: 22 janvier 2008 , quaterly report
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the statements in this Quarterly Report on Form 10-QSB, including, but not limited to this Management's Discussion and Analysis or Plan of Operation, contain forward-looking statements regarding the Company's business, financial condition, and results of operations and prospects that are based on the Company's current expectations, estimates and projections. In addition, other written or oral statements which constitute forward-looking statements may be made by the Company or on the Company's behalf. Words such as "expects," "anticipates," "intends," "believes," "estimates," "may," "would," or variations of such words and similar expressions are intended to identify such forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions. These statements are not guarantees of future performance, and are inherently subject to risks and uncertainties that are difficult to predict. As a result, actual outcomes and results may differ materially from the outcomes and results discussed in or anticipated by the forward-looking statements. All such statements are therefore qualified in their entirety by reference to the factors specifically addressed in the sections entitled "Risk Factors" in the Company's Annual Report on Form 10-KSB and this Quarterly Report on Form 10-QSB. New risks can arise and it is not possible for management to predict all such risks, nor can management assess the impact of all such risks to the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-QSB. The Company undertakes no obligation to revise or update publicly any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report on Form 10-QSB, other than as required by law.
Open Energy Corporation is a renewable energy company focused on the development and commercialization of a portfolio of solar products and technologies for a wide range of residential, commercial and industrial applications. Our product and technology portfolio includes the following:
Solar Roofing Tiles. In March 2006, we acquired California-based Connect Renewable Energy, Inc. (CRE), which develops, manufactures and distributes photovoltaic ("PV") integrated roofing tiles. These tiles can be installed on commercial and residential properties.
SolarSave Membrane. In August of 2005, we acquired a controlling interest in Toronto-based Solar Roofing Systems, Inc. (SRS), which develops and manufactures a patent pending on SolarSave photovoltaic (PV) roofing membrane. Subsequently in April 2006 we acquired the remaining minority interest and SRS became our wholly owned subsidiary.
SolarSave Architectural Glass. We design and manufacture custom PV glass laminates to meet the aesthetic, performance and structural requirements of designers and architects. Sizes, shapes and configurations can be built to match virtually any specification available today, allowing for a direct substitution for monolithic, laminated or insulated glass panels. This product is ideally suited for LEED certification on green building projects.
Water Monitoring. In December 2006, we acquired WaterEye, a Grass Valley, California based company with proprietary, web-enabled water monitoring software. WaterEye provides a technology platform for monitoring our PV installations.
Sun Cone Technology. In August of 2005, we signed an exclusive international license for SunCone CSP (concentrating solar power) technology. SunCone CSP utilizes curved geometries and reflective surfaces to collect solar thermal energy, which can then be used to heat a working fluid. A prototype of the CSP technology was designed and built by Hytec Engineering of Los Alamos, New Mexico, and initial testing of this prototype system was successful. Further development will be required for SunCone CSP to design a commercially viable system capable of interfacing with an off-the-shelf steam turbine to produce electricity and/or to interface with either flash distillation or membrane filtration equipment in order to produce potable water from salty or brackish sources, in a cost effective manner. No assurances can be made that we will be able to successfully commercialize this technology.
We are currently undertaking the following key initiatives to market our Solar Tiles and Solar Membrane products:
1) Utilize the traditional building trades as solar installers. In March 2007, we signed a master distribution agreement with privately held Eagle Roofing Products, one of the largest manufacturers of cement tiles in North America. This strategic alliance provides our company with access to major home developers and roofing contractors across the country. We intend to sell our residential tile products through this distribution pipeline, and utilize the building trades as our installation and service providers. On November 16, 2007, we signed a distribution agreement with Petersen-Dean Roofing Systems, one of the largest residential and commercial roofing contractors in the U.S., to install SolarSave® PV Tiles on new homes across the country. The agreement includes a minimum commitment to purchase the Company's products, including tiles, membranes and balance of system equipment.
2) Outsource high volume product manufacturing in order to remain competitive. In May of 2007, Open Energy and Suntech Power Holdings Co., Ltd. (NYSE:STP), signed a letter of intent for broad initiatives targeting the expansion of BIPV product sales in North America. Pursuant to the letter of intent, Suntech has been supplying us with their high-efficiency polycrystalline cells and providing production of our SolarSave PV Tile product laminates. This relationship is designed to give Open Energy the ability to deliver high quality products in very large volumes to meet the demands of the building and construction channels. In December 2007, we initiated a plan to shut down operations at our Aurora, Ontario, manufacturing facility in Canada.
