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EX-10.2 - MASTER ASSIGNMENT AND ASSUMPTION AGREEMENT - Andalay Solar, Inc.exhibit_10-2.htm
EX-31.1 - CERTIFICATION OF CEO UNDER 302 - Andalay Solar, Inc.exhibit_31-1.htm
EX-31.2 - CERTIFICATION OF CFO UNDER 302 - Andalay Solar, Inc.exhibit_31-2.htm
EX-10.3 - SUPPLY AND WARRANTY AGREEMENT - Andalay Solar, Inc.exhibit_10-3.htm
EX-32.2 - CERTIFICATION OF CFO UNDER 906 - Andalay Solar, Inc.exhibit_32-2.htm
EX-32.1 - CERTIFICATION OF CEO UNDER 906 - Andalay Solar, Inc.exhibit_32-1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

x
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2010

or

o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                                                                 to                      

Commission File Number 001-33695

Westinghouse Solar Logo

AKEENA SOLAR, INC.
(d/b/a Westinghouse Solar)
(Exact name of registrant as specified in its charter)

Delaware
90-0181035
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
 
1475 S. Bascom Ave. Suite 101, Campbell, CA
95008
(Address of principal executive offices)
(Zip Code)

(408) 402-9400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o    No o

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

Large accelerated filer  o
 
Accelerated filer  o
 
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  x
 

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

As of November 3, 2010, 45,649,366 shares of the issuer’s common stock, par value $0.001 per share, were outstanding (including non-vested restricted shares).


 
  
     
       
     
       
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EX-31.1 Section 302 Certification of CEO
       
         
EX-31.2 Section 302 Certification of CFO
       
         
EX-32.1 Section 906 Certification of CEO
       
         
EX-32.2 Section 906 Certification of CFO
       
 



 

AKEENA SOLAR, INC. (d/b/a WESTINGHOUSE SOLAR)
   
September 30, 2010 (unaudited)
   
December 31,
2009
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 1,271,737     $ 5,804,458  
Restricted cash
    342,403        
Accounts receivable, net
    690,134       173,501  
Other receivables
    5,053       16,406  
Inventory, net
    6,315,651       4,433,825  
Prepaid expenses and other current assets, net
    911,312       419,537  
Assets of discontinued operations
    1,489,423       5,280,551  
Assets held for sale
    752,300       2,132,772  
Total current assets
    11,778,013       18,261,050  
Property and equipment, net
    303,261       173,471  
Other assets, net
    407,539       100,894  
Long term assets of discontinued operations
    21,724       48,906  
Total assets
  $ 12,510,537     $ 18,584,321  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 4,276,121     $ 3,930,890  
Accrued liabilities
    739,268       398,452  
Accrued warranty
    33,236       8,404  
Common stock warrant liability
    448,048       2,536,402  
Credit facility
    342,403        
Liabilities of discontinued operations
    2,745,462       3,222,848  
Total current liabilities
    8,584,538       10,096,996  
Long-term liabilities of discontinued operations
    323,375       375,015  
Total liabilities
    8,907,913       10,472,011  
                 
Commitments, contingencies and subsequent events (Notes 16 and 17)
               
                 
Stockholders’ equity:
               
Common stock, $0.001 par value; 100,000,000 shares authorized; 41,204,551 and 36,406,944 shares issued and outstanding at September  30, 2010 and December 31, 2009, respectively
    41,204       36,407  
Additional paid-in capital
    66,467,479       59,897,553  
Accumulated deficit
    (62,906,059 )     (51,821,650 )
Total stockholders’ equity
    3,602,624       8,112,310  
Total liabilities and stockholders’ equity
  $ 12,510,537     $ 18,584,321  

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


 
AKEENA SOLAR, INC. (d/b/a WESTINGHOUSE SOLAR)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended 
September 30,
   
Nine Months Ended 
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Net revenue
  $ 2,142,229     $ 402,117     $ 5,096,656     $ 604,473  
Cost of goods sold
    1,827,931       361,024       4,325,204       539,674  
        Gross profit
    314,298       41,093       771,452       64,799  
Operating expenses
                               
Sales and marketing
    267,847       57,994       705,610       117,508  
General and administrative
    2,321,830       2,369,583       7,032,474       6,278,439  
Total operating expenses
    2,589,677       2,427,577       7,738,084       6,395,947  
Loss from operations
    (2,275,379 )     (2,386,484 )     (6,966,632 )     (6,331,148 )
Other income (expense)
                               
Interest income (expense), net
    (5,059 )     13,944       75       (46,357 )
Adjustment to the fair value of common stock warrants
    81,857       758,352       1,876,759       (2,320,167 )
Total other income (expense)
    76,798       772,296       1,876,834       (2,366,524 )
Loss before provision for income taxes and discontinued operations
    (2,198,581 )     (1,614,188 )     (5,089,798 )     (8,697,672 )
Provision for income taxes
                       
Net loss from continuing operations (Note 3)
    (2,198,581 )     (1,614,188 )     (5,089,798 )     (8,697,672 )
Loss from discontinued operations, net of tax
    (3,996,971 )     (790,022 )     (5,994,612 )     (3,471,464 )
Net loss
  $ (6,195,552 )   $ (2,404,210 )   $ (11,084,410 )   $ (12,169,136 )
                                 
Loss from continuing operations per common and common equivalent share (basic and diluted)
  $ (0.05 )   $ (0.05 )   $ (0.13 )   $ (0.27 )
                                 
Loss from discontinued operations per common and common equivalent share (basic and diluted)
  $ (0.10 )   $ (0.02 )   $ (0.16 )   $ (0.11 )
                                 
Net loss per common and common equivalent share (basic and diluted)
  $ (0.15 )   $ (0.07 )   $ (0.29 )   $ (0.38 )
                                 
Weighted average shares used in computing loss per common share: (basic and diluted)
    40,097,640       33,357,430       38,150,455       31,459,670  



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


 
 
AKEENA SOLAR, INC. (d/b/a WESTINGHOUSE SOLAR)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)


   
Number of Shares
   
Amount
   
Additional Paid-in Capital
   
Accumulated Deficit
   
Stockholders' Equity
 
Balance at January 1, 2010
    36,406,944     $ 36,407     $ 59,897,553     $ (51,821,650 )   $ 8,112,310  
Issuance of common shares pursuant to October 2009 securities purchase agreement
    483,753       484       593,392             593,876  
Issuance of common shares pursuant to May 2010 securities purchase agreement, net
    2,717,392       2,717       2,330,807             2,333,524  
Conversion of common stock warrant liability upon exercise or expiration of warrants
                211,594             211,594  
Grants of restricted stock, net of forfeitures and repurchases for employee taxes
    524,386       524       (9,958 )           (9,434 )
Stock-based compensation expense
                2,523,177             2,523,177  
Exercise of warrants for common shares at various exercise prices, $0.001 par value
    1,072,076       1,072       920,914             921,986  
Net loss
                      (11,084,409 )     (11,084,409 )
Balance at September 30, 2010
    41,204,551     $ 41,204     $ 66,467,479     $ (62,906,059 )   $ 3,602,624  



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


 
 AKEENA SOLAR, INC. (d/b/a WESTINGHOUSE SOLAR)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
 Nine Months Ended September 30,
 
   
2010
   
2009
 
Cash flows from operating activities
           
Net loss
  $ (11,084,409 )   $ (12,169,136 )
Adjustments to reconcile net loss to net cash (used in) provided by operations:
               
Depreciation
    101,436       89,074  
Amortization of customer list, customer contracts and patents
    3,193       3,707  
Unrealized (gain) loss on fair value adjustment of common stock warrants
    (1,876,759 )     2,320,167  
Non-cash stock-based compensation expense
    2,523,177       1,859,494  
Changes in assets and liabilities:
               
Accounts receivable
    (516,633 )      
Other receivables
    11,353       27,814  
Inventory
    (1,881,826 )     5,963,332  
Prepaid expenses and other current assets
    (491,776 )     91,573  
Assets of discontinued operations – short term
    3,791,128       5,488,033  
Assets held for sale
    1,468,447       1,531,064  
Other assets
    (309,838 )     (5,473 )
Assets of discontinued operations – long-term
    27,182       573  
Accounts payable
    345,231       1,863,198  
Accrued liabilities and accrued warranty
    365,648       (198,557 )
Liabilities of discontinued operations
    (351,501 )     (2,386,265 )
Net cash (used in) provided by operating activities
    (7,875,947 )     4,478,598  
Cash flows from investing activities
               
Acquisition of property and equipment     (231,226      
Acquisition of property and equipment - discontinued operations     (139,483 )     (76,425
Proceeds from disposal of property and equipment from discontinued operations
    60,685        
Net cash used in investing activities
    (310,024 )     (76,425
Cash flows from financing activities
               
Borrowing on long-term debt from discontinued operations
    18,914       57,335  
Repayment of long-term debt from discontinued operations
    (188,410     (182,485 )
Borrowings (repayment) on line of credit, net
    342,403       (18,746,439 )
Repayments on capital lease obligations from discontinued operations
    (17,206     (17,508 )
Restricted cash
    (342,403 )     17,500,000  
Proceeds from stock offering
    2,499,999       2,000,000  
Proceeds from securities purchase agreement
    593,876        
Proceeds from exercise of warrants
    921,985       3,222,415  
Payment of placement agent and registration fees and other direct costs
    (166,474 )     (1,195,886 )
Employee taxes paid for vesting of restricted stock
    (9,434 )     (2,804 )
Net cash provided by financing activities
    3,653,250       2,634,628  
Net increase (decrease) in cash and cash equivalents
    (4,532,721 )     7,036,801  
Cash and cash equivalents
               
