State issuer's revenues for its most recent fiscal year (ended December 31, 2006): $ 55,886,830
State the aggregate market value of voting and nonvoting common equity by non-affiliates: $7,583,995 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 36,113,700 shares of common stock were outstanding as of August 27, 2007
GIRASOLAR INC.
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS PART I Page Item 1. . .DESCRIPTION OF BUSINESS 1 Item 2. . . . DESCRIPTION OF PROPERTY 19 Item 3. . . . LEGAL PROCEEDINGS 19 Item 4. . . . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
PART II Item 5 MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS . . . . AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES 20 Item 6. .. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 20 Item 7. . FINANCIAL STATEMENTS 23 Item 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON . .. ACCOUNTING AND FINANCIAL DISCLOSURE 24 Item 8A. CONTROLS AND PROCEDURES 24
PART III Item 9. . . . DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 24 Item 10 . . . EXECUTIVE COMPENSATION 25 Item 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND . . MANAGEMENT AND RELATED STOCKHOLDER MATTERS 25 Item 12 . . . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26 Item 13 . . . EXHIBITS, LIST AND REPORTS ON FORM 8-K 27 Item 14 . . . PRINCIPAL ACCOUNTANT FEES AND SERVICES 27
SIGNATURES 28 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . F-1 EXHIBITS |
SAFE HARBOR STATEMENT
This Annual Report on Form 10-K (the “Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Discussions containing such forward-looking statements may be found in Items 1,and 6 hereof, as well as within this Report generally. In addition, when used in this Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,” “intends,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from projected results. We do not undertake any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL INFORMATION
GiraSolar is a reporting company under the federal securities laws. Our shares of common stock are publicly traded on the Pink Sheets under the symbol GRSR.PK. We were organized under the laws of Delaware on June 7, 2002. In February 2006 we acquired 51% of the outstanding capital stock of GiraSolar, BV in exchange for an aggregate of 12,500,000 shares of our common stock. In May 2006, we had a recapitalization of our Company in which every two shares of capital stock outstanding were converted into five shares of capital stock. All shares and per share data for 2006 in this Annual Report have been adjusted retroactively to reflect such recapitalization.
ITEM 1. BUSINESS
GENERAL OVERVIEW
GiraSolar, Inc. develops, markets, and manufactures solar power products. Our business contributes to the promotion and growth of environmentally clean electric power throughout the world.
We own a majority of GiraSolar BV which is based in the Netherlands. GiraSolar BV operates through three subsidiaries: Dutch Solar BV, GiraMundo, and a 51% owned joint venture called GiraSolar Turkey. All of our revenue is derived from the activities of GiraSolar BV and its subsidiaries. Through our subsidiaries, we sell our own range of solar modules under the GiraSolar brand, as well as raw materials, intermediate products, third party brand modules and other solar affiliated products.
Solar modules are assemblies of photovoltaic cells that have been electrically interconnected and laminated in a physically durable and weather-tight package. We sell our products using distributors, systems integrators and other value-added clients, who often add value through system design by incorporating our modules associated with electronics, structures and wiring systems. Applications for our products include on-grid power generation, in which all or supplemental electricity is provided to an electric utility grid, and off-grid generation for markets where access to conventional electric power is not economical or physically feasible.
Our end-products are currently primarily sold in the EU, which constitutes approximately two thirds of the world market. Main markets within the EU are Germany and Spain, where strong incentive programs stimulate the market. We are active in regions and countries where we see opportunities for success, i.e. in existing markets like Spain and Germany and emerging markets like the USA and Greece and other countries especially in Southern, Central and Eastern Europe, where incentive programs have or are being implemented.
We also generate revenue through the sale of raw materials, intermediate products and half-fabricates to third parties, consulting solar related projects, and resale and distribution of solar components to third parties. The main markets for intermediate products and components are now Germany, Spain, China and Taiwan.