3) Offer financed solutions through long-term power purchase agreements. In general, homeowners, commercial tenants and industrial operations do not buy power generating systems. They pay for power through their monthly utility bills. Solar electric systems remain expensive, although state rebates, federal tax incentives and other government programs have reduced the costs of solar electricity. Open Energy has developed a plan it believes will provide a financial solution to the dilemma. Together with a tax equity partner, we will install our products in "solar communities." We will coordinate the engineering, equipment procurement and construction of each project. We will contract with third parties to maintain the rooftop systems, to read the meters, and to bill the customers. The equity investor will receive a secure internal rate of return and the benefits of the 30% Federal tax credit and 5-year accelerated depreciation under the 2005 U.S. Energy Bill. The builders will reduce their construction costs and, hopefully, sell their homes more quickly. The homeowner will be guaranteed a reduced monthly utility bill and receive the benefits of incremental home value at no additional expense or tax impact. We believe we will sell more products and participate in the long term revenue streams.
Looking forward we intend to develop and focus on our core competencies as a leading edge designer of innovative products and technologies, and as a customer-centric marketer of renewable energy solutions. While we will continue to develop innovative products, we will also evaluate licensing and purchasing options to acquire technologies developed by others. As thin film, nano-materials, vapor deposition and other innovations become commercially viable on a cost per installed watt basis, we intend to use them to develop commercial products and bring them to market. We do not intend to spend extensively on research, or carry expensive operational overhead. We expect to outsource the majority of our manufacturing. Our core focus will be on providing customer-centric solutions and services.
Recent Developments for the Three and Six Months Ended November 30, 2007
On September 19, 2007, we entered into a Securities Purchase Agreement with a certain accredited investor for the private placement of (i) a convertible note in the principal amount of $20,000,000 and (ii) a warrant to acquire up to 40,000,000 shares of common stock, resulting net proceeds totaling $18.46 million.
During the quarter ended November 30, 2007 we completed the shipments for several purchase orders of architectural glass products, and we began receiving shipments from Suntech for our SolarSave Tile product, and thus were able to begin shipments to Eagle and Petersen-Dean. We also made progress with identifying and correcting product warranty issues with our SolarSave photovoltaic (PV) roofing membrane product, and we are in the process of making the necessary design changes to the product.
David P. Saltman became our Chairman of the board of directors in October 2007, and he remains our Chief Executive Officer.
David A. Field became our President in October 2007and remains our Chief Operating Officer.
Christopher S. Gopal, Ph.D. was hired in November 2007 as our Executive Vice President, World Wide Operations. Prior to joining Open Energy Corporation, Mr. Gopal held senior executive positions at major product and services companies. These have included Vice President in World-Wide Operations at Dell Computer, and Director of Global Supply Chain Services at Ernst & Young Consulting.
Limited Operating History
There is limited historical financial information about the Company upon which to base an evaluation of its future performance. The Company has generated limited revenues from operations and there is no guarantee that the Company will generate significant revenues in the future. The Company is subject to risks including limited capital resources, possible delays in product development and manufacturing, and possible cost overruns due to price and cost increases. No assurance can be given that future financing will be available to the Company, or if available will be on acceptable terms. Additional equity financing would likely result in dilution to existing shareholders.
Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex. The Company has identified the following accounting policies, described below, as the most important to an understanding of the Company's current financial condition and results of operations.
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB 104"). The Company generates revenue from the sale of photovoltaic roofing tiles, photovoltaic roofing membranes, balance of system products, water monitoring equipment and subscriptions and management system products to dealers and other parties. The Company does not perform any installations of photovoltaic products. The Company does, however, install water monitoring systems and recognizes corresponding license/subscription revenue consistent with AICPA Statement of Position (SOP) 97-2, Software Revenue Recognition requirements.
SAB 104 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the seller's price to the buyer is fixed and determinable; and (4) collectibility is reasonably assured. Amounts billed or received from customers in advance of performance are recorded as deferred revenue.
Inventories are valued at the lower of cost (first in, first out) or market. Management provides a reserve, as necessary, to reduce inventory to its net realizable value. Certain factors could impact the realizable value of inventory so management continually evaluates the recoverability based on assumptions about customer demand and market conditions. The evaluation may take into consideration expected demand, new product development; the effect new products might have on the sale of existing products, product obsolescence and other factors. The reserve or write down is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory reserves or write downs may be required. If actual market conditions are more favorable, reserves or write-downs may be reversed.
Goodwill and Intangible Assets
Goodwill represents the excess of costs over fair value of assets of businesses acquired. Per Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets ("SFAS No.142"), goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead must be tested for impairment annually or more frequently if circumstances indicate that indicators of impairment may be present. Management assesses goodwill for impairment at the reporting unit level on an annual basis at fiscal year end or more frequently under certain circumstances. Such circumstances include (i) significant adverse change in legal factors or in the business climate, (ii) an adverse action or assessment by a regulator, (iii) unanticipated competition, (iv) a loss of key personnel,
(v) a more-likely-than-not expectation that a reporting unit or a significant portion of that unit will be sold or otherwise disposed of, and (vi) recognition of an impairment loss in a subsidiary that is a component of a reporting unit. Management must make assumptions regarding estimating the fair value of the Company reporting unit. If these estimates or related assumptions change in the future, the Company may be required to record an impairment charge.
