 31, 2007,
there was approximately $1.5 million of unrecognized stock-based compensation
expense associated with the non-vested restricted shares granted. Stock-based
compensation expense relating to these restricted shares is being recognized
over a weighted-average period of 2.7 years. SFAS 123R requires the cash flows
as a result of the tax benefits resulting from tax deductions in excess of
the
compensation cost recognized (excess tax benefits) to be classified as financing
cash flows. There are no excess tax benefits relating to restricted stock for
the years ended December 31, 2007 and 2006, respectively, and therefore, there
is no impact on the accompanying consolidated statements of cash
flows.
The
following table sets forth a summary of stock option activity for the twelve
months ended December 31, 2007:
|
|
Number
of Shares
Subject
To Option
|
|||
|
Outstanding
at January 1, 2007
|
—
|
|||
|
Granted
during 2007
|
2,065,000
|
|||
|
Forfeited/cancelled
during 2007
|
—
|
|||
|
Exercised
during 2007
|
—
|
|||
|
Outstanding
at December 31, 2007
|
2,065,000
|
|||
|
|
||||
|
Exercisable
at December 31, 2007
|
—
|
|||
The
stock
options are valued at the grant date fair value of the common stock and expensed
over the requisite service period or vesting period. The fair value of stock
option grants during the year ended December 31, 2007 was estimated on the
date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions: risk-free interest rates ranging from 3.4% to
4.2%, an expected life of 3.5 years, an expected volatility factor of 96.9%
and
a dividend yield of 0.0%. The weighted-average fair value per share of the
stock
options as determined on the date of grant was $3.51 and the
weighted-average exercise price is $5.31 for the 2,065,000 stock options
outstanding as of Decemeber 31, 2007. SFAS 123R requires the estimation of
forfeitures when recognizing compensation expense and that this estimate of
forfeitures be adjusted over the requisite service period should actual
forfeitures differ from such estimates. At December 31, 2007, there was
approximately $4.5 million of unrecognized stock-based compensation expense
associated with stock options granted. Stock-based compensation expense relating
to these stock options is being recognized over a weighted-average period of
three years. SFAS 123R requires the cash flows as a result of the tax benefits
resulting from tax deductions in excess of the compensation cost recognized
(excess tax benefits) to be classified as financing cash flows. There are no
excess tax benefits for years ended December 31, 2007 and 2006, respectively,
and therefore, there is no impact on the accompanying consolidated statements
of
cash flows.
41
14.
Stock Warrants
In
March
2001, the Company issued a warrant to purchase 1,000,000 shares of the Company’s
common stock at an exercise price per share of $0.01 in exchange for the
purchase of assets from Akeena Wireless, Inc. (“AWI”), (see Note 16). The
warrants to purchase 1,000,000 shares of the Company’s common stock were
exercised and 1,000,000 shares of common stock were issued during 2006 at the
exercise price of $0.01, for approximately $10,000.
During
August and September 2006, the Company issued warrants to purchase 61,500
shares of the Company’s common stock at an exercise price per share of $1.00 to
the placement agent that sold 41 units under the Private Placement. The fair
value of these warrants was estimated using the Black-Scholes pricing model
with
the following weighted average assumptions: a risk-free interest rate of 4.9%,
an expected life of three years, an expected volatility factor or 103.3% and
a
dividend yield of 0.0%. The value assigned to these warrants under the
Black-Scholes estimate is approximately $70,000.
During
March 2007, the Company issued warrants to purchase 79,976 shares of the
Company’s common stock at exercise prices ranging from $1.97 - $2.75 per share
in connection with the March 2007 Private Placement. The fair value of
these warrants was estimated using the Black-Scholes pricing model with the
following weighted average assumptions: a risk-free interest rate of 4.5%,
an
expected life of three years, an expected volatility factor or 103.3% and a
dividend yield of 0.0%. The value assigned to these warrants under the
Black-Scholes estimate is approximately $122,000. In connection with the
$4.1 million raised under the March 2007 Private Placement and the
issuance of 2,062,304 shares of common stock to the investors, the Company
also
issued to the investors in the March 2007 Private Placement warrants to
purchase 412,460 shares of the Company’s common stock, with exercise prices
ranging from $2.75 - 3.00 per share. Using the Black-Scholes pricing model,
the
relative fair value of the warrants issued to the investors under the
March 2007 Private Placement was approximately $779,000. The total relative
fair value of the common stock and the warrants issued to investors under the
March 2007 Private Placement was approximately
$4.7 million.
During
June 2007, the Company issued warrants to purchase 385,964 shares of the
Company’s common stock at exercise prices ranging from $2.75 - $3.95 per share
in connection with the June 2007 Private Placement. The fair value of these
warrants was estimated using the Black-Scholes pricing model with the following
weighted average assumptions: a risk-free interest rate of 4.9%, an expected
life of three years, an expected volatility factor of 96.9% and a dividend
yield
of 0.0%. The value assigned to these warrants under the Black-Scholes estimate
is approximately $880,000. In connection with the $12.6 million raised
under the June 2007 Private Placement and the issuance of 4,567,270 shares
of common stock to the investors, the Company also issued to the investors
in
the June 2007 Private Placement warrants to purchase 913,455 shares of the
Company’s common stock, with an exercise price of $3.95 per share. Using the
Black-Scholes pricing model, the relative fair value of the warrants issued
to
the investors under the June 2007 Private Placement was approximately $2.4
million. The total relative fair value of the common stock and the warrants
issued to investors under the June 2007 Private Placement was approximately
$14.6 million.
During
November 2007, the Company issued warrants to purchase 280,929 shares of
the Company’s common stock at an exercise price of $10.08 per share in
connection with the November 2007 Private Placement. The fair value of
these warrants was estimated using the Black-Scholes pricing model with the
following weighted average assumptions: risk-free interest rates ranging from
3.7% to 4.0%, expected lives ranging from three to five years, an expected
volatility factor of 96.9% and a dividend yield of 0.0%. The value assigned
to
these warrants under the Black-Scholes estimate is approximately $1.4 million.
In connection with the $26.1 million raised under the November 2007
Private Placement and the issuance of 3,728,572 shares of common stock to the
investors, the Company also issued to the investors in the November 2007
Private Placement warrants to purchase 745,716 shares of the Company’s common
stock, with an exercise price of $10.08 per share. Using the Black-Scholes
pricing model, the relative fair value of the warrants issued to the investors
under the November 2007 Private Placement was approximately $5.0 million.
The total relative fair value of the common stock and the warrants issued to
investors under the November 2007 Private Placement was approximately
$30.2 million.
During
the years ended December 31, 2007 and 2006, warrants to purchase 641,967 and
1,000,000 shares of the Company’s common stock were exercised, respectively. As
of December 31, 2007, warrants to purchase 2,238,033 shares of the Company’s
common stock were outstanding and exercisable. As
of
December 31, 2006, warrants to purchase 61,500 shares of the Company’s common
stock were outstanding and exercisable.
15.
Income Taxes
As
the
Company was a Subchapter S corporation until June 2006, any taxable income
or
loss of the S corporation through June 2006 was included within the sole
stockholder’s income for federal and state income tax purposes. During the years
ended December 31, 2007 and 2006, respectively, there was no income tax expense
or benefit for federal and state income taxes in the accompanying consolidated
statements of operations due to the Company’s net loss and a valuation allowance
on the resulting deferred tax asset.