Beginning of period
    5,804,458       148,230  
End of period
  $ 1,271,737     $ 7,185,031  
Supplemental cash flows disclosures:
               
Cash paid during the period for interest
  $ 24,165     $ 131,730  
Supplemental disclosure of non-cash financing activity:
               
Fair value of warrants issued in stock offering
          1,676,282  
Initial fair value of preferred stock issued in offering
          380,600  
Conversion of preferred stock to common stock
          464,286  
Conversion of common stock warrant liability upon exercise of warrants
    211,594       313,024  
 Acquisition of property and equipment under capital lease - discontinued operations      9,717       —   
Reclassification of common stock warrant liability to Additional Paid-in Capital
          777,415  
Fair value of warrants issued in connection with induced exercise
          303,391  

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


AKEENA SOLAR, INC. (d/b/a WESTINGHOUSE SOLAR)
Notes to Condensed Consolidated Financial Statements
September 30, 2010
(Unaudited)
 
1. Basis of Presentation and Description of Business

Basis of Presentation — Interim Financial Information

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. They should be read in conjunction with the financial statements and related notes to the financial statements of Akeena Solar, Inc. (d/b/a Westinghouse Solar) (“we”, “us”, “our” or the “Company”) for the years ended December 31, 2009 and 2008 appearing in our Form 10-K. The September 30, 2010 unaudited interim consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements filed with our Annual Report on Form 10-K have been condensed or omitted as permitted by those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

Reclassifications

Certain line items in our condensed consolidated balance sheets and our condensed consolidated statements of cash flows have been reclassified to conform to the current presentation. In September 2010, we announced we were exiting the installation business and reclassifying the installation business segment as discontinued operations. (See Note 3. Discontinued Operations). Additionally, parts and supplies, which amounted to $101,000 as of December 31, 2009, and which previously was included in prepaid expenses and other current assets, have now been included in inventory, net.

Description of Business

Akeena Solar, Inc. was incorporated in February 2001 in the State of California and elected at that time to be taxed as an S Corporation. During June 2006, we reincorporated in the State of Delaware and became a C Corporation. On August 11, 2006, we 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. Our common shares were also adjusted from $0.01 par value to $0.001 par value at the time of the Merger. Subsequent to the Merger, the consolidated financial statements include the assets, liabilities and the historical operations of Akeena Solar and Fairview from the closing date of the Merger.

We are a manufacturer and distributor of solar power systems and solar panels with integrated microinverters (which we call AC solar panels). We design, market and sell these solar power systems to solar installers, trade workers and do-it-yourself customers through distribution partnerships, our dealer network and retail outlets. Our products are designed for use in solar power systems for residential and commercial rooftop customers.

On May 17, 2010, we entered into an exclusive worldwide agreement to manufacture, distribute and market our solar panels under the Westinghouse name. On July 22, 2010, we announced that we will operate under the name “Westinghouse Solar” and, effective July 23, 2010 at the opening of the market, our stock began trading under the stock symbol “WEST” on the NASDAQ Capital Market, and we are listed as Akeena Solar, Inc. (d/b/a Westinghouse Solar). Subject to shareholder approval, we plan in the future to formally change our corporate name to Westinghouse Solar, Inc.

On September 7, 2010, we announced that we were expanding our distribution business to include sales of our Westinghouse Solar Power Systems directly to dealers in California and that we were exiting the solar panel installation business. As a result, beginning with the third quarter of 2010, our installation business has been reclassified in our financial statements as discontinued operations. The exit from the installation business is expected to be completed by the end of the fourth quarter of 2010. (See Note 3. Discontinued Operations).
 
Concentration of Risk in Customer and Supplier Relationships

During both the three months and nine months ended September 30, 2010, our three largest customers together accounted for 54% of our net revenue from continuing operations. In each of those periods, our top two customers each accounted for more than 10% of our total net revenue. The relative magnitude and the mix of sales to our largest customers have varied significantly quarter to quarter. Over time, as we work to add additional distributors to our network and to grow our distribution business, we anticipate that the relative significance to our revenue of any particular customer will decline. We do not expect any one customer to continue to account for more than 10% of our revenue on an ongoing basis. 

We currently obtain virtually all of our solar panels from Suntech, which manufactures panels for us that are built to our unique specifications, and we currently purchase all of the microinverters used in our AC solar panels from Enphase.  We believe that our commercial relationship with each of those suppliers is good.  Although we had a significant amount of inventory on hand as of September 30, 2010, and although we believe we could find alternative suppliers for solar panels manufactured to our specifications, and alternative suppliers for microinverters, on comparable terms, the sudden loss of either of our current primary component supply relationships could cause a delay in manufacturing and be disruptive to our operations.


2. Significant Accounting Policies

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.

Revenue Recognition

Revenue is recognized when a solar power system is shipped to a customer. Revenue recognition methods for revenue streams that fall under other categories are determined based on facts and circumstances.

Defective solar panels or inverters are covered under the manufacturer warranty. In the event that a panel or inverter needs to be replaced, we will assist the customer in replacing the defective item within the manufacturer’s warranty period (between 15 - 25 years). See the “Manufacturer and installation warranties” discussion below.

Deferred revenue consists of installations initiated but not completed within the reporting period.

Cash and Cash Equivalents

We consider all highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. We maintain 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. We have not experienced any losses on these investments.

Restricted Cash

On March 3, 2009, we entered into a Loan and Security Agreement (Cash Collateral Account) with Comerica Bank, dated as of February 10, 2009 (the “2009 Bank Facility”), which has a limit of $1.0 million, subject to our obligation to maintain cash as collateral for any borrowings incurred or any letters of credit issued on our behalf. The 2009 Bank Facility has a termination date of January 1, 2011. As of September 30, 2010, there was approximately $342,000 borrowed under this line of credit. In accordance with the 2009 Bank Facility, we have recorded a corresponding amount under “Restricted cash” on our condensed consolidated balance sheets.

Discontinued operations

Discontinued operations are presented and accounted for in accordance with Accounting Standards Codification (ASC) 360, “Impairment or Disposal of Long-Lived Assets”, (ASC 360). When a qualifying component of the Company is disposed of or has been classified as held for sale, the operating results of that component are removed from continuing operations for all periods presented and displayed as discontinued operations if: (a) elimination of the component’s operations and cash flows from the Company’s ongoing operations has occurred (or will occur) and (b) significant continuing involvement by the Company in the component’s operations does not exist after the disposal transaction.

On September 7, 2010, we announced that we were exiting the solar panel installation business. The exit from the installation business is expected to be completed by the end of the fourth quarter of 2010. The exit from the installation business was therefore classified as discontinued operations for all periods presented under the requirements of ASC 360.
 
Manufacturer and Installation Warranties

We warrant our products for various periods against defects in material or manufacturing workmanship. The manufacturer warranties on solar panels and inverters range from 15 to 25 years. We assist our customers in the event of a claim under the manufacturer warranty to replace a defected panel or inverter. The liability for the manufacturing warranty of approximately $33,000 at September 30, 2010 and $8,000 at December 31, 2009, is included within “Accrued warranty” in the accompanying condensed consolidated balance sheets.



The liability for our manufacturing warranty consists of the following:

   
September 30, 2010 (Unaudited)
   
December 31, 2009
 
Beginning accrued warranty balance (January 1)
  $ 8,404     $  
Reduction for labor payments and claims made under the warranty
           
Accruals related to warranties issued during the period
    24,832       8,404  
Ending accrued warranty balance
  $ 33,236     $ 8,404  


Patent Costs

We capitalize external legal costs and filing fees associated with obtaining or defending our patents and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life. We believe the remaining useful life we assigned to these assets, approximately 14 years as of September 30, 2010, are reasonable. We periodically review our patents to determine whether any such costs have been impaired and are no longer being used. To the extent we no longer use certain patents, the associated costs will be written-off at that time.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

ASU Update No. 2009-13 – Revenue Recognition (Topic 605), Multiple Deliverable Revenue Arrangements was issued in October 2009. This guidance eliminates the residual method of allocation and requires the relative selling price method when allocating deliverables of a multiple-deliverable revenue arrangement. The determination of the selling price for each deliverable requires the use of a hierarchy designed to maximize the use of available objective evidence, including: vendor specific objective evidence, third party evidence of selling price, or estimated selling price. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, and must be adopted in the same period using the same transition method. If adoption is elected in a period other than the beginning of a fiscal year, the amendments in these standards must be applied retrospectively to the beginning of the fiscal year. Full retrospective application of these amendments to prior fiscal years is optional. Early adoption of these standards may be elected. We do not believe the impact of these new accounting standards on our consolidated financial position, results of operations and cash flows.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

In July 2010, the Financial Accounting Standards Board (“FASB”) issued a pronouncement that requires enhanced disclosures regarding the nature of credit risk inherent in an entity’s portfolio of financing receivables, how that risk is analyzed, and the changes and reasons for such changes in the allowance for credit losses. The new disclosures will require information for both the financing receivables and the related allowance for credit losses at more disaggregated levels and will be effective in fiscal years beginning in 2011. Specific disclosures regarding activities that occur during a reporting period, such as the disaggregated roll forward disclosures, are effective for us at the beginning of our 2011 fiscal year. We do not expect that the adoption of this new accounting standard will have a material impact on our consolidated financial position, results of operations and cash flows.