Evaluation of Long-lived Assets
The Company's policy is to assess potential impairments to its long-lived assets when there is evidence that events or changes in circumstances have made recovery of the assets carrying value unlikely and the carrying amount on the asset exceeds the estimated undiscounted future cash flows. If such evaluation were to indicate a material impairment of these long -lived assets, such impairment would be recognized by a write down of the applicable asset to its estimated fair value under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets .
Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
Beneficial Conversion and Warrant Valuation
In accordance with EITF No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Rations and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments , the Company records a beneficial conversion feature ("BCF") related to the issuance of convertible debt instruments that have conversion features at fixed rates that are in the money when issued, and the fair value of warrants issued in connection with those instruments. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds to warrants, based on their relative fair value, and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion feature. The discounts recorded in connection with the BCF and warrant valuation are recognized as non-cash interest expense over the term of the convertible debt, using the effective interest method.
Results of Operations - Three and Six Months Ended November 30, 2007
The following table sets forth the Company's consolidated statement of operations data for the three and six months ended November 30, 2007 and 2006.
Summary Statement of Operations (in thousands):
Three Months Ended November 30, Six Months Ended November 30,
2007 2006 2007 2006
Revenues, net $ 1,326 $ 1,704 $ 2,873 2,060
Gross loss (2,089 ) (353 ) (2,353 ) (307 )
Selling, general and
administrative 6,059 3,896 9,990 7,973
Research and development 93 106 165 425
Impairment of technology
agreement and note
receivable - 2,376 - 2,376
Total operating expenses 6,152 6,378 10,155 10,774
Loss from operations (8,241 ) (6,731 ) (12,508 ) (11,081 )
Total other (expense) (2,456 ) (4,141 ) (7,986 ) (5,023 )
Loss before income tax
benefit (10,697 ) (10,872 ) (20,494 ) (16,104 )
Income tax benefit 391 1,003 1,200 1,303
Net loss $ (10,306 ) (9,869 ) (19,294 ) (14,801 )
Net loss per share - basic
and fully diluted $ (0.08 ) (0.13 ) (0.17 ) (0.20 )
Revenues for the three months ended November 30, 2007 and 2006 were $1,326,000 and $1,704,000, respectively. For the six months ended November 30, 2007 and 2006, revenues were $2,873,000 and $2,060,000, respectively.
During the quarter, a majority of our revenue consisted of shipments of SolarSave Tiles for residential projects. We also shipped SolarSave PV Glass for the remainder of the California Academy of Sciences Museum installation in Golden Gate Park, San Francisco, California, and to another PV Glass customer. We also had limited revenues for the quarter from the SolarSave Membrane product, WaterEye subscriptions, inverters, and other system components.
During the six months ended November 30, 2007, revenue of $2,873,000 consisted of approximately equal shipments of SolarSave Tiles for residential projects and SolarSave PV Glass. We also had limited revenues for the period from the SolarSave Membrane product, WaterEye subscriptions, inverters, and balance of system components.
Revenues for the three and six month periods ended November 30, 2006 consisted primarily of shipments of our SolarSave membrane product. We have identified a warranty issue with respect to the diode design for that product and discontinued shipments during the three and six months ended November 30, 2007 to complete that re-engineering work and certification testing.
Cost of sales and Gross loss
For the three months ended November 30, 2007 and 2006, cost of sales was $3,415,000 and $2,057,000, respectively. For the six months ended November 30, 2007 and 2006 cost of sales was $5,226,000 and $2,367,000, respectively. Gross loss for the three months ended November 30, 2007 and 2006 was $2,089,000 and $353,000, respectively, and for the six months ended November 30, 2007 and 2006, our gross loss was $2,353,000 and $307,000, respectively.
The gross loss for the three month period ended November 30, 2007 of $2,089,000 reflects: a $996,000 increase to warranty reserve related to prior quarter SolarSave membrane product shipments; higher than expected freight and manufacturing costs incurred as a result of the tight delivery schedule for Eagle Roofing and Petersen-Dean and the high cost of laminates for the SolarSave Tile for low volume purchase quantities. With respect to the warranty reserve, we have noted that some significant fraction of the diodes we used in our SolarSave membrane product, under certain reverse voltage conditions combined with high ambient temperatures, may experience a run away current condition, which overheats the diodes. This may cause permanent damage to the diode and heat discoloration or charring of the covering film. We have corrected this issue for future product shipments by changing the diode specifications to reduce the reverse current flow to negligible levels over a much wider range of voltage and ambient temperatures. We are currently receiving certification for the revised diode specification.