Our administrative headquarters are located in Ann-Arbor, Michigan, USA, whereas our operational headquarters are located in Deventer, The Netherlands. During 2006 GiraSolar moved its operational headquarters to Munsterstraat 9, 7418 EV, Deventer, the Netherlands to accommodate growth and centralization of facilities. At December 31, 2006, the company had 15 direct employees located at our combined facilities.
INDUSTRY BACKGROUND
Electric power is an increasingly vital component of the global economy, accounting for a greater share of overall energy use as reliance on electricity-dependent technology grows.
We believe that deregulation, economic, environmental and national security pressures, and technological innovations are creating significant opportunities for new entrants and technologies within the electric power industry, just as these changes have created similar opportunities in other regulated industries such as telecommunications, banking and transportation.
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Sources of fuel for electricity generation include coal, natural gas, oil, nuclear power and renewable sources, such as solar, hydroelectric and wind power. By the end of 2005 coal fuels represented 39% of worldwide electricity generation, natural gas 18%, nuclear 18%, oil 8%, and renewable sources, chiefly hydroelectric, 18% of global electricity generation. Solar and other non-hydroelectric sources account for approximately 2% of global electricity generation. Full details on developments and trends in this field can be obtained from McKinsey’s 2007 report by McKinsey Global Institute, “Curbing Global Energy Demand Growth”.
Challenges to the energy sector
Energy consumption growth make electric power producers face several challenges in meeting anticipated growth in electricity demand:
* Environmental regulations. Environmental regulations, addressing global climate change and air quality, seek to limit emissions by existing fossil fuel-fired generation plants and new generating facilities. Countries that are parties to international treaties such as the Kyoto Protocol have voluntarily submitted to reducing emissions of greenhouse gases. National and regional air pollution regulations also restrict the release of carbon dioxide and other gases by power generation facilities.
* Infrastructure reliability. Investment in electricity transmission and distribution infrastructure has not kept pace with increased demand, resulting in major service disruptions in the United States, such as the Northeast blackout in August 2003. Increasing the aging infrastructure to meet capacity constraints will be capital intensive, time consuming and may be restricted by environmental concerns. With continuing liberalization of the electricity market in Europe, disruptions of service have become ever more frequent also and parts of the EU stand to suffer from the imminent shut down of several Eastern and Central European nuclear power plants.
* Constraints by and cost pressure on fossil fuel supply. The supply of fossil fuels is finite and discussions about oil supply mostly range from having passed peak-oil supply already or being at peak-oil supply today. While an adequate supply of coal, natural gas and oil exists for the foreseeable future, depletion of the fossil fuels over this century may impact prices and infrastructure requirements. Political instability, labor unrest, war and the threat of terrorism in oil producing regions has disrupted oil production, increased the volatility of fuel prices and raised concerns over foreign dependency in consumer nations.
It therefore is our belief that traditional fossil fuel-based power generation technologies alone will not be enough to meet future demand for electricity and that a more diversified energy economy, incorporating renewable energy sources, is not only required but unavoidable.
Distributed Generation and Renewable Energy
We believe that distributed generation and renewable energy are two of the most promising areas for growth in the global electric power industry, and solar power is both distributed and renewable. Distributed generation is defined as point-of-use electricity generation that either supplements or bypasses the electric utility grid and employs technologies such as solar power, micro-turbines and fuel cells. We believe capacity constraints, increased demand for power reliability and quality and the challenges of building new centralized generation and transmission facilities will drive the demand for distributed generation. Renewable energy is defined as energy supplies that are derived from non-depleting sources such as solar, wind and certain types of biomass. We believe that economic and security pressures to reduce dependence on imported and increasingly expensive oil and natural gas and growing environmental pressures will drive demand for renewable energy. Renewable energy, including solar and wind power, is the fastest growing segment of the energy industry worldwide.
We further believe that environmentally benign, locally sourced renewable energy will become increasingly more important for economic development, environmental policy and national security. Increasing attention to global warming, global energy policy and regional stability and development will support the deployment of distributed generation, particularly renewable energy.