42
The
actual tax expense differs from the “expected” tax expense for the years ended
December 31, 2007 and 2006 (computed by applying the U.S. Federal Corporate
tax
rate of 34% to income before taxes) as follows:
|
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Tax
at Federal statutory rate
|
$
|
(3,755,905
|
)
|
$
|
(553,376
|
)
|
|
|
State
taxes, net of Federal benefit
|
(679,239
|
)
|
(86,959
|
)
|
|||
|
Research
credits
|
(44,919
|
)
|
—
|
||||
|
Other
permanent items
|
24,195
|
—
|
|||||
|
Valuation
allowance
|
4,455,868
|
640,335
|
|||||
|
Income
tax provision
|
$
|
—
|
$
|
—
|
|||
The
tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31, 2007 are as
follows:
|
|
December
31,
2007
|
December
31,
2006
|
|||||
|
Deferred
tax assets:
|
|
|
|||||
|
Net
operating loss and credit carryforwards
|
$
|
3,306,347
|
$
|
640,335
|
|||
|
Stock-based
compensation
|
921,085
|
—
|
|||||
|
Accruals
|
727,116
|
—
|
|||||
|
Basis
difference for fixed assets and intangibles
|
141,655
|
—
|
|||||
|
Total
gross deferred tax assets
|
5,096,203
|
640,335 | |||||
|
Valuation
allowance
|
(5,096,203
|
)
|
(640,335
|
)
|
|||
|
Net
deferred tax assets
|
$
|
—
|
$
|
—
|
|||
A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company established
a 100% valuation allowance due to the uncertainty of realizing future tax
benefits from its net operating loss carryforwards and other deferred tax
assets. At December 31, 2007, the Company had useable net operating loss
carryforwards of approximately $8.1 million for federal and state income tax
purposes, available to offset future taxable income expiring in 2017 and 2027,
respectively. At December 31, 2006, the Company had useable net operating loss
carryforwards of approximately $1.6 million for federal and state income tax
purposes, available to offset future taxable income expiring in 2016 and 2026,
respectively. The net change in the valuation allowance during the years ended
December 31, 2007 and 2006 was an increase of approximately $4.5 million due
primarily to current year losses and approximately $640,000,
respectively.
Internal
Revenue Code Section 382 places a limitation (the “Section 382 Limitation”) on
the amount of taxable income which can be offset by net operating loss
carryforwards after a change in control (generally greater than a 50% change
in
ownership) of a loss corporation. Generally, after a control change, a loss
corporation cannot deduct operating loss carryforwards in excess of the Section
382 Limitation. Due to these “change in ownership” provisions, utilization of
the net operating loss and tax credit carryforwards may be subject to an annual
limitation regarding their utilization against taxable income in future periods.
The Company has not concluded its analysis of Section 382 through December
31,
2007, but believes that these provisions will not limit the availability of
losses to offset future income.
43
16.
Related Party Transactions
The
Chief
Executive Officer of the Company is a director of AWI and is currently a
custodian for AWI. The Company previously issued a warrant to purchase 1,000,000
shares of the Company’s common stock at an exercise price per share of $0.01 in
exchange for the purchase of assets from AWI. The Company did not enter into
any
transactions with AWI during 2007.
At
December 31, 2006, the Company had an amount due from Andalay Solar, Inc.
(“Andalay Solar”) for expenses of approximately $22,000 paid by the Company on
behalf of Andalay Solar recorded as “Due from related party” within the
accompanying consolidated balance sheet. The
Chief
Executive Officer of the Company is a director of Andalay Solar.
Andalay
Solar
became a
wholly-owned subsidiary of the Company during October 2007.
During
September 2006, the Company entered into the Purchase Agreement as described
in
Note 6. After the Purchase Agreement was executed, the Seller transferred
ownership of Solahart All Valley Energy Systems (“Solahart”), a Fresno-based
installer of solar energy systems, solar hot water systems and solar pool
heaters, to a family member and became an employee of the Company. Solahart
no
longer installs solar energy systems, but continues to operate focusing on
solar
water heating installations used in swimming pool and residential water heating.
From time to time, the Company utilizes subcontractor labor provided by
Solahart. The Company paid approximately $22,000
& $159,000
to
Solahart relating primarily to subcontracted installers during the years ended
December 31, 2007 and 2006, respectively.
17.
Commitments and Contingencies
Non-Cancelable
Operating Leases
The
Company’s operating lease for its Los Gatos, California corporate office
facility expires during November 2009. Total rent expense amounted to
approximately $528,000 and $87,000 for the years ended December 31, 2007 and
2006, respectively. The Company also has operating leases relating to its Fresno
(Clovis), Orange County (Lake Forest), Bakersfield, Manteca, Santa Rosa, Palm
Springs, and San Diego, California offices. The Company rents office and
warehouse space in New Jersey on a month-to-month basis and also rents office
and warehouse space in Thousand Oaks (Westlake Village), California on a
month-to-month basis.
Future
minimum lease payments on operating leases at December 31, 2007 are as
follows:
|
2008
|
$
|
773,011
|
||
|
2009
|
690,546
|
|||
|
2010
|
263,955
|
|||
|
2011
|
143,494
|
|||
|
2012
|
77,050
|
|||
|
Thereafter
|
—
|
|||
|
Total
minimum lease payments
|
$
|
1,948,056
|
Litigation
The
Company is involved in certain legal proceedings arising in the ordinary course
of business. In the opinion of management, the outcome of such proceedings
will
not materially affect the Company’s financial position, results of operations or
cash flows.
Employment
Agreement
The
Company has employment agreements with three employees. One employment agreement
provides for an annual base salary of $120,000, expires December 31, 2008,
and includes automatic one-year renewals unless written notice is given within
30 days of the end of the term by either party. A second employment
agreement, which provides for an annual base salary of $120,000, expires June
1,
2009. A third employment agreement, which provides for an annual based salary
of
$120,000, expires October 1, 2009.
44
18.
Significant Concentrations of Business and Credit Risk
Financial
instruments that potentially subject the Company to credit risk are comprised
of
cash and cash equivalents, which are maintained at high quality financial
institutions. At December 31, 2007 and 2006, there was approximately $21.5
million and approximately $1.0 million, respectively, in excess of the Federal
Deposit Insurance Corporation limit of $100,000.
The
Company maintains reserves for potential credit losses and such losses, in
the
aggregate, have generally not exceeded management’s estimates. The Company has
three vendors that accounted for approximately 71.9% of and 79.6%, respectively,
of materials purchases during the years ended December 31, 2007 and 2006. At
December 31, 2007, accounts payable included amounts owed to the 2007 top three
vendors of approximately $5.1 million. At December 31, 2006, accounts payable
included amounts owed to the 2006 top three vendors of approximately $1.3
million.
19.
Employee Benefit Plan
On
December 14, 2007, the Board of Directors approved that the Company will
establish a 401(k) profit sharing plan (the “401(k) Plan”) effective January 1,
2008. Employees may begin deferring a portion of their compensation into the
401(k) Plan commencing on January 1, 2008 and the Company is not matching
employee deferrals.
20.
Subsequent Events
During
January 2008, the Company entered into a Licensing Agreement with Suntech Power
Holdings Co., Ltd. (“Suntech”). The terms of the Licensing Agreement authorize
Suntech to distribute the Company’s Andalay product in Europe, Japan, and
Australia commencing in January 2008.
During
January 2008, the Company’s Board of Directors approved the granting of an
aggregate of 94,275 restricted common stock and an aggregate of 131,871 stock
options to employees and consultants under the Company’s Stock Plan. Pursuant to
the Purchase Agreement (see Note 6), the Company issued 29,481
shares of the Company’s common stock at a value of approximately $236,000. The
$236,000 was treated as compensation expense during the year ended December
31,
2007 and is included within "Additional paid-in capital,” in the accompanying
consolidated balance sheets.
During
March 2008, the Company entered into a letter of intent with Kyocera Solar
Inc.
(“Kyocera”). Under the Kyocera agreement, Kyocera will manufacture Andalay
panels utilizing their high efficiency solar cells and will deliver
approximately 1.6 megawatts of panels to the Company during 2008. Kyocera will
be the Company’s preferred supplier for commercial installations.
45
Item
8. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
There
were no changes in or disagreements with our Accountants during 2007.
Item
8A. Controls
And Procedures.
Reference
is made to the disclosures below under Item 8A(T) Controls and
Procedures.
Item
8A(T). Controls And Procedures.
Disclosure
Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Annual Report (December 31, 2007), as is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended. Our disclosure controls and procedures are intended to ensure that
the information we are required to disclose in the reports that we file or
submit under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and
(ii) accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as the principal executive and
financial officers, respectively, to allow timely decisions regarding required
disclosures.
Based
on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Annual Report,
our
disclosure controls and procedures were effective.
Our
management has concluded that the financial statements included in this
Form 10-KSB present fairly, in all material respects our financial
position, results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles.
It
should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of
the
system will be met. In addition, the design of any control system is based
in
part upon certain assumptions about the likelihood of future
events.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with
generally accepted accounting principles.