3. Discontinued Operations

On September 7, 2010, we announced that we were exiting the solar panel installation business and we were expanding our distribution business to include sales of our Westinghouse Solar Power Systems directly to dealers in California. The exit from the installation business is expected to be completed by the end of the fourth quarter of 2010. As a result of the decision to exit the California installation business we, recorded a restructuring charge totaling approximately $2.6 million for the quarter ended September 30, 2010, the majority of which consisted of non-cash charges. This restructuring charge was comprised primarily of (i) one-time severance costs of $809,000 related to headcount reductions, which was paid in shares of our common stock, (ii) inventory write downs of $698,000, (iii) lease accelerations and the write off of leasehold improvements of $307,000, (iv) goodwill impairment of $299,000, (v) vehicle, furniture and fixtures and computer equipment write downs of $290,000 and (vi) other prepaid costs write-downs of $239,000.

The assets and liabilities of discontinued operations are presented separately under the captions “Assets of discontinued operations,” “Liabilities of discontinued operations” and “Long-term liabilities of discontinued operations,” respectively, in the accompanying condensed consolidated balance sheets at September 30, 2010 and December 31, 2009, and consist of the following:

Assets of discontinued operations:
 
September 30, 2010 (unaudited)
   
December 31, 2009
 
Accounts receivable and other receivables
  $ 1,265,176     $ 4,144,319  
Prepaid expenses and other current assets
    214,674       836,195  
Goodwill
          298,500  
Other assets
    9,573       1,537  
    $ 1,489,423     $ 5,280,551  

 
Liabilities of discontinued operations:
 
September 30, 2010 (unaudited)
   
December 31, 2009
 
Accounts payable
  $ 434,743     $ 346,709  
Customer rebate payable
    1,365       60,105  
Accrued liabilities
    482,834       776,527  
Accrued warranty
    1,296,591       1,179,596  
Deferred revenue
    326,408       619,242  
Current portion of capital lease obligations
    6,479       18,086  
Current portion of long-term debt
    197,042       222,583  
Total current liabilities
    2,745,462       3,222,848  
                 
Capital lease obligations, less current portion
    6,307       2,728  
Long-term debt, less current portion
    208,891       352,847  
Other long-term liabilities
    108,177       19,440  
Total discontinued operations liabilities
  $ 3,068,837     $ 3,597,863  

In connection with the announcement of our exit from the solar panel installation business, we reclassified certain assets as “Assets held for sale,” in the accompanying condensed consolidated balance sheets at September 30, 2010 and December 31, 2009, and consist of the following:

Assets held for sale:
 
September 30, 2010 (unaudited)
   
December 31, 2009
 
Inventory
  $ 342,240     $ 1,057,249  
Office equipment
    12,333       194,195  
Furniture and fixtures
    18,305       199,446  
Vehicles
    379,422       681,882  
    $ 752,300     $ 2,132,772  







Significant components of our results of discontinued operations consisted of the following (unaudited):

Three Months Ended September 30, 2010
 
Revenue
   
Gross Profit
   
Net Loss
   
Net Loss per Share (Basic and Diluted)
 
Prior to reclassification of discontinued operations
  $ 9,547,684     $ 1,951,797     $ (6,195,552 )   $ (0.15 )
Discontinued operations
    7,405,455       1,637,499       (3,996,971 )     (0.10 )
Continuing operations, as adjusted
  $ 2,142,229     $ 314,298     $ (2,198,581 )   $ (0.05 )

Three Months Ended September 30, 2009
 
Revenue
   
Gross Profit
   
Net Loss
   
Net Loss per Share (Basic and Diluted)
 
Prior to reclassification of discontinued operations
  $ 7,671,420     $ 1,896,111     $ (2,404,210 )   $ (0.07 )
Discontinued operations
    7,269,303       1,855,018       (790,022 )     (0.02 )
Continuing operations, as adjusted
  $ 402,117     $ 41,093     $ (1,614,188 )   $ (0.05 )

Nine Months Ended September 30, 2010
 
Revenue
   
Gross Profit
   
Net Loss
   
Net Loss per Share (Basic and Diluted)
 
Prior to reclassification of discontinued operations
  $ 25,926,489     $ 5,522,259     $ (11,084,410 )   $ (0.29 )
Discontinued operations
    20,829,833       4,750,807       (5,994,612 )     (0.16 )
Continuing operations, as adjusted
  $ 5,096,656     $ 771,452     $ (5,089,798 )   $ (0.13 )

Nine Months Ended September 30, 2009
 
Revenue
   
Gross Profit
   
Net Loss
   
Net Loss per Share (Basic and Diluted)
 
Prior to reclassification of discontinued operations
  $ 21,171,370     $ 5,313,135     $ (12,169,136 )   $ (0.38 )
Discontinued operations
    20,566,897       5,248,336       (3,471,464 )     (0.11 )
Continuing operations, as adjusted
  $ 604,473     $ 64,799     $ (8,697,672 )   $ (0.27 )




Quarterly Information (unaudited)
 
The following table sets forth our unaudited quarterly summary consolidated statements of operations, which have been restated to include the discontinued operations of our installation segment, for each of the first three quarters of 2010 and for each of the four quarters for the year ended December 31, 2009. This data should be read in conjunction with our consolidated financial statements and related notes. These operating results may not be indicative of results to be expected for any future period.

   
For the Quarter Ended
     
   
March 31,
   
June 30,
   
September 30,
   
Nine Months Ended September 30,
 
2010
                       
Net revenue
  $ 729,375     $ 2,225,052     $ 2,142,229     $ 5,096,656  
Cost of goods sold
    614,196       1,883,077       1,827,931       4,325,204  
        Gross profit
    115,179       341,975       314,298       771,452  
Operating expenses
                               
Sales and marketing
    164,849       272,914       267,847       705,610  
General and administrative
    2,559,087       2,151,557       2,321,830       7,032,474  
Total operating expenses
    2,723,936       2,424,471       2,589,677       7,738,084  
Loss from operations
    (2,608,757 )     (2,082,496 )     (2,275,379 )     (6,966,632 )
Other income (expense)
                               
Interest income (expense), net
    9,122       (3,987 )     (5,059 )     76  
Adjustment to the fair value of common stock warrants
    883,523       911,379       81,857       1,876,759  
Total other income (expense)
    892,645       907,392       76,798       1,876,835  
Loss before provision for income taxes and discontinued operations
    (1,716,112 )     (1,175,104 )     (2,198,581 )     (5,089,797 )
Provision for income taxes
                       
Net loss from continuing operations
    (1,716,112 )     (1,175,104 )     (2,198,581 )     (5,089,797 )
Loss from discontinued operations, net of tax
    (719,324 )     (1,278,317 )     (3,996,971 )     (5,994,612 )
Net loss
  $ (2,435,436 )   $ (2,453,421 )   $ (6,195,552 )   $ (11,084,409 )
                                 
Loss from continuing operations per common and common equivalent share (basic and diluted)
  $ (0.05 )   $ (0.03 )   $ (0.05 )   $ (0.13 )
                                 
Loss from discontinued operations per common and common equivalent share (basic and diluted)
  $ (0.02 )   $ (0.03 )   $ (0.10 )   $ (0.16 )
                                 
Net loss per common and common equivalent share (basic and diluted)
  $ (0.07 )   $ (0.06 )   $ (0.15 )   $ (0.29 )

 



 


   
For the Quarter Ended
       
   
March 31,
   
June 30,
   
September 30,
   
December 31,
   
Year Ended December 31,
 
2009
                             
Net revenue
  $     $ 202,356     $ 402,117     $ 1,387,788     $ 1,992,261  
Cost of goods sold
          178,650       361,024       1,157,934       1,697,608  
        Gross profit
          23,706       41,093       229,854       294,653  
Operating expenses
                                       
Sales and marketing
    15,210       44,304       57,994       171,123       288,631  
General and administrative
    2,226,974       1,681,881       2,369,583       2,104,558       8,382,996  
Total operating expenses
    2,242,184       1,726,185       2,427,577       2,275,681       8,671,627  
Loss from operations
    (2,242,184 )     (1,702,479 )     (2,386,484 )     (2,045,827 )     (8,376,974 )
Other income (expense)
                                       
Interest income (expense), net
    (76,541 )     16,239       13,945       12,004       (34,353 )
Adjustment to the fair value of common stock warrants
    (1,541,764 )     (1,536,755 )     758,352       (168,036 )     (2,488,203 )
Total other income (expense)
    (1,618,305 )     (1,520,516 )     772,297       (156,032 )     (2,522,556 )
Loss before provision for income taxes and discontinued operations
    (3,860,489 )     (3,222,995 )     (1,614,188 )     (2,201,860 )     (10,899,532 )
Provision for income taxes
                             
Net loss from continuing operations
    (3,860,489 )     (3,222,995 )     (1,614,188 )     (2,201,860 )     (10,899,532 )
Loss from discontinued operations, net of tax
    (1,218,735 )     (1,462,706 )     (790,023 )     (1,473,866 )     (4,945,330 )
Net loss
  $ (5,079,224 )   $ (4,685,701 )   $ (2,404,211 )   $ (3,675,726 )   $ (15,844,862 )
                                         
Loss from continuing operations per common and common equivalent share (basic and diluted)
  $ (0.13 )   $ (0.10 )   $ (0.05 )   $ (0.06 )   $ (0.33 )
                                         
Loss from discontinued operations per common and common equivalent share (basic and diluted)
  $ (0.04 )   $ (0.04 )   $ (0.02 )   $ (0.05 )   $ (0.15 )
                                         
Net loss per common and common equivalent share (basic and diluted)
  $ (0.17 )   $ (0.14 )   $ (0.07 )   $ (0.11 )   $ (0.48 )




4. Accounts Receivable

Accounts receivable consists of the following:
   
September 30, 2010 (Unaudited)
   
December 31,
 2009
 
Trade accounts
  $ 690,657     $ 347,002  
Less: Allowance for returns
    (523 )     (173,501 )
    $ 690,134     $ 173,501  

5. Inventory

Inventory consists of the following:
   
September 30, 2010 (Unaudited)
   
December 31,
 2009
 
Work in process
  $ 452,980     $ 632,995  
Finished goods
    5,862,671       3,800,830  
    $ 6,315,651     $ 4,433,825  

6. Note Receivable

During March 2009, we reached a resolution with a customer who had lost project funding for which we had recorded bad debt expense of $963,000 in the fourth quarter of 2008. The settlement resulted in us receiving a combination of cash, other consideration and a promissory note of $675,000. The $675,000 note receivable was reflected in prepaid expenses and other current assets, net, as of December 31, 2009, with a corresponding reserve of $675,000. In accordance with the terms of the note, the note was paid in full in March 2010 and the $675,000 reserve was reversed to bad debt expense reflected in general and administrative expenses in our consolidated statements of operations. As of September 30, 2010, we had no remaining note receivable.