Solar Power
Solar power generation uses interconnected photovoltaic cells to generate electricity from sunlight. Most photovoltaic cells are constructed using specially processed silicon, which, when exposed to daylight, results in the generation of direct current. The interconnected cells are packaged into the laminate of the solar module, which protects the cells. The module collects day light to generate electricity. Solar power systems are comprised of a single or multiple solar modules along with related power electronics. Solar power technology, first used in the space program in the late 1950s, has experienced growing worldwide commercial use for over the past 25 years in both on-grid and off-grid applications.
• On-grid. On-grid applications provide supplemental electricity to customers that are served by an electric utility grid, but choose to generate a portion of their electricity needs on-site or provide electricity generated exclusively to feed into the grid. On-grid applications include residential, industrial and commercial rooftops, as well as ground-mounted solar-power plants with a capacity up to many Mega-Wattpeak. On-grid applications have been the fastest growing part of the solar power market. This growth is primarily driven by government initiatives, including incentive programs to promote solar power systems by investment subsidies and/or higher feed-in tariffs for solar electricity in several countries, including the larger part of the European Union and the United States, as well as by the worldwide trend toward deregulation and privatization of the electric power industry.
• Off-grid. Off-grid applications serve markets where access to conventional electric power is not economical or physically feasible. Solar power products can provide a cost-competitive, reliable alternative for such power applications as highway call boxes, microwave stations, portable
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highway road signs, remote street or billboard lights, vacation homes, rural homes, rural hospital equipment in developed and developing countries, water pumps and battery chargers for recreational vehicles and other consumer applications.
Solar power has emerged as one of the primary distributed generation technologies seeking to capitalize on the opportunities resulting from trends affecting the electric power industry. Relative to other distributed generation technologies, solar power benefits include:
• Modularity and scalability. From tiny solar cells powering a hand-held calculator to an array of roof mounted modules powering an entire home or acres of modules on a commercial building roof or field, solar power products can be deployed in many sizes and configurations and can be installed almost anywhere in the world. Solar is among the best technologies for power generation in urban areas, environmentally sensitive areas and geographically remote areas in both developing and developed countries.
• Applicability and suitability. Land use and infrastructural investments are very limited compared to nuclear, wind or conventional power. Especially in urban areas, solar power systems add supply to the grid while using mostly existing infrastructure. Solar power systems further provide power only during the daytime when peak demand occurs.
• Reliability. With no moving parts and no fuel supply required, solar power systems reliably power some of the world’s most demanding applications, from space satellites to maritime applications to remote microwave stations. Solar modules typically carry warranties on their output as long as 25 years.
• Dual use. Solar modules are expected to increasingly serve as both a power generator and the skin of the building. Like architectural glass, solar modules can be installed on the roofs or facades of residential and commercial buildings.
• Environmentally clean. Solar power systems consume no fuel and produce no air, water or noise emissions.
Solar Market
* The market in 2006
Cautionary note: The data below with respect to growth and installations for the year ended December 31, 2006 is not final and therefore, until definitive numbers come out only limited reliance may be placed on such data.
Until 2006, the solar power market has seen sustained and rapid growth. We attribute this growth to the recognition of solar power’s benefits and government support in many countries worldwide in an effort to bring about a more diversified energy economy to counter the effects of the depletion of conventional energy sources. During the 20 year period preceding 2006, unit shipments each year increased with over 20% per year on average, and, for the five year period ending 2005 even over 40% on average per year. In 2006 however, the long planned reduction of the Japanese solar promotion programme, the yearly reduction of the German feed-in tariff for solar electricity and high silicon prices, caused a slump in global sales growth. Despite at least a relative decline in demand in Germany and Japan, global solar production capacity grew astoundingly. World wide solar module manufacturing capacity ending 2006 is now estimated at 2.5 GWp and cell production capacity has increased to an estimated 2.25GWp, whereas preliminary global sales are estimated around 1.7GWp. We believe that this recent and fast production capacity growth is largely due to the establishment of new and quickly expanding solar manufacturers in China, expecting an easy entry in a booming and increasingly profitable market in the EU.