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of
the
effectiveness of our internal control over financial reporting based on the
framework established by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as set forth in Internal Control - Integrated
Framework. Based on our evaluation under the framework in Internal Control
-
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2007.
This
annual report does not include an audit or attestation report of our registered
public accounting firm regarding our internal control over financial reporting.
Our management’s report was not subject to audit or attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual
report.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition,
the design of any control system is based in part upon certain assumptions
about
the likelihood of future events. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
46
Evaluation
of Changes in Internal Control over Financial Reporting
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of our internal control over
financial reporting to determine whether any change occurred during the fourth
quarter of 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Based on
that
evaluation, our management concluded that the improvements described below
were
the only such changes during the quarter.
As of
the end of the period covered by this Annual Report, no deficiencies were
identified in our internal controls over financial reporting which constitute
a
“material weakness.”
Remediation
Plan for Previously Identified Material Weaknesses
During
the process of preparing our Annual Report on Form 10-KSB for the year ended
December 31, 2006, our management identified the following material weakness
as
of December 31, 2006. The material weakness was an insufficient number of
personnel having adequate knowledge, experience and training to provide
effective oversight and review over our financial and reporting
process.
Management
initiated the following activities intended to improve our internal control
over
financial reporting during 2007.
|
|
·
|
|
In
September of 2007, we hired a new Chief Financial Officer, Gary Effren.
Additionally, since September of 2006, we expanded our accounting
department with the addition of a purchasing and inventory control
position. A full-time clerical position was added, in addition to
adding a
payroll position and an invoicing position. By December of 2006,
a senior
accountant position was filled. Since May of 2006, we have retained
an
independent consultant trained in accounting and financial reporting
who
is a certified public accountant and who became a full-time employee
during December 2007.
|
|
|
|
||
|
|
·
|
|
We
have developed improved policies and procedures to monitor and track
sales
and installations by product, date of sale and customer. Installation
performance logs, identifying key product and installation type
information, are now maintained and analyzed by management on a monthly
basis.
|
|
|
|
||
|
|
·
|
|
We
have developed improved policies and procedures regarding installation
milestones to monitor when the risk of ownership of our products
and
services is transferred to our customers. Monthly sales and installation
completion documents are reviewed by management to determine when
the risk
of ownership has been transferred to the customer and revenue has
been
appropriately recognized.
|
| Item 8B. |
Other
Information.
|
None
47
PART
III
| Item 9. |
Directors,
Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act.
|
Directors
and Executive Officers
Our
directors and our executive officers are as follows:
|
Name
|
Age
|
Position
|
||
|
Barry
Cinnamon
|
50
|
President,
Chief Executive Officer, Secretary, Treasurer and
Director
|
||
|
James
Curran
|
57
|
Chief
Operating Officer
|
||
|
Gary
Effren
|
52
|
Chief
Financial Officer
|
||
|
Steve
Daniel
|
49
|
Executive
Vice President Sales and Marketing
|
||
|
Edward
Roffman
|
58
|
Director
|
||
|
George
Lauro
|
49
|
Director
|
||
|
Jon
Witkin
|
54
|
Director
|
Each
director holds office until the next annual meeting of stockholders or until
their successors have been duly elected and qualified. Executive officers are
elected annually and serve at the discretion of our board of
directors.
Barry
Cinnamon, Chairman, President, Chief Executive Officer, Secretary, Treasurer
and
Director.
Our
founder, Barry Cinnamon, has served as director since the Company began in
2001.
Mr. Cinnamon is a long-time advocate of solar energy and widely recognized
solar
energy expert. He started his career in solar energy in the late 1970s as a
researcher into new flat plate and concentrating collector designs at the
Massachusetts Institute of Technology (MIT). During the late 1970s and early
1980s, Mr. Cinnamon designed and installed active solar, passive solar and
ground coupled heat pump systems. Mr. Cinnamon’s work in solar energy
computer modeling led him into the software industry, where he served as Chief
Executive Officer of Software Publishing Corporation, and founded Allegro New
Media, a multimedia software publisher, which he led to an IPO in 1995. Mr.
Cinnamon earned a BS Degree in Mechanical Engineering from MIT and a MBA degree
in Marketing from Wharton School of the University of Pennsylvania.
Mr. Cinnamon is a NABCEP-Certified Solar Installer, a licensed California
C-46 Solar Contractor, a member of the board of directors of CALSEIA and SEIA,
and an active member of the Silicon Valley Leadership Group.
James
Curran, Chief Operating Officer. Mr.
Curran joined the Company during May 2007. Mr. Curran most recently founded
Shamrock Partners, LLP, a consulting firm specializing in e-commerce, business
strategy and business planning for financial management and operations. Prior
to
founding Shamrock Partners, Mr. Curran was General Manager of International
Business Management and Operations at Exodus Communications, a provider of
Internet hosting for enterprises. Additionally, he served as the Executive
Vice
President of Information and Product Systems at Visa International. Prior to
joining Visa, Mr. Curran spent over 20 years at IBM Corporate, where he held
various executive positions in the software and personal computer business
groups. Mr. Curran brings over 25 years of operations experience to the Company.
Mr. Curran received a Bachelors degree in Philosophy from Cathedral College
Seminary in New York.
Gary
Effren, Chief Financial Officer. From
1980
to 2006, Mr. Effren held various executive financial positions at Knight Ridder,
Inc., a Fortune 500 media company. Mr.
Effren served as the Vice President/Finance of Knight Ridder since January
2005.
Prior to that, Mr. Effren served as Senior Vice President/Finance and Chief
Financial Officer of Knight Ridder from 2001 to 2004, and as Vice
President/Controller of Knight Ridder from 1995 to 2001. During his tenure
at
Knight Ridder, Mr. Effren’s overall responsibilities included corporate
accounting and financial reporting, strategic business development, tax,
treasury, risk management and investor relations. Prior to joining Knight
Ridder, Mr. Effren worked as an auditor at Peat Marwick Mitchell. Mr. Effren
is
a CPA with 30 years of experience in accounting and finance. Mr. Effren earned
his MBA from the University of Miami and earned his Bachelors degree in Commerce
from Rider College in New Jersey
Steve
Daniel, Executive Vice President Sales and Marketing. Mr.
Daniel joined the Company during January 2007. Mr.
Daniel provides over 25 years experience in high-tech sales and business
development management. Most recently, he was at BEA Systems, Inc. managing
sales in the western U.S. with Global Systems Integrators such as Accenture
and
Deloitte. Mr. Daniel also worked at MarketFirst as Vice President of Western
Sales and as Senior Sales Director at Exodus Communications. Mr. Daniel holds
a
B.S. in Industrial Engineering and Operations Research from the University
of
Massachusetts at Amherst.
48
Ed
Roffman, Director.
Mr.
Roffman has been a director since August 2006. Mr. Roffman served
as
Chief Financial Officer of Red Mile Entertainment, Inc. from January 2005
until April 2006 and at Fluent Entertainment, Inc. from February 2003
to December 2004. Both companies are consumer software developers and
publishers. Mr. Roffman has also been a principal of Creekside, LLC, a
consulting firm which specializes in the software, internet and consumer
products industries. From August 1995 to January 1999,
Mr. Roffman served as Chief Financial Officer and Chief Operating Officer
at Palladium Interactive, Inc., a consumer software company. Mr. Roffman
currently serves on the board and audit committee of Silverstar Holdings
(NASDAQ: SSTR), a publicly traded publisher and developer of interactive
entertainment software. Mr. Roffman is a CPA with over 30 years
of experience in accounting and finance. Mr. Roffman earned his BBA in
accounting from Temple University.
George
Lauro, Director.
Mr.