7. Property and Equipment, Net

Property and equipment, net consist of the following:
   
September 30, 2010 (Unaudited)
   
December 31, 2009
 
Office equipment
  $ 416,735     $ 365,317  
Furniture and fixtures
    82,184        
Leasehold improvements
    69,888        
Vehicles
    30,226        
      599,033       365,317  
Less: Accumulated depreciation and amortization
    (295,772 )     (191,846 )
    $ 303,261     $ 173,471  

Depreciation expense for the three months ended September 30, 2010 and 2009 was approximately $37,000 and $30,000, respectively. Depreciation expense for the nine months ended September 30, 2010 and 2009 was approximately $101,000 and $89,000, respectively.

8. Accrued Liabilities
 
Accrued liabilities consist of the following:
 
   
September 30, 2010 (Unaudited)
   
December 31, 2009
 
Accrued salaries, wages, benefits and bonus
  $ 263,635     $ 238,350  
Accrued accounting and legal fees
    135,657       124,295  
Other accrued liabilities
    339,976       35,808  
    $ 739,268     $ 398,453  
 


9. Credit Facility
 
On March 3, 2009, we entered into a Loan and Security Agreement (Cash Collateral Account) with Comerica Bank, dated as of February 10, 2009 (the “2009 Bank Facility”), which has a limit of $1.0 million, subject to our obligation to maintain cash as collateral for any borrowings incurred or any letters of credit issued on our behalf. The 2009 Bank Facility has a termination date of January 1, 2011. The 2009 Bank Facility replaced and amended our previous credit facility with Comerica Bank (the “2007 Credit Facility”). As of March 3, 2009, we fully repaid the $17.2 million outstanding principal balance on the 2007 Credit Facility by using our restricted cash balance that was on deposit with Comerica. The 2009 Bank Facility no longer includes an asset-based line of credit, and Comerica Bank has released its security interest in our inventory, accounts receivable, and other assets (other than the cash collateral account as provided in the 2009 Bank Facility). The 2009 Bank Facility does not include any ongoing minimum net worth or other financial covenants, and we are in compliance with the terms of the 2009 Bank Facility as of September 30, 2010. As of September 30, 2010, there was approximately $342,000 borrowed under this line of credit. In accordance with the 2009 Bank Facility, we have recorded a corresponding amount under “Restricted cash” on our condensed consolidated balance sheets.

10. Stockholders’ Equity
 
On March 3, 2009, we closed an offering of securities (the “March 2009 Offering”) pursuant to a securities purchase agreement with certain investors, dated February 26, 2009. Net proceeds from the offering were approximately $1.4 million, after deducting the placement agents’ fees and other direct expenses. In accordance with the securities purchase agreement, we sold units consisting of an aggregate of (i) 1,785,714 shares of common stock at a price of $1.12 per share; (ii) 2,000 shares of Series A Preferred Stock which were convertible into a maximum aggregate of 539,867 shares of common stock, depending upon the volume weighted average trading price of Akeena common stock for a specified period following the Closing; (iii) Series E Warrants to purchase up to 1,339,286 shares of common stock at a strike price of $1.34 per share, which warrants were not exercisable until six months after the Closing and have a term of seven years from the date of first exercisability; (iv) Series F Warrants to purchase up to an aggregate of 540,000 shares of common stock (subject to reduction share for share to the extent shares of common stock were issued upon conversion of the Series A Preferred Stock) at a strike price of $1.12 per share, which warrants were immediately exercisable and had a term of 150 trading days from the Closing; and (v) Series G Warrants to purchase up to an aggregate of 2,196,400 shares of common stock at a strike price of $1.12 per share, which warrants were immediately exercisable and originally had a term of 67 trading days from the Closing (subsequently extended, as described below). During March 2009, the 2,000 shares of Series A preferred stock issued in the financing converted into 539,867 shares of common stock. As a result of the issuance of the conversion shares, the shares of common stock subject to purchase under the Series F Warrants were reduced by 539,867 shares.

On April 20, 2009, we entered into an amendment agreement (the “Amendment Agreement”) with investors who had previously acquired the Series G Warrants on March 3, 2009 (the “Original Series G Warrants”). In the Amendment Agreement, the investors agreed to purchase 425,000 shares of common stock through exercise of their Original Series G Warrants, with gross proceeds to us of $476,000. In conjunction with that exercise, the term of the remaining Original Series G Warrants, was amended such that the unexercised balance of the Original Series G Warrants had a term extending until August 10, 2009, and we issued to the same investors additional, newly issued Series G Warrants to purchase up to an aggregate of 1,275,000 shares of Common Stock on the same terms as the amended Original Series G Warrants and at a strike price of $1.12 per share (the “Additional Series G Warrants”).

On June 1, 2009, we entered into another amendment agreement (the “Second Amendment Agreement”) with investors who had previously acquired Series G Warrants. Pursuant to the Second Amendment Agreement, the investors purchased 625,000 shares of our common stock through the exercise of a portion of their Series G Warrants, with gross proceeds to us of $700,000. In conjunction with that exercise, we and the investors agreed to further amend the remaining Series G Warrants, to extend the term of the unexercised balance of the Series G Warrants until November 6, 2009 and to delete certain of the potential adjustment provisions. In addition, we issued new Series H Warrants to purchase up to an aggregate of 625,000 shares of Common Stock at a strike price of $1.34 per share. The Series H Warrants became exercisable on December 1, 2009 and originally had a term of six months from the day they first become exercisable. In conjunction with the May 17, 2010 transaction discussed below, the expiration date for the Series H Warrants was extended until December 1, 2011.

On October 21, 2009, we entered into a securities purchase agreement with an institutional investor. The agreement permits us to exercise a “put” right to sell shares of common stock to the purchaser, and permits the purchaser to exercise a “call” right to purchase shares of common stock from us, in multiple “draw downs” from time to time over the life of the agreement. The agreement extends until October 21, 2010, unless terminated before that date. The shares in each draw down will be sold at the closing price from the latest trading day, but in no event less than $1.14 per share. Unless waived by both parties, the maximum dollar value of any single draw down is limited to 25% of the total dollar trading volume on the trading day prior to the day of the draw down notice, or $250,000, whichever is less. Sales of shares and warrants under the agreement are subject to the limitation on the aggregate value of securities issuable in a rolling 12 month period under our Form S-3 registration statement. Over the life of the agreement, the


aggregate maximum amount of draw downs is $15 million. At the end of the agreement, the purchaser will receive warrants to purchase a number of shares of common stock equal to 15% of the number of draw down shares issued over the course of the agreement, with a warrant term of three years and exercise prices equal to the purchase prices for each related draw down, or the latest closing market price when the warrant is issued, whichever is higher. During the nine months ended September 30, 2010, we issued 483,753 shares of common stock under the securities purchase agreement, with net proceeds of approximately $594,000.

On May 17, 2010, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale of 2,717,392 shares of common stock at a price of $0.92 per share and Series I Warrants to purchase up to 1,358,696 shares of common stock (50% of the number of shares of common stock initially issued) at an exercise price of $1.10 per share, which warrants are not exercisable until six months after issuance and have a term of five and one-half years. The aggregate purchase price for the Securities was $2,500,000. Under the Securities Purchase Agreement, we also agreed to amend the still outstanding Series H Warrants to extend the term until December 1, 2011. The outstanding Series H Warrants were issued on June 1, 2009, and were due to expire on June 1, 2010. The remaining outstanding Series H Warrants represent the right to purchase up to an aggregate of 625,000 shares of common stock at an exercise price of $1.34 per share.

See Note 12 for a discussion of the accounting treatment of the stock warrant transactions described above.

11. Stock Option Plan and Stock Incentive Plan
 
On August 8, 2006, we 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. On October 21, 2008, the Stock Plan was amended to increase the number of shares available for issuance to 5,000,000 shares. At the annual meeting of shareholders held on May 7, 2010, the Stock Plan was amended to increase the number of shares available for issuance to 12,000,000 shares.

Restricted stock and options to purchase common stock may be issued under the Stock Plan. The restriction period on the restricted stock granted generally expires at a rate of 25% per year over four years, unless decided otherwise by our Compensation Committee. Options to purchase common stock generally vest and become exercisable as to one-third of the total amount of shares subject to the option on each of the first, second and third anniversaries from the date of grant. Options to purchase common stock generally have a 5-year term.