The vast majority of world wide installed solar power installations are found in the European Union, which now total 3.400 MWp of installed solar power. Also in 2006, the majority of new installations occurred again in the EU. Several EU countries showed fast growth, but the largest number of installations is still concentrated in Germany, now representing 55% of the global market. Japan however decreased its global share in 2006 to 17% whereas Spain grew to at almost 10% and the United States remained stable at close to 8%. Both the data on the USA and Spain represent strong growth in absolute numbers though. We believe that government policies in the countries with increased installations, in the form of both regulation and incentives, have accelerated the adoption of solar technologies by businesses and consumers over the past years. This can be seen in the European Union (representing 66% of global sales) where many countries adopted and implemented a favorable feed-in tariff to promote sustainable power supplies, most similar that of the successful German program. In the United States, both federal and state legislation have been enacted as incentives for the adoption of solar technology. The 2005 energy bill enacted a 30% investment tax credit for solar installations, and in 2006, California approved the largest solar program in the country’s history, the $3 billion, 11-year California Solar Initiative, which is expected to lead to strong growth in installed volume.
The global growth volume of new solar installations was nonetheless lower in 2006 compared to 2005. As mentioned in this paragraph, data on solar market development in 2006 is however not yet conclusive and there seems to be a disparity in presented data from various sources. Combining US and EU sources, which include Photon International, Solarbuzz, EU Commission and BSW, worldwide new solar photovoltaic installations in 2006 reached up to an estimate of over 1,700 Megawatt-peak (MWp), representing a growth figure of almost 20%. Nonetheless, even with growth as estimated, the global growth figure seems to have fallen significantly compared to recent years.
We believe that the cause of lower growth lies in a combination of:
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- Rapid increase of solar module prices due to extreme increases in silicon prices following rapid growth of the solar industry and its resulting demand for silicon;
- The expected reduction of the Japanese support programme, reducing growth in the world’s second largest market;
- The yearly ±5% reduction of the German feed-in tariff, which lowers the return on investment (“ROI”) for new solar investors resulting in reduced new investments;
- Regulatory revisions in Spain, Italy and Greece, which prevented demand from these markets from growing faster.
This seems to have caused a large, but nonetheless well predictable dip in demand for solar products in the second half of 2006. Industry pricing was clearly affected by these events as well and module prices declined towards the end of 2006. The resulting drop in module prices at the factory gates - of some 20% compared to ending 2005 - partly restored demand at end-user level. Despite, the reduced support in the two main markets and extremely high silicon prices since 2003, solar industry sales maintained double digit growth, which seems to illustrate the strength of global demand.
* Short term outlook
We believe that the market does not have a clear short term direction and that market data supplied is not presenting figures most suitable for the purpose of giving reliable guidance.
The currently available market data indicates that the lagging growth in Germany and Japan was partly offset by growth in EU countries and the USA market, which is illustrated by the slightly reduced combined global market share of Germany and Japan. In our opinion much of the short term market developments will now depend on the successful prolongation and/or implementation of new or renewed support programs in the EU and the USA in general and in Germany and Japan specifically. Also when China’s commitment to its USD 200 billion 20 year support program for renewable energy supply should be implemented, this is expected to have a significant positive impact on global market demand. Further, the speed of increase in silicon supply capacity will have a significant impact on product pricing and thus on market developments.
We expect that Germany will however remain the largest PV market short term, partly due to Japan’s relative decline. It is also expected that the USA market will grow substantially and that the USA will finally depart from it’s approximately 3 year stable 8% world market share. Further Spain, Italy, Greece and other still less significant EU markets showed strong demand growth, though sales to end-users somewhat lagged behind expectations due to uncertainty caused by regulatory revisions in Spain, Greece and Italy and slow implementation of practical support programs in the USA. Over all we nevertheless expect strong growth in the eastern and southern EU countries and the USA will add significantly to demand in 2007 and coming years, reducing the importance and impact of demand development in Germany and Japan. We therefore expect a stabilization of prices on current levels until silicon supply increases further and prices can come down.