Lauro has been a director since July 2007. Mr. Lauro has been a senior partner
at Alteon Capital Partners since January 2007, a Silicon Valley firm that
provides direct venture investment and advisory services to private companies
in
the semiconductors, MEMS, nanotech and photonics sectors. From May 2006 to
January 2007, Mr. Lauro was Managing Director at Techfarm Ventures, a Silicon
Valley venture capital firm with approximately $250M under management. He was
also Managing Director at Wasserstein Venture Capital from May 1999 to May
2005
and was one of two partners managing over $300M across two venture funds. Before
joining Wasserstein, Mr. Lauro was Director of Rapid Commercialization at IBM
Headquarters from September 1995 to May 1999. At Motorola (NASDAQ: MOT), he
conceived the world's first consumer handheld Global Positioning Product (Traxar
GPS), invented new classes of RF transponders, and launched Motorola's
businesses in these spaces. He completed a Bachelors degree in Electrical
Engineering from Brown, a Master of Business Administration from Wharton, and
graduate work in Astronautics at MIT. Mr. Lauro currently serves as a Director
on ChipX and Pinyon Technologies.
Jon
Witkin, Director.
Mr.
Witkin has been a director since July 2007. Mr. Witkin is a co-owner of Western
States Glass, the largest independent flat glass distributor in Northern
California, which he co-founded in 1991. Mr. Witkin oversees Western States
Glass's operations, including its fleet of delivery vehicles and remote offices
throughout California. Prior to founding Western States Glass, Mr. Witkin was
a
Partner at Bay Mirror and an Area Sales Manager at ACI Glass Distribution
(“ACI”). He also served in various sales and management roles at the Havlin
Witkin Corporation which was sold to ACI. Mr. Witkin earned a Bachelors of
Science degree in 1976 from the University of Utah.
There
are no family relationships among our directors, nominees for director and
executive officers. The Company encourages but does not require members of
the
Board of Directors to attend the annual meetings of the stockholders.
Committees
of the Board of Directors
The
Board
of Directors held one meeting during 2007 and acted by unanimous written consent
twenty-three times during 2007. The Board of Directors did not hold any meetings
in 2006, instead acting by unanimous written consent sixteen times. In 2006,
the
Board of Directors was comprised of Ed Roffman and Barry Cinnamon. Mr. Roffman
and Mr. Cinnamon were joined by George Lauro and Jon Witkin on July 18, 2007,
increasing the size of the Board from two to four persons.
The
Company has standing Nominating, Audit and Compensation committees of the Board
of Directors. These committees were formed on July 18, 2007. In 2006, the
Company did not have any committees.
The
Nominating Committee.
The
Nominating Committee is comprised of Messrs. Witkin and Lauro.
The
Nominating Committee of the Board of Directors performs the functions typical
of
a nominating committee, including: (i) developing and recommending corporate
governance principles and procedures applicable to the Board of Directors and
the Company’s employees; (ii) recommending committee composition and
assignments; (iii) identifying individuals qualified to become directors; (iv)
recommending director nominees; (v) recommending whether incumbent directors
should be nominated for re-election to the Board of Directors and (vi) reviewing
the adequacy of the Nominating Committee charter. The Nominating Committee
has
established a charter, which is available on the investor relations section
of
our website at www.akeena.com.
The
Audit Committee.
The
Audit Committee is comprised of Messrs. Roffman, Lauro and Witkin. Our Board
has
designated Mr. Roffman our audit committee financial expert as defined in Item
407(d)(5)(ii) of Regulation S-B. The Audit Committee of the Board of Directors
has the authority and responsibility to select, evaluate and, when appropriate,
replace the company’s independent registered public accounting firm. The Audit
Committee monitors the activities of the Company’s external auditors, including
the audit scope, the external audit fees, auditor independence matters and
the
extent to which the independent auditors may be retained to perform advisory
services. The Audit Committee also reviews the results of the external audit
work to assess the adequacy and appropriateness of the Company’s financial and
accounting controls. The Audit Committee reviews changes in accounting standards
that impact the Company’s financial statements and discusses with management
major events, including legal matters and tax audits, which may have significant
financial impact or are the subject of discussions with the independent
auditors. In addition, the Audit Committee oversees the Company’s internal
compliance programs. The Audit Committee has established a charter, which is
available on the investor relations section of our website at www.akeena.com.
49
The
Compensation Committee.
The
Compensation Committee is comprised of Messrs. Lauro, Witkin and Roffman. The
Compensation Committee administers the Company’s stock option plan, including
the review and grant of stock options to officers, directors and other employees
under the Company’s stock option plan. The Compensation Committee also reviews
and approves various other Company compensation policies and matters, and
reviews and approves salaries and other matters relating to compensation of
the
executive officers of the Company. The Compensation Committee has established
a
charter, which is available on the investor relations section of our website
at
www.akeena.com.
The
Compensation Committee meets in person, telephonically or otherwise at least
twice during each fiscal year for, among other things, the consideration and
determination of executive and director compensation. The Compensation Committee
may also hold special meetings or act by unanimous written consent as required.
The Compensation Committee may request any officer or employee of the Company
or
the Company’s outside counsel to attend a meeting of the Compensation Committee
or to meet with any members of, or consultants to, the Compensation Committee;
provided, however, that the chief executive officer may not be present during
any discussions or deliberations of the Compensation Committee regarding the
chief executive officer’s compensation.
The
chairperson of the Compensation Committee presides at each meeting of the
Compensation Committee and, in consultation with the other members of the
Compensation Committee, shall set the frequency and length of each meeting
and
the agenda of items to be addressed at each meeting. The chairperson will ensure
that the agenda for each meeting is circulated in advance of the meeting. The
Compensation Committee shall keep minutes of each of its meetings and conference
calls and report its actions and any recommendations to the Board after each
of
the Compensation Committee’s meeting.
The
Compensation Committee meetings are governed by the quorum and other procedures
generally applicable to meetings of the Board under the Company’s bylaws, unless
otherwise stated in the bylaws or by resolution of the Board or the Compensation
Committee. The Compensation Committee shall have the authority to delegate
any
of its responsibilities to subcommittees as the Compensation Committee may
deem
appropriate.
The
Compensation Committee reviews and approves on an annual basis the corporate
goals and objectives with respect to the compensation for the Company’s chief
executive officer and other executive officers. The Committee shall evaluate
at
least once a year the chief executive officer and other executive officers’
performance in light of these established goals and objectives and based upon
these evaluations shall recommend to the full Board the chief executive officer
and other executive officers’ annual compensation, including salary, bonus,
incentive and equity compensation. In reviewing and recommending the
compensation of the chief executive officer and other executive officers, the
Committee may consider the compensation awarded to officers of similarly
situated companies, the Company’s performance, the individuals’ performance,
compensation given to the Company’s officers in past years or any other fact the
Committee deems appropriate. The chief executive officer shall not be permitted
to participate in any discussions or processes concerning his compensation,
but
may participate in a non-voting capacity in discussions or processes concerning
the compensation of other executive officers.
The
Compensation Committee develops and periodically assesses the Compensation
Committee’s compensation policies applicable to the Company’s executive officers
and directors, including the relationship of corporate performance to executive
compensation. The Compensation Committee will review and recommend to the Board
appropriate director compensation programs for service as directors, committee
chairs and committee members.
The
Board of Advisors
The
Company has a Board of Advisors which provides general business advice and
sales
and marketing strategy advisory services. The Company’s Board of Advisors is
comprised of the following members.
Steve
Westly.
Mr.
Westly is founder of The Westly Group, which helps entrepreneurs build great
companies in clean technology. Previously he served as controller and chief
fiscal officer for the State of California. As controller, he chaired the State
Lands Commission and served on 63 other boards and commissions, including
CalPERS and CalSTRS, the nation’s two largest public pension funds. He also led
an effort to commit more than $1 billion to clean technology investments. Westly
began his career in Washington,
D.C., where he worked first on Capitol Hill and later in the Office of
Conservation and Solar at the U.S. Department of Energy. Westly then returned
to
California to become special assistant to the President of the California Public
Utilities Commission. While there, he published two books on alternative energy
and the utilities.
50
Joe
Abrams.
Mr.