We use the Black-Scholes-Merton Options Pricing Model (Black-Scholes) to estimate fair value of our employee and our non-employee director stock-based awards. Black-Scholes requires various judgmental assumptions, including estimating stock price volatility, expected option life and forfeiture rates. If we had made different assumptions, the amount of our deferred stock-based compensation, stock-based compensation expense, gross margin, net loss and net loss per share amounts could have been significantly different. We believe that we have used reasonable methodologies, approaches and assumptions to determine the fair value of our common stock, and that our deferred stock-based compensation and related amortization were recorded properly for accounting purposes. If any of the assumptions we used change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

We measure compensation expense for non-employee stock-based compensation under Accounting Standards Codification (ASC) 505-50, “Equity-Based Payments to Non-Employees.” The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The estimated fair value is measured utilizing Black-Scholes using the value of our common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete (generally the vesting date). The fair value of the equity instrument is charged directly to expense and additional paid-in capital.

We recognized stock-based compensation expense of approximately $1.6 million and $862,000 during the three months ended September 30, 2010 and 2009, respectively, and approximately $2.5 million and $1.9 million during the nine months ended September 30, 2010 and 2009, respectively, relating to compensation expense calculated based on the fair value at the time of grant for restricted stock and based on Black-Scholes for stock options granted under the Stock Plan.



The following table sets forth a summary of restricted stock activity for the nine months ended September 30, 2010:

   
Number of Restricted Shares
   
Weighted-Average Grant Date
Fair Value
 
Outstanding and not vested beginning balance at January 1, 2010
    779,929     $ 2.63  
Granted
    887,997     $ 0.70  
Forfeited/cancelled
    (355,428 )   $ 2.05  
Released/vested
    (888,019 )   $ 1.11  
Outstanding and not vested at September 30, 2010
    424,479     $ 2.27  

Restricted stock is valued at the grant date fair value of the common stock and expensed over the requisite service period or vesting period. We estimate forfeitures when recognizing stock-based compensation expense for restricted stock, and the estimate of forfeitures is adjusted over the requisite service period should actual forfeitures differ from such estimates. At September 30, 2010 and December 31, 2009, there was approximately $846,000 and $1.8 million, respectively, of unrecognized stock-based compensation expense associated with the granted but unvested restricted stock. Stock-based compensation expense relating to these restricted shares is being recognized over a weighted-average period of 2.1 years. The total fair value of shares vested during the nine months ended September 30, 2010 was approximately $624,000. Tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows on our consolidated statements of cash flows. During the nine months ended September 30, 2010, there were no excess tax benefits relating to restricted stock 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 nine months ended September 30, 2010:

   
Number of Shares Subject to Option
   
Weighted-Average Exercise Price
 
Outstanding at January 1, 2010
    2,518,529     $ 3.07  
Granted
    1,576,500     $ 0.87  
Forfeited/cancelled/expired
    (188,332 )   $ 1.89  
Exercised
        $ -  
Outstanding at September 30, 2010
    3,906,697     $ 2.24  
Exercisable at September 30, 2010
    1,397,201     $ 4.27  

Stock options are valued at the estimated fair value grant date or the measurement date and expensed over the requisite service period or vesting period. The weighted-average volatility was based upon the historical volatility of our common stock price. The fair value of stock option grants during the nine months ended September 30, 2010 and 2009 was estimated using the Black-Scholes option-pricing model with the following assumptions:

   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Weighted-average volatility
    105.0 %     103.2 %
Expected dividends
    0.0 %     0.0 %
Expected life
 
3.9 years
   
3.3 years
 
Weighted-average risk-free interest rate
    1.1 %     2.9 %

The weighted-average fair value per share of the stock options as determined on the date of grant was $0.51 for the stock options to purchase 1.6 million shares of common stock granted during the nine months ended September 30, 2010. The weighted-average remaining contractual term for the stock options outstanding (vested and expected to vest) and exercisable as of September 30, 2010 and 2009, was 2.3 years and 3.8 years, respectively. The total estimated fair value of stock options vested during the nine months ended September 30, 2010 was approximately $315,000.



We estimate forfeitures when recognizing stock-based compensation expense for stock options and the estimate of forfeitures is adjusted over the requisite service period should actual forfeitures differ from such estimates. At September 30, 2010 and December 31, 2009, there was approximately $1.2 million and $2.3 million, respectively, 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 2.45 years. Tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) is classified as financing cash flows on our consolidated statements of cash flows. During the nine months ended September 30, 2010, there were no excess tax benefits relating to stock options and therefore there is no impact on the accompanying consolidated statements of cash flows.

12. Stock Warrants

During March 2009, in connection with the March 2009 Offering as described above in Note 10, we issued three series of warrants (Series E, F and G) to purchase shares of our common stock.

We issued Series E Warrants to purchase 1,339,285 shares of common stock at an exercise price of $1.34 per share. The fair value of the warrants was estimated using Black-Scholes with the following weighted average assumptions:  risk-free interest rate of 2.69%, an expected life of five years; an expected volatility factor of 112% and a dividend yield of 0.0%. The value assigned to these warrants was approximately $1.0 million, of which $1.0 million was reflected as common stock warrant liability with an offset to additional paid-in capital as of the offering close date. As of September 30, 2010, the fair value of the warrants was estimated using Black-Scholes with the following weighted average assumptions:  risk-free interest rate of 0.6%, an expected life of 3.4 years; an expected volatility factor of 103.9% and a dividend yield of 0.0%. The fair value of the warrants decreased to $448,000 as of September 30, 2010 and we recognized an $799,000 favorable non-cash adjustment from the change in fair value of these warrants for the nine months ended September 30, 2010.

We issued Series F Warrants to purchase 540,000 shares of common stock in connection with the March 2009 Offering at an exercise price of $1.12 per share. During March 2009, warrants to purchase 539,867 shares of common stock were canceled upon the conversion of 2,000 shares of Series A preferred stock into 539,867 shares of common stock pursuant to the terms of the March 2009 Offering. Because of the built-in price protection in the combined 150-Day Warrants and preferred stock instrument, we classified the estimated fair value of the combined instrument of $380,000 as a liability. The fair value of these warrants increased to $464,000 at the time of the cancellation resulting in recognizing an $84,000 non-cash charge. The $464,000 common stock warrant liability was reclassified to additional paid-in capital upon cancelation. The remaining 133 Series F Warrants expired during May 2009.

We issued Series G Warrants to purchase 2,196,400 shares of common stock in connection with the March 2009 Offering at an exercise price of $1.12 per share (the “Original Series G Warrants”). The fair value of the warrants was estimated using Black-Scholes with the following weighted-average assumptions:  risk-free interest rate of 0.16%, an expected life of 51 days; an expected volatility factor of 112% and a dividend yield of 0.0%. The original value assigned to these warrants was approximately $264,000 and we recorded the $264,000 fair value of the warrants to common stock warrant liability with an offset to additional paid-in-capital at the offering close date.

On April 20, 2009, we entered into an amendment agreement (the “Amendment Agreement”) with investors who had previously acquired Series G Warrants in connection with the March 2009 Offering. In the Amendment Agreement, the investors agreed to purchase 425,000 shares of common stock through exercise of their Original Series G Warrants and we agreed to extend the term of the remaining Original Series G Warrants until August 10, 2009 and to issue to the investors additional, newly issued Series G Warrants to purchase up to an aggregate of 1,275,000 shares of our common stock on the same terms as the amended Original Series G Warrants and at a strike price of $1.12 per share (the “Additional Series G Warrants”). As of April 20, 2009, the fair value of the amended Original Series G Warrants and the Additional Series G Warrants was estimated using Black-Scholes with the following weighted average assumptions:  risk-free interest rate of 0.04%, an expected life of 0.2 years; an expected volatility factor of 115.6% and a dividend yield of 0.0%. As a result, the fair value of the warrants increased $653,000 and we recognized a non-cash charge from the change in fair value of these warrants.

On June 1, 2009, we entered into another amendment agreement (the “Second Amendment Agreement”) with investors who had previously acquired Series G Warrants. Pursuant to the Second Amendment Agreement, the investors agreed to purchase 625,000 shares of common stock through exercise of their Series G Warrants and we agreed to further extend the term of the remaining Series G Warrants until November 6, 2009. As of June 1, 2009, the fair value of the remaining Original Series G Warrants and the Additional Series G Warrants was estimated using Black-Scholes with the following weighted average assumptions:  risk-free interest rate of 0.13%, an expected life of 0.3 years; an expected volatility factor of 115.2% and a dividend yield of 0.0%. As a result, the fair value of the warrants increased $258,000 and we recognized a non-cash charge from the change in fair value of these warrants. Pursuant to the


Second Amendment Agreement, we and the investors also agreed to delete certain of the potential adjustment provisions and as a result, the remaining warrant liability of the Original Series G Warrants and the Additional Series G warrants of $777,400 was reclassified to additional paid-in-capital. Lastly, pursuant to the Second Amendment Agreement, we agreed to issue new Series H Warrants to purchase up to an aggregate of 625,000 shares of our common stock at a strike price of $1.34 per share. The Series H Warrants became exercisable on December 1, 2009 and had a term of six months from the day they first became exercisable. The fair value of the Series H Warrants was estimated using Black-Scholes with the following weighted average assumptions:  risk-free interest rate of 0.29%, an expected life of 0.8 years; an expected volatility factor of 115.2% and a dividend yield of 0.0%. The value assigned to these warrants was approximately $303,400 as of June 1, 2009, and we recognized a non-cash charge for the fair value of these warrants of $303,000 with an offset to additional paid-in-capital.