The gross loss for the six month period ended November 30, 2007 of $2,353,000 reflects: a $996,000 increase to warranty reserve related to diode failures of prior quarter SolarSave membrane product shipments; higher than expected freight and manufacturing costs incurred as a result of the tight delivery schedule for Eagle Roofing and Petersen-Dean and the high cost of laminates for the SolarSave Tile for low volume purchase quantities.
We are undertaking a number of initiatives to improve gross margin. We believe that the redesign of our SolarSave membrane product will address the warranty issues. We are negotiating with outsourced manufacturers on product pricing for our SolarSave roofing tiles and are also evaluating other cost effective supply options for our laminates and products. As we mature in our relationship with our suppliers and customers and improve forecasting, we expect to decrease the expedited freight expenses. Due to these initiatives, we expect our gross margin to improve. However, our industry is still developing and significant competitive pressure is continuing to put pressure on gross margins.
Selling, general and administrative
Selling, general and administrative expenses for the three months ended November 30, 2007 and 2006 were $6,059,000 and $3,896,000, respectively. For the six months ended November 30, 2007 and 2006, selling, general and administrative expenses were $9,990,000 and $7,973,000, respectively.
For the three months ended November 30, 2007, expenses included $3,234,000 in stock-based compensation, $216,000 of depreciation expense and intangible asset amortization expense, and $540,000 of legal and professional fees associated primarily with SEC reporting, convertible debenture financings, and efforts to protect the Company's intellectual property.
For the six months ended November 30, 2007, SG&A expenses of $9,990,000 included $5,344,000 in stock-based compensation, $431,000 of depreciation expense and intangible asset amortization expense, and $846,000 of legal and professional fees associated primarily with SEC reporting, convertible debenture financings, and efforts to protect the Company's intellectual property.
Research and development
For the three months ended November 30, 2007 and 2006, research and development expenses were $93,000 and $106,000, respectively. For the six months ended November 30, 2007 and 2006, research and development expenses were $165,000 and $425,000, respectively.
During the three and six month periods, research and development expenses were related to the ongoing development of the SolarSave Tiles and SolarSave Membranes, and future product development.
Future research and development efforts will be focused on improvements to our SolarSave solar roofing tiles, roofing membranes, and architectural glass which we believe will contribute to increasing and retaining market share.
Other income (expense)
During the three months ended November 30, 2007 and 2006, other expenses were $2,456,000 and $4,141,000, respectively. Other expenses for the six months ended November 30, 2007 and 2006, were $7,986,000 and $5,023,000, respectively.
For the three months ended November 30, 2007, other expenses totaling $2,456,000 included $2,271,000 that is non-cash interest from the amortization of the discounts recorded in connection with warrants, beneficial conversion features and original issue discounts, and non-cash deferred financing fees associated with convertible debentures and notes payable.
For the six months ended November 30, 2007, other expenses totaling $7,986,000 included $7,447,000 in non-cash interest from the amortization of the discounts recorded in connection with warrants, beneficial conversion features and original issue discounts, and non-cash deferred financing fees associated with convertible debentures and notes payable.
For the three months ended November 30, 2007 and 2006, we incurred a net loss of $10,306,000 and $9,869,000, respectively. Our net loss for the six months ended November 30, 2007 and 2006 was $19,294,000 and $14,801,000, respectively.
For the three months ended November 30, 2007, the net loss of $10,306,000 included $3,234,000 in stock-based compensation, $247,000 in depreciation and amortization expense, and $2,271,000 in non-cash interest from the amortization of the discounts recorded in connection with warrants, beneficial conversion features and original issue discounts, and non-cash deferred financing fees associated with convertible debentures and notes payable.
For the six months ended November 30, 2007, the net loss of $19,294,000 included $5,344,000 in stock-based compensation, $493,000 in depreciation and amortization expense, and $7,447,000 in non-cash interest from the amortization of the discounts recorded in connection with warrants, beneficial conversion features and original issue discounts, and non-cash deferred financing fees associated with convertible debentures and notes payable.
Liquidity and Capital Resources
As of November 30, 2007, we had $13,063,000 in cash, inventory of $1,695,000 and working capital of $2,792,000. Since our inception we have generated significant losses from operations and expect to generate losses from operations during at least the next two fiscal quarters.
The Company has financed operations since inception primarily through private sales of securities. On December 7, 2007, we closed on an amendment to our September 29, 2007 Securities Purchase Agreement. In connection with the December 7, 2007 amendment we completed a private placement with certain additional accredited investors and issued (i) convertible notes in the . . .