Abrams specializes in working with small technology companies to build
shareholder value in the public markets. As a direct result of his efforts,
he
has completed merger and acquisition transactions in excess of $1 billion and
small cap market equity raises in excess of $200 million. Abrams co-founded
Intermix in 1998, the predecessor company to MySpace, which was sold to News
Corp. in 2005 for $580 million. In 1983, Abrams co-founded The Software
Toolworks, Inc., a publicly held developer, publisher, and distributor of
educational and entertainment software, which was sold to Pearson, Plc. in
1994
for $462 million.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires the Company’s executive officers, directors and persons who own more
than 10% of the Company’s outstanding common stock to file initial reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished
to the Company, none of the Company’s directors, officers or beneficial owners
of more than 10% of its common stock failed to file on a timely basis any
reports required by Section 16(a) of the Exchange Act during the year ended
December 31, 2007, except that Barry Cinnamon, Steve Daniel, John Witkin, George
Lauro, Gary Effren, Jim Curran and Ed Roffman each filed one late Form 4
describing a change in ownership of our securities and George Lauro, Gary Effren
and John Witkin each filed one late Form 3 describing an initial statement
of
beneficial ownership of our securities.
Code
of Ethics and Corporate Governance
The
Company adopted a Code of Business Conduct and Ethics (the “Code”) on July 18,
2007 that applies to all of the Company’s directors and employees, including its
chief executive officer and chief financial officer. The purpose of the Code
is
to, among other things, focus the Company’s directors, officers and employees on
areas of ethical risk, provide guidance to help them recognize and deal with
ethical issues, provide mechanisms to report unethical or unlawful conduct
and
to help enhance and formalize the Company’s culture of integrity, respect and
accountability. The full text of the Code is posted on the investor relations
section of our website at www.akeena.com. A printed copy of the Code may also
be
obtained free of charge by writing to Akeena Solar, Inc., 16005 Los Gatos Blvd.,
Los Gatos, CA 95032, Attention: In-House Counsel. The Company intends to
disclose any amendment to or waiver from, a provision of the Code by posting
such information on its web site.
Item
10. Executive Compensation
The
following Summary Compensation Table sets forth certain information about
compensation paid, earned or accrued for services by our Chief Executive
Officers (“Named Executive Officers”).
Summary
Compensation Table
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Restricted
Stock
Awards(1)
|
|
Stock
Option
Awards(1)
|
|
All
Other
Compensation
|
|
Total
|
||||||||
|
Barry
Cinnamon Chief Executive Officer, President, Treasurer, Secretary
and
Director
|
2007
|
$
|
203,750
|
$
|
—
|
$
|
—
|
$
|
89,756
|
$
|
—
|
|
$
|
293,506
|
(2) | |||||||
|
2006
|
$
|
132,392
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
11,000
|
(3)
|
$
|
143,392
|
|||||||||
|
James
Curran Chief Operating Officer
|
2007
|
$
|
130,827
|
$
|
—
|
$
|
16,284
|
$
|
116,545
|
$
|
—
|
$
|
263,656
|
(4)
|
||||||||
|
Gary
Effren Chief Financial Officer
|
2007
|
$
|
68,750
|
$
|
—
|
$
|
—
|
$
|
112,792
|
$
|
—
|
$
|
181,542
|
(5)
|
||||||||
|
Steve
Daniel Executive Vice President of Sales and Marketing
|
2007
|
$
|
133,371
|
$
|
—
|
$
|
19,682
|
$
|
80,580
|
$
|
143,980
|
(6)
|
$
|
377,613
|
(7)
|
|||||||
(1) Amount
expensed for the year ended December 31, 2007 is based upon the
aggregate grant date fair value calculated in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 123R, Share Based Payments. The
Company’s policy and assumptions made in the valuation of share based payments
are contained in Note 13 to the Company’s December 31, 2007 financial
statements. Stock options awarded vest over a three-year period from the
date of grant and restricted stock awarded vests over a four-year period from
the date of grant.
(2) Mr.
Cinnamon was not compensated for his service on the Board of Directors of
the
Company.
(3)
Represents distributions on Mr. Cinnamon’s common stock paid by Akeena Solar,
Inc. prior to the Merger.
(4) Mr.
Curran joined the Company during May 2007.
(5) Mr.
Effren joined the Company during September 2007.
(6) All
Other
Compensation for Mr. Daniel includes sales commissions paid during
2007.
(7)
Mr.
Daniel joined the Company during January 2007.
51
Outstanding
Equity Awards at Fiscal Year-End
Restricted
Stock Awards
Restricted
stock awards pursuant to the Stock
Plan held
by
the Named Executive Officers as of December 31, 2007 are set forth in the table
below.
|
Name
and Principal Position
|
Year
Granted
|
|
Number
of Restricted Stock Awards Not Vested
|
|
Aggregate
Market Value of Restricted Stock Awards Not Vested
|
|||||
|
James
Curran Chief Operating Officer
|
2007
|
35,000
|
(1)
|
$
|
278,600
|
|||||
|
Steve
Daniel Executive Vice President of Sales and Marketing
|
2007
|
35,000
|
(2)
|
$
|
278,600
|
|||||
(1) On
May 29, 2007, Mr. Curran was granted 35,000 shares of restricted stock, which
restriction lapses as to 8,750 shares on each anniversary of the date of grant
commencing on May 29, 2008. Mr. Curran is entitled to vote such restricted
shares, subject to forfeiture in accordance with the terms of the
grant.
(2) On
April 27, 2007, Mr. Daniel was granted 35,000 shares of restricted stock,
which restriction lapses as to 6,250 shares on each one-year anniversary
beginning on January 30, 2008 and which restriction lapses as to 2,500 shares
on
each anniversary of the date of grant commencing on April 27, 2008.
Mr. Daniel is entitled to vote such restricted shares, subject to
forfeiture in accordance with the terms of the grant.
Option
Grants
Options
granted pursuant to the Stock Plan to our Named Executive Officers as of
December 31, 2007 are set forth in the table below.
|
Name
and Principal Position
|
Date
Granted
|
Number
of Vested, Unexercised Options
|
Number
of Options
Not
Vested
|
Option
Exercise Price
|
Option
Expiration
Date
|
|||||||||||
|
Barry
Cinnamon - Chief Executive Officer, President, Treasurer, Secretary
and
Director
|
September
7, 2007
|
—
|
313,000
|
(1)
|
$4.94
|
September
7, 2012
|
||||||||||
|
James
Curran - Chief Operating Officer
|
September
7, 2007
|
—
|
406,000
|
(1) |
$4.94
|
September
7, 2012
|
||||||||||
|
Gary
Effren - Chief Financial Officer
|
September
21, 2007
|
—
|
350,000
|
(2) |
$6.30
|
September
21, 2012
|
||||||||||
|
Steve
Daniel - Executive Vice President of Sales and Marketing
|
September
7, 2007
|
—
|
281,000
|
(1) |
$4.94
|
September
7, 2012
|
||||||||||
(1) Options
were granted on September 7, 2007 and vest over a three-year vesting period
beginning on each one-year anniversary of the date of grant commencing on
September 7, 2008.
(2)
Options were granted on September 21, 2007 and vest over a three-year vesting
period beginning on each one-year anniversary of the date of grant commencing
on
September 21, 2008.
52
Employment
Agreements
We
currently do not have employment agreements with any of our executive officers,
other than at-will employment offer letters.
Stock
Incentive Plan
On
August 8, 2006, our board of directors and stockholders adopted the 2006
Stock Incentive Plan (the “Stock Plan”). On December 20, 2006, we amended
the Stock Plan to increase the number of shares of common stock reserved for
issuance under the Plan as restricted stock or options to Akeena Solar’s
employees, directors and consultants, from 450,000 shares to 1,000,000 shares.
On August 24, 2007 our shareholders approved the Second Modification to the
Plan
to increase the number of common shares reserved for issuance under the Plan
from 1,000,000 to 4,000,000. The purpose of the Stock Plan is to provide an
incentive to retain and attract as directors, officers, consultants, advisors
and employees of our company, persons of training, experience and ability,
to
encourage the sense of proprietorship and to stimulate the active interest
of
such persons into our development and financial success. Under the Stock Plan,
we are authorized to issue incentive stock options intended to qualify under
Section 422 of the Code, non-qualified stock options and restricted stock.
The Stock Plan is administered by our board of directors. As of December 31,
2007, there have been 2,065,000 grants of stock options and an aggregate of
1,011,150 shares of restricted stock have been granted under the Stock Plan,
of
which restrictions have lapsed on 381,984 shares.