On May 17, 2010, we entered into a Securities Purchase Agreement and issued Series I Warrants to purchase 1,358,696 shares of common stock at an exercise price of $1.10 per share (the “Series I Warrants”). The fair value of the warrants was estimated using Black-Scholes with the following weighted-average assumptions:  risk-free interest rate of 1.28%, an expected life of 4.1 years; an expected volatility factor of 107% and a dividend yield of 0.0%. The estimated value of these warrants was approximately $950,000. Under the May 17, 2010 Securities Purchase Agreement, we also agreed to extend the term of the remainder of our outstanding Series H Warrants until December 1, 2011. The estimated value assigned to the extension of these warrants was approximately $210,000.

As a result of our adoption of Topic 815 - Derivatives and Hedging (Topic 815), warrants to purchase 588,010 shares of our common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment. The warrants had exercise prices ranging from $2.75-$3.95 and expired in March and June 2010. Effective January 1, 2009, we reclassified the fair value of these warrants to purchase common stock, which had exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in March and June 2007. On January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $998,000 to beginning retained deficit and $289,000 to common stock warrant liability, to recognize the fair value of such warrants on such date. These warrants were subject to an adjustment triggered by the March 2009 Offering, such that the 588,010 shares of common stock were adjusted to purchase an aggregate of 2,618,943 shares of our common stock at an exercise price of $0.86 per share. As of September 30, 2010, all of these warrants were either exercised or expired. Upon the exercise or expiration of warrants during the nine months ended September 30, 2010, the fair value of the warrants was estimated using the Black-Scholes pricing model with the following weighted average assumptions:  risk-free interest rates ranging from 0.02%-0.17%, expected life ranging from 0.01-0.42 years, an expected volatility factor of 107%-111% and a dividend yield of 0.0%. We recognized a $1.1 million favorable non-cash adjustment from the change in fair value of these warrants for the nine months ended September 30, 2010.

The following table summarizes the Warrant activity for the nine months ending September 30, 2010:

   
Warrants for Number of Shares
   
Weighted-Average Exercise Price
 
Outstanding at January 1, 2010
    5,426,152     $ 2.78  
Issued
    1,358,696     $ 1.10  
Exercised
    (1,072,076 )   $ (0.86 )
Cancelled/expired
    (1,363,146 )   $ (0.86 )
Outstanding at September 30, 2010
    4,349,626     $ 3.33  

13. Earnings Per Share

On January 1, 2009, we adopted Accounting Standards Codification (ASC) 260 (formerly Financial Accounting Standards Board Staff Position (FSP) Emerging Issues Task Force (EITF) 03-6-1) (ASC 260), Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (the “Staff Position”), which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and shall be included in the computation of net income (loss) per share pursuant to the two-class method described in ASC 260 (formerly Statement of  Financial Accounting Standards (SFAS) No. 128), Earnings Per Share.
 
 
In accordance with the Staff Position, basic net income (loss) per share is computed by dividing net income (loss), excluding net income (loss) attributable to participating securities, by the weighted average number of shares outstanding less the weighted average unvested restricted shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss), excluding net income (loss) attributable to participating securities, by the denominator for basic net income (loss) per share and any dilutive effects of stock options, restricted stock, convertible notes and warrants.



The following table sets forth the computation of basic and diluted net loss per share (unaudited):

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Basic:
                       
Numerator:
                       
Net loss
  $ (6,195,552 )   $ (2,404,210 )   $ (11,084,410 )   $ (12,169,136 )
Less: Net loss allocated to participating securities
    101,017       54,625       199,720       302,549  
Net loss attributable to stockholders
  $ (6,094,535 )   $ (2,349,585 )   $ (10,884,690 )   $ (11,866,587 )
Denominator:
                               
Weighted-average shares outstanding
    40,762,256       34,132,948       38,850,465       32,261,759  
Weighted-average unvested restricted shares outstanding
    (664,616 )     (775,518 )     (700,010 )     (802,089 )
Denominator for basic net loss per share
    40,097,640       33,357,430       38,150,455       31,459,670  
                                 
Basic net loss per share attributable to common stockholders
  $ (0.15 )   $ (0.07 )   $ (0.29 )   $ (0.38 )
                                 
Diluted:
                               
Numerator:
                               
Net loss
  $ (6,195,552 )   $ (2,404,210 )   $ (11,084,410 )   $ (12,169,136 )
Less: Net loss allocated to participating securities
    101,017       54,625       199,720       302,549  
Net loss attributable to stockholders
  $ (6,094,535 )   $ (2,349,585 )   $ (10,884,690 )   $ (11,866,587 )
Denominator:
                               
Denominator for basic calculation
    40,097,640       33,357,430       38,150,455       31,459,670  
Weighted-average effect of dilutive stock options
                       
Denominator for diluted net loss per share
    40,097,640       33,357,430       38,150,455       31,459,670  
                                 
Diluted net loss per share attributable to common stockholders
  $ (0.15 )   $ (0.07 )   $ (0.29 )   $ (0.38 )

The following table sets forth potential shares of common stock at the end of each period presented that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive:

   
September 30,
 
   
2010
   
2009
 
Stock options outstanding
    3,906,697       2,261,529  
Unvested restricted stock
    424,479       731,200  
Warrants to purchase common stock
    4,349,626       6,204,117  

14. Fair Value Measurement

We use a fair-value approach to value certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We use a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level one — Quoted market prices in active markets for identical assets or liabilities;
   
Level two — Inputs other than level one inputs that are either directly or indirectly observable; and
   



 
Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter. Assets and liabilities measured at fair value on a recurring basis are summarized as follows (unaudited):

Assets
 
Level 1
   
Level 2
   
Level 3
   
September 30,
2010
 
Fair value of cash equivalents
  $ 1,000,329     $     $     $ 1,000,329  
Total
  $ 1,000,329     $     $     $ 1,000,329  
                                 
Liabilities
 
Level 1
   
Level 2
   
Level 3
   
September 30,
2010
 
Fair value of common stock warrants
  $     $     $ 448,048     $ 448,048  
Accrued rent related to office closures
                248,179       248,179  
Total
  $     $     $ 696,227     $ 696,227  

Cash equivalents represent the fair value of our investment in a money market account as of September 30, 2010. A discussion of the valuation techniques used to measure fair value for the common stock warrants is in Note 12. The accrued rent relates to a non-cash charge for the closure of our Anaheim, Clovis, Palm Springs and San Diego, California and Denver, Colorado locations, calculated by discounting the future lease payments to their present value using a risk-free discount rate from 0.0% to 1.2%. The accrued rent is included within liabilities of discontinued operations and long-term liabilities of discontinued operations in our consolidated balance sheets.

The following table shows the changes in Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2010:
   
Other Liabilities*
   
Common Stock Warrant Liability
   
Total Level 3
 
Beginning balance – January 1, 2010
  $ 107,110     $ 2,536,402     $ 2,643,512  
Total realized and unrealized gains or losses
    551       (1,876,759 )     (1,876,208 )
Purchases, sales, repayments, settlements and issuances, net
    (95,747 )     (211,595 )     (307,342 )
Net transfers in and/or (out) of level 3
    236,265             236,265  
Ending balance – September 30, 2010
  $ 248,179     $ 448,048     $ 696,227  

*           Represents the estimated fair value of the office closures included in accrued and other long-term liabilities.

15. Income Taxes
 
Deferred income taxes arise from timing differences resulting from income and expense items reported for financial account 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. During the nine months ended September 30, 2010 and 2009, respectively, there was no income tax expense or benefit for federal and state income taxes in the accompanying condensed consolidated statements of operations due to our net loss and a valuation allowance on the resulting deferred tax asset. Our deferred tax asset has a 100% valuation allowance.

16. Commitments and Contingencies

On March 31, 2010, a U.S. Federal Customs Headquarters ruling (Headquarters Ruling) revoked the U.S. Federal Custom Agency ruling from the New York office (NY Ruling) made on January 9, 2009 imposing a 2.5% tariff on the solar module imports of one U.S. based solar company. The tariff classification ordered in the NY Ruling was different than the one historically used in the solar industry for module imports. The Headquarters Ruling determined that solar modules should be treated as duty free consistent with historical practice. After the NY Ruling we had reserved $124,000 under accrued liabilities in our condensed consolidated balance sheet as of December 31, 2009. As a result of this ruling, we reversed the $124,000 accrual in the three months ended March 31, 2010, and as of September 30, 2010, we had no remaining liability.



Litigation

On May 18, 2009, we and certain of our officers were named in a putative class action complaint in the United States District Court Northern District of California San Jose Division alleging violations of the federal securities laws. The suit alleges various omissions and misrepresentations during the period of December 26, 2007 to March 13, 2008 regarding, among other things, our backlog reporting and bank line of credit. We moved to dismiss the complaint on February 12, 2010, for failure to state a claim for relief. On May 20, 2010, the District Court granted in part our motion to dismiss the complaint. The District Court dismissed plaintiffs' claims relating to statements made prior to the class period, including statements relating to our backlog, our Andalay product, and our supply agreement with Suntech Power Holdings Co., Ltd. (“Suntech”). Due to the stage of the case, we have not had the opportunity to present any defenses to the only two remaining allegations, which relate to our December 26, 2007 disclosure of the Comerica line of credit and our January 2, 2008 announcement of the Suntech license agreement. On October 22, 2010, plaintiffs moved the court to certify themselves as a class, a procedure required in order for plaintiffs to move forward with their case as a class action. We will be moving to oppose plaintiffs’ motion for class certification, and a hearing on the issue is scheduled for February 7, 2011. Discovery is also currently ongoing with a court imposed cut-off date of August 1, 2011. We believe that the claims in this case are entirely without merit and we are defending the case vigorously. However, this matter is in the early stages and we cannot reasonably estimate an amount of potential loss, if any, at this time.
 