Director
Compensation
In
addition to reimbursement for reasonable expenses incurred in the performance
of
their duties as directors, including participation on the Board of Directors
and
its committees, as of July 18, 2007, the Company now compensates its
non-employee directors as follows:
|
|
·
|
10,000
shares of restricted stock under the Company’s Stock Plan, which
restriction lapses as to approximately 833 shares monthly for twelve
months commencing on the date of grant. Directors are entitled to
vote
such restricted stock, subject to forfeiture, in accordance with
the terms
of the grant; and
|
|
|
·
|
travel
and lodging expenses for any activities related to the performance
of
their duties on the Board of
Directors.
|
Prior
to
July 18, 2007, members of the Board of Directors included only Barry Cinnamon
and Ed Roffman. Mr. Cinnamon received no remuneration for his services as a
director. On August 29, 2006, Mr. Roffman was granted 20,000 shares of
restricted stock under our Stock Plan, which restrictions lapse as to 5,000
shares on each of the first four anniversaries of the date of grant, commencing
on August 30, 2007, subject to Mr. Roffman serving on our board of
directors on each such anniversary date. This grant of 20,000 shares received
by
Mr. Roffman includes the 10,000 shares of restricted stock the Company now
awards to non-employee directors. On April 2, 2007, Mr. Roffman received 48,000
shares of the Company’s restricted common stock under our Stock Plan, which
restrictions lapse as to 4,000 shares monthly for twelve months commencing
on
the date of grant, subject to Mr. Roffman serving as the Board’s Audit Committee
Chairman. Mr. Roffman is entitled to vote such restricted shares, subject
to forfeiture in accordance with the terms of the grant.
The
following table sets forth certain information concerning compensation earned
by
the Directors who were not Named Executive Officers during the year ended
December 31, 2007.
|
Name
|
Fees
Earned or Paid in Cash
|
|
Restricted
Stock
Awarded
(1)
|
|
Option
Awards
|
|
Total
($)
|
||||||
|
Ed
Roffman
|
$
|
—
|
$
|
142,417
|
(2)
|
$
|
—
|
$
|
142,417
|
||||
|
George
Lauro
|
$
|
—
|
$
|
21,263
|
$
|
—
|
$
|
21,263
|
|||||
|
Jon
Witkin
|
$
|
—
|
$
|
21,263
|
$
|
—
|
$
|
21,263
|
|||||
(1) Amount
expensed for the year ended December 31, 2007, based upon the aggregate
grant date fair value calculated in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 123R, Share Based Payments. The Company’s
policy and assumptions made in the valuation of share based payments are
contained in Note 13 to the Company’s December 31, 2007 financial statements.
53
(2)
On
August 30, 2006, Mr. Roffman was granted 20,000 shares of restricted stock,
which restriction lapses as to 5,000 shares, on each anniversary of the date
of
grant commencing on August 30, 2007, subject to Mr. Roffman serving on the
Company’s board of directors on each such anniversary. At December 31, 2006,
20,000 shares of restricted stock were held by Mr. Roffman. On April 2, 2007,
Mr. Roffman received 48,000 shares of the Company’s restricted common stock
under our Stock Plan, which restrictions lapse as to 4,000 shares monthly
for
twelve months commencing on the date of grant, subject to Mr. Roffman serving
as
the Board’s Audit Committee Chairman. Mr. Roffman is entitled to vote such
restricted shares, subject to forfeiture in accordance with the terms of
the
grant.
(3)
On
July 18, 2007, Mr. Lauro and Mr. Witkin each received 10,000 shares of the
Company’s restricted common stock under our Stock Plan, which restrictions lapse
as to approximately 833 shares monthly for twelve months commencing on the
date
of grant, subject to serving on the Company’s Board of Directors. Mr. Lauro and
Mr. Witkin are entitled to vote such restricted shares, subject to forfeiture
in
accordance with the terms of the grant.
Item
11. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters and Director Independence.
Equity
Compensation Plan Information as of December 31, 2007
|
Number
of securities to be issued upon exercise of outstanding
options
|
Weighted-average
exercise price of outstanding options
|
Number
of securities remaining available for issuance under equity compensation
plans (excluding securities reflected in column (a) and excluding
restricted stock awards)
|
||||||||
|
(a)
|
(b)
|
(c)
|
||||||||
|
Equity
compensation plans:
|
||||||||||
|
2006
Stock Incentive Plan and
|
2,065,000
|
$
|
5.31
|
923,850
|
||||||
| 2001 Stock Option Plan |
—
|
—
|
4,000,000
|
|||||||
54
Beneficial
Ownership Table
The
following table sets forth information concerning ownership of the Company's
Shares, as of March 10, 2008, by (i) each person known by the Company to be
the
beneficial owner of more than five percent of the outstanding Shares, (ii)
each
director (iii) each of the Named Executive Officers listed in the Summary
Compensation Table included in our Annual Report on Form 10-KSB and (iv) all
directors and executive officers of the Company as a group. Unless otherwise
indicated, the Company believes that each stockholder has sole voting power
and
sole dispositive power with respect to the Shares beneficially owned by
him.
|
Name
of Beneficial Owner(1)
|
Amount
and
Nature
of
Beneficial
Owner
(2)
|
Percent
of
Class
(2)
|
|||||
|
Barry
Cinnamon
|
7,600,000
|
26.8
|
%
|
||||
|
Ed
Roffman
|
68,000
|
(3)
|
*
|
%
|
|||
|
George
Lauro
|
10,000
|
*
|
%
|
||||
|
Jon
Witkin
|
10,000
|
*
|
%
|
||||
|
James
Curran
|
35,000
|
*
|
%
|
||||
|
Steve
Daniel
|
35,000
|
*
|
%
|
||||
|
All
directors and executive officers as
a group (6 persons)
|
7,758,000
|
27.3
|
%
|
||||
|
5%
holders:
|
|||||||
|
Angeleno
Group, LLC (4) 2029
Century Park East, Suite 2980, Los Angeles, California
90067
|
1,527,272
|
(4)
|
5.4
|
%
|
|||
|
9,285,272
|
32.7
|
%
|
|||||
|
*
|
Less
than 1%
|
|
(1)
|
Unless
otherwise indicated the address for each of the stockholders is c/o
Akeena
Solar, Inc. 16005 Los Gatos Blvd., Los Gatos, CA
95032.
|
|
(2)
|
The
applicable percentage of ownership for each beneficial owner is based
on
28,394,935
shares of Common Stock outstanding as of March 10, 2008. In calculating
the number of Shares beneficially owned by a stockholder and the
percentage of ownership of that stockholder, shares of Common Stock
issuable upon the exercise of options, warrants or the conversion
of other
securities held by that stockholder that are exercisable within 60
days,
are deemed outstanding for these Shares, however, are not deemed
outstanding for computing the percentage ownership of any other
stockholder.
|
|
(3)
|
Includes 20,000
shares of restricted common stock granted to Mr. Roffman on
August 30, 2006, under Akeena’s Stock Plan. Restrictions on the
20,000 shares lapse as to 5,000 shares on each anniversary of the
date of grant, commencing August 30, 2007. Also includes 48,000
shares of restricted common stock granted to Mr. Roffman on April
2, 2007,
under the Akeena Stock Plan. Restrictions on the 48,000 shares lapse
as to
4,000 shares monthly for twelve months commencing on the date of
grant.
Mr. Roffman is entitled to vote such restricted shares, subject
to forfeiture in accordance with the terms of the
grant.
|
55
|
(4)
|
Includes
currently exercisable warrants to purchase 254,545 shares of common
stock.
Voting and dispositive power is shared by Angeleno Group LLC, Angeleno
Group Management II, LLC and Angeleno Investors II, LP. Yaniv Tepper,
a
managing member, has voting and dispositive power over these securities.
Mr. Tepper disclaims beneficial ownership of such
securities.
|
Item
12. Certain
Relationships and Related Transactions, and Director Independence.