 
Beginning on May 28, 2010, several derivative lawsuits were brought against us, current and former members of our board of directors, and certain current and former officers in Santa Clara Superior Court (Dulgarian v. Cinnamon, et. al.) and in the United States District Court Northern District of California San Jose Division (Sabbag v. Cinnamon, et al.; Jaquez v. Cinnamon, et. al; Triskett v. Cinnamon, et. al.; Cilurzo v. Cinnamon, et. al.; and Klein v. Cinnamon, et al.), respectively. Such tag-along derivative cases often occur when a securities class action suit is pending. The complaints repeat many of the allegations made by plaintiffs in the class action with respect to our backlog, our Andalay product and our supply agreement with Suntech, which were recently dismissed by the District Court in the class action. The complaints also allege the making of improper statements concerning our license agreement with Suntech and our Comerica line of credit, a failure to exercise oversight of the financial and reporting process, and trading on inside information. The plaintiffs seek damages, restitution, attorneys' fees, equitable and/or injunctive relief and a judgment directing us to improve our corporate governance. On July 23, 2010, we filed demurrers seeking dismissal of the case brought in Superior Court on the grounds there is no legal basis for the lawsuit. A hearing on this demurrer motion is scheduled for December 3, 2010. On September 17, 2010, we filed a motion to dismiss or in the alternative stay the District Court case in favor of the prior-filed and substantially similar derivative action pending in the Superior Court in order to reduce the derivative actions pleading the same claims based on the same facts to one case in one court. A hearing on this motion is scheduled for November 5, 2010. We believe that the claims in these complaints are entirely without merit and we intend to continue vigorously defending these matters.

On October 22, 2009, we filed a complaint against several defendants including Zep Solar, Inc. in the United States District Court Northern District of California San Francisco Division for the direct and contributory infringement of U.S. Patent No. 7,406,800 (our Andalay patent). Our suit alleges the defendants are engaged in various sales, marketing and other activities involving a product that embodies inventions contained in our Andalay patent. The defendants moved to stay the case on January 27, 2010 after filing a petition with the United States Patent and Trademark Office (“USPTO”) to have the Andalay patent re-examined. On March 16, 2010, the USPTO granted the defendant’s patent re-examination request in part, and the case is currently stayed during this process. Over 95% of patent re-examination requests are granted by the USPTO almost as a matter of routine, and the fact that a request is granted does not indicate the likely disposition of the re-examination. Recently, the USPTO ruled that certain portions of the Andalay patent being re-examined remain valid over all of the challenges submitted by defendants, including some of the portions of the patent we are asserting in the Zep litigation. Based on the USPTO decision, a reduced number of claims remain at issue in the re-examination, and even if defendant’s re-examination request is ultimately successful with respect to the remaining portions of the Andalay patent, we would still have a patent which could be enforced against defendants. We are continuing to aggressively pursue this case.

We are also involved in other litigation from time to time in the ordinary course of business. In the opinion of management, the outcome of such proceedings will not materially affect our financial position, results of operations or cash flows.



17. Subsequent Events

On October 7, 2010, we entered into a Securities Purchase Agreement with certain institutional accredited investors relating to the sale of 4,000,000 shares of common stock at a price of $0.55 per share, along with the sale of Series J Warrants to purchase up to 1,600,000 shares of common stock (40% of the number of shares of common stock initially issued) at an exercise price of $0.61 per share. The warrants are not exercisable until six months after issuance and have a term of five years from the date they are first exercisable. The aggregate purchase price for the shares and the warrants was $2,200,000.
 
Under the Securities Purchase Agreement, we agreed to amend the outstanding Series I Warrants, such that the exercise price of the Series I Warrants is reduced from $1.10 per share to $0.61 per share. In addition, with respect to 45% of the shares of common stock subject to each of the Series I Warrants, (i) each warrant is not exercisable until the six month anniversary of the closing under the Securities Purchase Agreement, and (ii) the expiration date is extended such that the warrant is exercisable for five years from the delayed initial exercise date. The outstanding Series I Warrants were originally issued on May 17, 2010, and represent the right to purchase up to an aggregate of 1,358,696 shares of common stock.

We have evaluated subsequent events through the date of this filing, noting no other events that require adjustment of, or disclosure in, the consolidated financial statements for the period ended September 30, 2010.


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

All references to the “Company,” “we,” “our,” and “us” refer to Akeena Solar, Inc. (d/b/a Westinghouse Solar) and its subsidiaries (“Akeena Solar” or “Westinghouse Solar”).
 
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 Quarterly Report and in our Annual Report on Form 10-K. This discussion contains “forward-looking statements,” including but not limited to expectations regarding revenue growth, net sales, gross profit, operating expenses and performance objectives, and statements using the terms “believes,” “expects,” “will,” “could,” “plans,” “anticipates,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “should,” “may,” or the negative of these terms or similar expressions. These forward-looking statements are subject to risks and uncertainties that may cause our 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 below in Item 1A. of Part II of this Quarterly Report. Further information on potential risk factors that could affect our future business and financial results can be found in our periodic filings with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to update any of these forward-looking statements.

Company Overview
 
We are a manufacturer and distributor of solar power systems and solar panels with integrated microinverters (which we call AC solar panels). We design, market and sell these solar power systems to solar installers, trade workers and do-it-yourself customers through distribution partnerships, our dealer network and retail outlets. Our products are designed for use in solar power systems for residential and commercial rooftop customers. 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.

Our corporate headquarters is located at 1475 S. Bascom Ave., Suite 101, Campbell, CA  95008-0528. Our telephone number is (408) 402-9400. Additional information about Akeena Solar is available on our website at http://www.westinghousesolar.com and http://www.akeena.com. The information on our web sites is not incorporated herein by reference.

On September 7, 2010, we announced that we were exiting the solar panel installation business and we were expanding our distribution business to include sales of our Westinghouse Solar Power Systems directly to dealers in California. The exit from the installation business is expected to be completed by the end of the fourth quarter of 2010. The installation business segment had historically been our core business and represented most of our revenue. Because of our exit from the installation business and the discontinuation of that segment, our financial results for the third quarter of 2010 and future periods will be not be easily comparable to our results from past periods.

During September 2007, we introduced our new solar panel technology (“Andalay”), which significantly reduced installation time and costs, as well as provide superior reliability and aesthetics, when compared to other solar panel mounting products and technology. Our Andalay panel technology 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) approximately 70% fewer roof-assembled parts and approximately 50% less roof-top labor required; (v) approximately 25% fewer roof attachment points; (vi) complete compliance with the National Electric Code and UL wiring and grounding requirements. Suntech Power Holdings Co. Ltd. (“Suntech”) and Kyocera Solar, Inc. (“Kyocera”) have agreements with us to provide volume manufacturing and delivery of our Andalay product used in our solar system installations. On August 5, 2008, we received from the United States Patent and Trademark Office U.S. Patent #7,406,800 which covers key claims of our Andalay solar panel technology, as well as U.S. Trademark #3481373 for registration of the mark “Andalay.”

In February 2009, we announced a strategic partnership with Enphase, a leading manufacturer of microinverter products, to develop and market Andalay solar panel systems with ordinary AC house current output instead of high voltage DC output. We introduced Andalay AC panel products and began offering them to our customers in the second quarter of 2009. Andalay AC panels deliver 5-25% more energy compared to ordinary panels, produce safe household AC power, and have built-in panel level monitoring, racking, wiring, grounding and microinverters. With 80% fewer parts and 5 – 25% better performance than ordinary DC panels, we believe Andalay AC panels are an attractive solution for solar installers, trade workers and do-it-yourself customers.


On May 17, 2010, we entered into an exclusive worldwide agreement to manufacture, distribute, market and install our solar panels under the Westinghouse name. On July 22, 2010, we announced that we will operate under the name “Westinghouse Solar” and, effective July 23, 2010 at the opening of the market, our stock began trading under the stock symbol “WEST” on the NASDAQ Capital Market, and we are listed as Akeena Solar, Inc. (d/b/a Westinghouse Solar). Subject to shareholder approval, we plan in the future to formally change our corporate name to Westinghouse Solar, Inc. Our installation business in California will continue to operate under the name Akeena Solar.
 
Concentration of Risk in Customer and Supplier Relationships

During both the three months and nine months ended September 30, 2010, our three largest customers together accounted for 54% of our net revenue from continuing operations. In each of those periods, our top two customers each accounted for more than 10% of our total net revenue. The relative magnitude and the mix of sales to our largest customers have varied significantly quarter to quarter. Over time, as we work to add additional distributors to our network and to grow our distribution business, we anticipate that the relative significance to our revenue of any particular customer will decline. We do not expect any one customer to continue to account for more than 10% of our revenue on an ongoing basis. 

We currently obtain virtually all of our solar panels from Suntech, which manufactures panels for us that are built to our unique specifications, and we currently purchase all of the microinverters used in our AC solar panels from Enphase.  We believe that our commercial relationship with each of those suppliers is good.  Although we had a significant amount of inventory on hand as of September 30, 2010, and although we believe we could find alternative suppliers for solar panels manufactured to our specifications, and alternative suppliers for microinverters, on comparable terms, the sudden loss of either of our current primary component supply relationships could cause a delay in manufacturing and be disruptive to our operations.