On
March
30, 2001, Akeena, Inc. (the former name of Akeena Solar, Inc.) purchased certain
infrastructure and harvester technology from Akeena Wireless, Inc., a Delaware
corporation (“AWI”), of which Barry Cinnamon, our President and Chief Executive
Officer, is a director, principal stockholder and chief executive officer,
in
exchange for warrants to purchase an aggregate of 1,000,000 shares of Akeena,
Inc.’s common stock at an exercise price of $0.01 per share. On July 18, 2006,
AWI sold warrants to purchase 750,000 shares of Akeena, Inc.’s common stock to
The Cinnamon 2006 Irrevocable Children’s Trust, and warrants to purchase 90,000
shares of Akeena, Inc.’s common stock to Mr. Cinnamon, for an aggregate price of
$30,000. On August 11, 2006, we assumed the obligations of Akeena Solar under
the warrants in the Merger, so that each warrant was converted into a warrant
to
purchase one share of our common stock. On November 30, 2006, Mr. Cinnamon
gifted his warrants to purchase 90,000 shares to various adult family members,
all of which were exercised by December 31, 2006. The Company did not enter
into
any transactions with AWI during 2007.
The
Board
of Directors is presently comprised of Barry Cinnamon, Ed Roffman, George Lauro
and Jon Witkin. Of such directors, Ed Roffman, George Lauro and Jon Witkin
are
each an “independent director” as such term is defined in Marketplace Rule
4200(a)(15) of the listing standards of the NASDAQ Stock Market. The Company
was
not a party to any transaction, relationship or other arrangement with any
of
its “independent directors” that was considered by our Board of Directors under
Marketplace Rule 4200(a)(15) in the determination of such director’s
independence.
Each
member of the Nominating, Compensation and Audit committees of the Board of
Directors meets the independence requirements applicable to those committees
prescribed by the NASDAQ Stock Market and, for purposes of the Audit Committee,
Section 10A of The Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
56
Item
13. Exhibits.
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Agreement
of Merger and Plan of Reorganization, dated August 11, 2006, by and
among
Fairview Energy Corporation, Inc., ASI Acquisition Sub, Inc. and
Akeena
Solar, Inc. (incorporated herein by reference to Exhibit 2.1 to our
Current Report on Form 8-K, dated August 11, 2006 (the “August 2006
8-K”))
|
|
|
3.1
|
Certificate
of Incorporation (incorporated herein by reference to Exhibit 3.1
to our
Current Report on Form 8-K, dated August 3, 2006)
|
|
|
3.2
|
By-laws
(incorporated herein by reference to Exhibit 3.2 to our Current Report
on
Form 8-K, dated August 3, 2006)
|
|
|
3.3
|
Certificate
of Amendment to the Certificate of Incorporation (incorporated herein
by
reference to Exhibit 3.3 to the August 2006 8-K)
|
|
|
4.1
|
Form
of Restricted Stock Agreement (incorporated herein by reference to
Exhibit
4.1 to our Annual Report on Form 10-KSB filed with the SEC on March
29,
2007)
|
|
|
4.2
|
Form
of Class B Common Stock Purchase Warrant, dated March 8, 2007
(incorporated herein by reference to Exhibit 10.3 to our Current
Report on
Form 8-K, dated March 8, 2007 (“March 8, 2007 8-K”))
|
|
|
4.3
|
Form
of Class A Common Stock Purchase Warrant, dated March 8, 2007
(incorporated herein by reference to Exhibit 10.4 to the March 8,
2007
8-K)
|
|
|
4.4
|
Registration
Rights Agreement (incorporated herein by reference to Exhibit 10.2
to the
March 8, 2007 8-K)
|
|
|
4.5
|
Form
of Class C Common Stock Purchase Warrant, dated May 25, 2007 (incorporated
herein by reference to Exhibit 10.3 to our
Current Report on Form 8-K, dated June 4, 2007)
|
|
|
4.6
|
Form
of Warrant to Purchase Common Stock, dated November 2007 (incorporated
herein by reference to Exhibit 4.1 to our
Current Report on Form 8-K, dated November 1, 2007)
|
|
|
10.1
|
Akeena
Solar, Inc. 2006 Stock Incentive Plan (incorporated herein by reference
to
Exhibit 10.1 to the August 2006 8-K)
|
|
|
10.2
|
First
Amendment to the Akeena Solar, Inc. 2006 Incentive Stock Plan
(incorporated herein by reference to Exhibit 10.1 to our Current
Report on
Form 8-K, dated December 20, 2006)
|
|
|
10.3
|
Form
of Subscription Agreement (incorporated herein by reference to Exhibit
10.2 to the August 2006 8-K)
|
|
|
10.4
|
Form
of Registration Rights Agreement (incorporated herein by reference
to
Exhibit 10.3 to the August 2006 8-K)
|
|
|
10.5
|
Form
of Lockup Agreement (incorporated herein by reference to Exhibit
10.4 to
the August 2006 8-K)
|
|
|
10.6
|
Loan
and Security Agreement, dated January 29, 2007, between the Company
and
Comerica Bank (incorporated herein by reference to Exhibit 10.1 to
our
Current Report on Form 8-K, dated January 29, 2007)
|
|
|
10.7
|
First
Modification to Loan and Security Agreement, dated June 26, 2007,
between
the Company and Comerica Bank (incorporated herein by reference to
Exhibit
10.1 to our Current Report on Form 8-K, dated June 26,
2007.
|
|
|
10.8
|
Second
Modification to Loan and Security Agreement, dated January 11, 2008
and
effective as of December 31, 2007, between the Company and Comerica
Bank
(incorporated herein by reference to Exhibit 10.1 to our Current
Report on
From 8-K, dated January 11, 2008)
|
|
|
10.9
|
Restricted
Stock Agreement, dated December 29, 2006, between the Company and
Edward
Roffman (incorporated herein by reference to Exhibit 10.8 to our
Annual
Report on Form 10-KSB filed with the SEC on March 29,
2007)
|
|
|
10.10
|
Form
of Director and Officer Indemnification Agreement (incorporated herein
by
reference to Exhibit 10.9 to the August 2006 8-K)
|
|
|
10.11*
|
Second
Amendment to the Akeena Solar, Inc. 2006 Incentive Stock
Plan
|
|
|
10.12
|
Standard
Industrial/Commercial Single-Tenant Lease - Net, dated September
30, 2002,
between Mattiuz Children’s Trust and the Company, as amended by First
Addendum to Standard Industrial/Commercial Single-Tenant Lease — Net,
dated April 26, 2004, Second Addendum Standard Industrial/Commercial
Single-Tenant Lease — Net, dated April 30, 2005 and Third Addendum to
Standard Industrial/Commercial Single-Tenant Lease, dated July 7,
2006
(incorporated herein by reference to Exhibit 10.11 to our Current
Report
on Form 8-K/A, dated August 11, 2006 (the “August 2006
8-K/A”))
|
|
|
10.13
|
Securities
Purchase Agreement, dated March 8, 2007, between the Company and
the
purchasers signatory thereto (incorporated herein by reference to
Exhibit
10.1 to the March 8, 2007 8-K)
|
57
|
10.14
|
Securities
Purchase Agreement, dated May 25, 2007, between the Company and the
purchasers signatory thereto (incorporated herein by reference to
Exhibit
10.1 to our Current Report on Form 8-K, dated June 4,
2007)
|
|
|
10.15
|
Registration
Rights Agreement (incorporated herein by reference to Exhibit 10.2
to our
Current Report of Form 8-K, dated June 4, 2007)
|
|
|
10.16
|
Securities
Purchase Agreement, dated November 1, 2007, between the Company and
the investors signatory thereto (incorporated herein by reference
to
Exhibit 10.1 to our
Current Report on Form 8-K, dated November 1, 2007)
|
|
|
21.1*
|
List
of Subsidiaries
|
|
|
23.1*
|
Consent of Independent Registered Accounting Firm Burr, Pilger & Mayer LLP | |
|
31.1*
|
Section
302 Certification of Principal Executive Officer
|
|
|
31.2*
|
Section
302 Certification of Principal Financial Officer
|
|
|
32.1*
|
Section
906 Certification of Principal Executive Officer
|
|
|
32.2*
|
Section
906 Certification of Principal Financial
Officer
|
* filed
herewith
Item
14. Principal
Accountant Fees and Services.
Burr,
Pilger and Mayer LLP (“BPM”) has served as our independent registered public
accounting firm since December 19, 2006. The following table sets forth the
aggregate fees billed to us for the fiscal years ended December 31, 2007 and
2006 by BPM.
|
|
2007
|
2006
|
|||||
|
Audit
Fees(1)
|
$
|
219,145
|
(1)
|
$
|
34,000
|
(2)
|
|
|
Tax
Fees
|
— | — | |||||
(1) Comprised
of the audit of our annual financial statements, reviews of our quarterly
financial statements and reviews of our various registration statements
throughout 2007.
(2)
Comprised of the audit of our annual financial statements for 2006.
The
Audit
Committee reviews and pre-approves all proposed audit and non-audit engagements
and related fees of BPM. In addition, any audit and non-audit fees for newly
proposed professional services to be provided by BPM that arise during the
year,
or changes to previously approved BPM work, are reviewed and approved in advance
of commencement of such services by the Audit Committee at their regularly
scheduled meetings throughout the fiscal year. Should a situation arise that
requires approval between meetings, the Audit Committee has delegated authority
to its Chairman to authorize such pre-approval and to report on same at the
following regularly scheduled meeting.
58
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated:
March 19, 2008
| AKEENA SOLAR, INC. | ||
| |
|
|
|
/s/
Barry Cinnamon
|
||
|
Barry Cinnamon |
||
| President and Chief Executive Officer | ||
|
(Principal
Executive Officer)
|
||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on
March 19, 2008.
|
Signature
|
|
Title
|
|
|
|
|
|
/s/
Barry Cinnamon
|
|
President,
Chief Executive Officer and Director
|
|
Barry
Cinnamon
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
/s/
Gary Effren
|
|
Chief
Financial Officer
|
|
Gary
Effren
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
/s/
Ed Roffman
|
|
Director
|
|
Ed
Roffman
|
|
|
|
|
|
|
|
/s/
George Lauro
|
|
Director
|
|
George
Lauro
|
|
|
|
|
|
|
|
/s/
Jon Witkin
|
|
Director
|
|
Jon
Witkin
|
|
|
59
Exhibit
Index
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Agreement
of Merger and Plan of Reorganization, dated August 11, 2006, by and
among
Fairview Energy Corporation, Inc., ASI Acquisition Sub, Inc. and
Akeena
Solar, Inc. (incorporated herein by reference to Exhibit 2.1 to our
Current Report on Form 8-K, dated August 11, 2006 (the “August 2006
8-K”))
|
|
|
3.1
|
Certificate
of Incorporation (incorporated herein by reference to Exhibit 3.1
to our
Current Report on Form 8-K, dated August 3, 2006)
|
|
|
3.2
|
By-laws
(incorporated herein by reference to Exhibit 3.2 to our Current Report
on
Form 8-K, dated August 3, 2006)
|
|
|
3.3
|
Certificate
of Amendment to the Certificate of Incorporation (incorporated herein
by
reference to Exhibit 3.3 to the August 2006 8-K)
|
|
|
4.1
|
Form
of Restricted Stock Agreement (incorporated herein by reference to
Exhibit
4.1 to our Annual Report on Form 10-KSB filed with the SEC on March
29,
2007)
|
|
|
4.2
|
Form
of Class B Common Stock Purchase Warrant, dated March 8, 2007
(incorporated herein by reference to Exhibit 10.3 to our Current
Report on
Form 8-K, dated March 8, 2007 (“March 8, 2007 8-K”))
|
|
|
4.3
|
Form
of Class A Common Stock Purchase Warrant, dated March 8, 2007
(incorporated herein by reference to Exhibit 10.4 to the March 8,
2007
8-K)
|
|
|
4.4
|
Registration
Rights Agreement (incorporated herein by reference to Exhibit 10.2
to the
March 8, 2007 8-K)
|
|
|
4.5
|
Form
of Class C Common Stock Purchase Warrant, dated May 25, 2007 (incorporated
herein by reference to Exhibit 10.3 to our
Current Report on Form 8-K, dated June 4, 2007)
|
|
|
4.6
|
Form
of Warrant to Purchase Common Stock, dated November 2007 (incorporated
herein by reference to Exhibit 4.1 to our
Current Report on Form 8-K, dated November 1, 2007)
|
|
|
10.1
|
Akeena
Solar, Inc. 2006 Stock Incentive Plan (incorporated herein by reference
to
Exhibit 10.1 to the August 2006 8-K)
|
|
|
10.2
|
First
Amendment to the Akeena Solar, Inc. 2006 Incentive Stock Plan
(incorporated herein by reference to Exhibit 10.1 to our Current
Report on
Form 8-K, dated December 20, 2006)
|
|
|
10.3
|
Form
of Subscription Agreement (incorporated herein by reference to Exhibit
10.2 to the August 2006 8-K)
|
|
|
10.4
|
Form
of Registration Rights Agreement (incorporated herein by reference
to
Exhibit 10.3 to the August 2006 8-K)
|
|
|
10.5
|
Form
of Lockup Agreement (incorporated herein by reference to Exhibit
10.4 to
the August 2006 8-K)
|
|
|
10.6
|
Loan
and Security Agreement, dated January 29, 2007, between the Company
and
Comerica Bank (incorporated herein by reference to Exhibit 10.1 to
our
Current Report on Form 8-K, dated January 29, 2007)
|
|
|
10.7
|
First
Modification to Loan and Security Agreement, dated June 26, 2007,
between
the Company and Comerica Bank (incorporated herein by reference to
Exhibit
10.1 to our Current Report on Form 8-K, dated June 26,
2007.
|
|
|
10.8
|
Second
Modification to Loan and Security Agreement, dated January 11, 2008
and
effective as of December 31, 2007, between the Company and Comerica
Bank
(incorporated herein by reference to Exhibit 10.1 to our Current
Report on
From 8-K, dated January 11, 2008)
|
|
|
10.9
|
Restricted
Stock Agreement, dated December 29, 2006, between the Company and
Edward
Roffman (incorporated herein by reference to Exhibit 10.8 to our
Annual
Report on Form 10-KSB filed with the SEC on March 29,
2007)
|
|
|
10.10
|
Form
of Director and Officer Indemnification Agreement (incorporated herein
by
reference to Exhibit 10.9 to the August 2006 8-K)
|
|
|
10.11*
|
Second
Amendment to the Akeena Solar, Inc. 2006 Incentive Stock
Plan
|
|
|
10.12
|
Standard
Industrial/Commercial Single-Tenant Lease - Net, dated September
30, 2002,
between Mattiuz Children’s Trust and the Company, as amended by First
Addendum to Standard Industrial/Commercial Single-Tenant Lease — Net,
dated April 26, 2004, Second Addendum Standard Industrial/Commercial
Single-Tenant Lease — Net, dated April 30, 2005 and Third Addendum to
Standard Industrial/Commercial Single-Tenant Lease, dated July 7,
2006
(incorporated herein by reference to Exhibit 10.11 to our Current
Report
on Form 8-K/A, dated August 11, 2006 (the “August 2006
8-K/A”))
|
|
|
10.13
|
Securities
Purchase Agreement, dated March 8, 2007, between the Company and
the
purchasers signatory thereto (incorporated herein by reference to
Exhibit
10.1 to the March 8, 2007 8-K)
|
60
|
10.14
|
Securities
Purchase Agreement, dated May 25, 2007, between the Company and the
purchasers signatory thereto (incorporated herein by reference to
Exhibit
10.1 to our Current Report on Form 8-K, dated June 4,
2007)
|
|
10.15
|
Registration
Rights Agreement (incorporated herein by reference to Exhibit 10.2
to our
Current Report of Form 8-K, dated June 4, 2007)
|
|
10.16
|
Securities
Purchase Agreement, dated November 1, 2007, between the Company and
the investors signatory thereto (incorporated herein by reference
to
Exhibit 10.1 to our
Current Report on Form 8-K, dated November 1, 2007)
|
|
21.1*
|
List
of Subsidiaries
|
|
23.1*
|
Consent of Independent Registered Accounting Firm Burr, Pilger & Mayer LLP |
|
31.1*
|
Section
302 Certification of Principal Executive Officer
|
|
31.2*
|
Section
302 Certification of Principal Financial Officer
|
|
32.1*
|
Section
906 Certification of Principal Executive Officer
|
|
32.2*
|
Section
906 Certification of Principal Financial
Officer
|
*
filed
herewith
61