Contingencies

A U.S. Federal Custom Agency ruling from the New York region (NY Ruling) from January 9, 2009 is imposing a 2.5% tariff on the solar module imports of one U.S. based solar company. The tariff classification ordered in the NY Ruling is different than the one historically used in the solar industry for module imports. However, we had reserved $124,000 under accrued liabilities in our condensed consolidated balance sheet as of December 31, 2009. On March 31, 2010, the U.S. Federal Custom Agency revoked the NY Ruling and determined that solar modules should be treated as duty free. As a result of this ruling, we reversed the $124,000 accrual in the first quarter ended March 31, 2010, and as of September 30, 2010, we had no remaining liability.

Three Months Ended September 30, 2010 as Compared to Three Months Ended September 30, 2009

Results of Operations

The following table sets forth, for the periods indicated, certain information related to our operations, expressed in dollars and as a percentage of net sales:

   
Three Months Ended September 30,
 
   
2010
   
2009
 
Net revenue
  $ 2,142,229     100.0 %   $ 402,117     100.0 %
Cost of goods sold
    1,827,931     85.3 %     361,024     89.8 %
Gross profit
    314,298     14.7 %     41,093     10.2 %
Operating expenses:
                           
Sales and marketing
    267,847     12.5 %     57,994     14.4 %
General and administrative
    2,321,830     108.4 %     2,369,583     589.3 %
Total operating expenses
    2,589,677     120.9 %     2,427,577     603.7 %
Loss from operations
    (2,275,379 )   (106.2 )%     (2,386,484 )   (593.5 )%
Other income (expense):
                           
Interest income (expense), net
    (5,059 )   (0.2 )%     13,944     3.5 %
Unrealized gain (loss) on adjustment to the fair value of common stock warrants
    81,857     3.8 %     758,352     188.6 %
Total other income (expense)
    76,798     3.6 %     772,296     192.1 %
Loss before provision for income taxes
    (2,198,581 )   (102.6 )%     (1,614,188 )   (401.4 )%
Provision for income taxes
        0.0 %         0.0 %
Net loss from continuing operations
    (2,198,581 )   (102.6 )%     (1,614,188 )   (401.4 )%
Discontinued Operations
                           
Loss from discontinued operations
    (3,996,971 )   (186.6 )%     (790,022 )   (196.5 )%
Net loss
  $ (6,195,552 )   (289.2 )%   $ (2,404,210 )   (597.9 )%
                             
Loss from continuing operations per common and common equivalent share (basic and diluted):
  $ (0.05 )         $ (0.05 )      
                             
Loss from discontinued operations per common and common equivalent share (basic and diluted):   $  (0.10          (0.02      
                             
Net loss per common and common equivalent share (basic and diluted):    (0.15          (0.07      

 


Discontinued operations

In September 2010, we announced we were exiting the installation business and reclassifying the installation business segment as discontinued operations. Certain line items in our condensed consolidated balance sheets, condensed consolidated statement of operations and our condensed consolidated statements of cash flows have been reclassified to conform to the current presentation.

Net revenue

We generate revenue from the sale of solar power systems. In the three months ended September 30, 2010, we generated $2.1 million of revenue, an increase of $1.7 million, or 432.7%, compared to $402,000 of revenue in the three months ended September 30, 2009. The increase in revenue was due to the growth of our network of distribution dealers.

Cost of goods sold
 
Cost of goods sold as a percent of revenue during the three months ended September 30, 2010, was 85.3% of net revenue compared to 89.8% during the three months ended September 30, 2009. The decrease in cost of goods sold as a percent of revenue was due to lower panel costs in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Gross profit from continuing operations for the three months ended September 30, 2010 was $314,000, or 14.7% of revenue, compared to $41,000 or 10.2% of revenue for the same period in 2009. The increase in the gross margin in the three months ended September 30, 2010 was due to the decrease in panel costs and also due to introductory sales pricing in the prior year as a result of the launch of our distribution business in the second quarter of 2009.

Sales and marketing expenses

Sales and marketing expenses for the three months ended September 30, 2010 were $268,000, or 12.5% of net revenue as compared to $58,000, or 14.4% of net revenue during the same period of the prior year. The increase in sales and marketing expense for the three months ended September 30, 2010, reflects higher payroll and commissions of $91,000, increased expenditures for advertising and trade shows of $76,000 and higher stock-based compensation of $27,000.

General and administrative expenses
 
General and administrative expenses for the three months ended September 30, 2010 were $2.3 million, or 108.4% of net revenue as compared to $2.4 million, or 589.3% of net revenue during the same period of the prior year. The decrease in general and administrative expense for the three months ended September 30, 2010 was due to lower research and development costs of $58,000 and a shift in the timing of the costs of our annual shareholder meeting of $38,000 from the third quarter in 2009 into the second quarter of 2010, partially offset by higher payroll costs of $17,000 and higher insurance costs of $11,000.
 
Interest, net

During the three months ended September 30, 2010, interest expense was approximately $7,000, slightly offset by interest income of $2,000 compared with interest income of $26,000, partially offset by interest expense of $12,000 during the same period in 2009. The decrease in interest income for the three months ended September 30, 2010 compared to the prior year is due to a decrease in our average cash balance.
 
Adjustment to the fair value of common stock warrants

During the three months ended September 30, 2010, we recorded mark-to-market adjustments to reflect the fair value of common stock warrants accounted for as a liability in accordance with provisions of the warrant agreements, resulting in an unrealized gain of $82,000 in our condensed consolidated statements of operations. The fair value of the warrants are lower now primarily due a shorter life for the remainder of our outstanding warrants and a decrease in the price of our common stock. During the three months ended September 30, 2009, we recorded mark-to-market adjustments resulting in a $758,000 unrealized gain in our condensed consolidated statements of operations.

Income taxes

During the three months ended September 30, 2010 and September 30, 2009, there was no income tax expense or benefit for federal and state income taxes reflected in our condensed consolidated statements of operations due to the our net loss and a valuation allowance on the resulting deferred tax asset.


Net loss from continuing operations

Net loss from continuing operations for the quarter ended September 30, 2010 was $2.2 million, or $0.05 per share, compared to a net loss from continuing operations of $1.6 million, or $0.05 per share, for the quarter ended September 30, 2009. Net loss for the quarter ended September 30, 2010 included a favorable non-cash adjustment to the fair value of common stock warrants of $82,000. Net loss for the quarter ended September 30, 2009 included a favorable non-cash adjustment of $758,000 to reflect the fair value of common stock warrants. Excluding the adjustments to reflect the fair value of warrants, net loss from continuing operations for the quarter ended September 30, 2010 would have been $2.3 million, or $0.05 per share, compared to $2.4 million, or $0.07 per share, for the same period last year.

Loss from discontinued operations

During the quarter ended September 30, 2010, we recorded a $4.0 million loss from the discontinuance of our installation business segment, compared with a loss of $790,000 during the same period in 2009. As a result of the decision to exit the California installation business we recorded a restructuring charge totaling approximately $2.6 million for the quarter ended September 30, 2010 the majority of which were non-cash charges. This restructuring charge was comprised primarily of (i) one-time severance costs of $809,000 related to headcount reductions, which was paid in shares of our common stock, (ii) inventory write downs of $698,000, (iii) lease accelerations and the write off of leasehold improvements of $307,000, (iv) goodwill impairment of $299,000, (v) vehicle, furniture and fixtures and computer equipment write downs of $290,000 and (vi) other prepaid costs write-downs of $239,000.

Nine Months Ended September 30, 2010 as compared to Nine Months Ended September 30, 2009

The following table sets forth, for the periods indicated, certain information related to our operations, expressed in dollars and as a percentage of net sales:

   
Nine Months Ended September 30,
 
   
2010
   
2009
 
Net revenue
  $ 5,096,656       100.0 %   $ 604,473     100.0 %
Cost of goods sold
    4,325,204       84.9 %     539,674     89.3 %
Gross profit
    771,452       15.1 %     64,799     10.7 %
Operating expenses:
                             
Sales and marketing
    705,610       13.8 %     117,508     19.4 %
General and administrative
    7,032,474       138.0 %     6,278,439     1,038.7 %
Total operating expenses
    7,738,084       151.8 %     6,395,947     1,042.7 %
Loss from operations
    (6,966,632 )     (136.7 )%     (6,331,148 )   (1,032.0 )%
Other income (expense):
                             
Interest income (expense), net
    75       0.0 %     (46,357 )   (7.7 )%
Unrealized gain (loss) on adjustment to the fair value of common stock warrants
    1,876,759       36.8 %     (2,320,167 )   (391.5 )%
Total other income (expense)
    1,876,834       36.8 %     (2,366,524 )   (383.8 )%
Loss before provision for income taxes
    (5,089,798 )     (99.9 )%     (8,697,672 )   (1.423.5 )%
Provision for income taxes
          0.0 %         0.0 %
Net loss from continuing operations
    (5,089,798 )     (99.9 )%     (8,697,672 )   (1.423.5 )%
Discontinued Operations
                             
Loss from discontinued operations
    (5,994,612 )     (117.6 )%     (3,471,464 )   (574.3 )%
Net loss
  $ (11,084,410 )     (217.5 )%   $ (12,169,136 )   (2013.2 )%
                               
Loss from continuing operations per common and common equivalent share (basic and diluted):
  $ (0.13 )