* Mid term outlook
Prices for solar modules clearly impact on the net ROI of solar investments and therefore demand. Module prices have been severely impacted by silicon prices, which increased rapidly until its peak in July 2006. However, silicon supply capacity increased in line with expectations with approximately a 16% increase in 2006 and is projected to grow another 20% in 2007 and over 50% in 2008. It is expected that up to 80,000 tons of silicon production capacity will be in place by end 2008 of which 50,000 metric tons of polysilicon will be available for the solar industry in 2009.
We however believe that end-user demand (in terms of tons of silicon) is balanced with supply capacity and we currently attribute the remaining short and mid term silicon supply shortage to the significant growth of production capacity down the line in the solar production chain. With solar production capacity growing fast and silicon supply capacity – despite fast growth – lagging behind, it is our opinion that the solar industry is facing a mid term overcapacity, both in view of available silicon for the manufacture of solar products and in view of end-user demand. This should have a positive effect on product pricing for investors.
Additionally, the strong potential of the fast growing markets in Southern, Eastern and Central European countries and the USA is more likely than before to significantly add to mid term demand and offset any decline in existing markets, like Germany and Japan. We also believe that Germany’s market will regain much of its stature at lower module prices. In short we expect silicon prices to be reduced significantly in the mid term resulting in lower product pricing, which we believe should generate strong global sales growth.
* Long term outlook
We believe that the expected significant increase of silicon supply capacity until 2009 and new technologies in this field will significantly impact solar market developments long term, due to lower silicon prices, resulting in lower module prices while worldwide support for renewable energy sources is increasing.
It is our opinion that when increases in silicon supply capacity to the solar industry remain in line with projections and expected cost reductions in crystalline solar technology continue to develop as in previous years, significant price improvements should again be realized. We believe that German and Japanese demand developments will have a significantly lesser effect due to overall strong EU market growth, especially since more countries adopted or are about to adopt the German feed-in tariff principle, and because of ongoing implementation and adoption of support programs in more USA states. Therewith it is our strong expectation to see further significant industry and market growth figures for the long term.
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Solar Power Industry Challenges
Although solar power can provide a cost-effective alternative for off-grid applications under the right circumstances and on-grid applications have achieved grid-parity at end-user level in some OECD countries, we believe the two main factors for success in widespread adoption of solar power for on-grid applications are achieving a level playing field and reducing manufacturing costs without impairing product reliability. We believe the following advancements in the solar industry are necessary to meet this challenge:
• Continued political and regulatory support. Continued support measures to promote solar energy application are still required to yield a sufficient return to end-users, whether large scale investors or private users. Further, smooth cooperation by energy companies in accepting on-grid solar power installations is a requirement for strong growth; till date only a few utilities world wide truly welcome on-grid solar installations. A level playing field for solar energy is however of paramount importance.
• Low cost silicon. The cost of pure silicon as the base material for solar cells will have to be brought down through increases in supply capacity to the solar industry and the introduction of new technologies for more cost efficient solar grade poly-silicon production. In this respect the future looks promising; production capacity is growing rapidly on a global scale and new technologies are expected to come on the market
• Efficient material use. Further reduction of raw materials waste, particularly the waste associated with sawing silicon by conventional crystalline silicon technology. Efficient use of silicon is imperative for the growth of the industry due to the still limited supply to the industry and the consequently high cost of silicon as currently experienced. While developments continue, wafer thickness has been reduced already by 40% over the past few years, enormously strengthening the position of crystalline solar cells.
• Simplified and continuous processing. Throughout the production chain efficiency improvement in production of solar products can still be achieved, which can lower Wp costs.
• Improved efficiency and performance. The net output of solar energy systems can still be improved significantly. Higher module and inverter efficiencies, transparency of glass and improved installation techniques can contribute to an overall higher output. The industry continuously works to increase the conversion efficiency of solar modules, their longevity and ease of use, (conversion efficiency refers to the fraction of the sun’s energy converted to electricity). Further improved design of balance of system (i.e. inverters, mounting systems etc.) and of systems in general to reduce installation costs will contribute to a lower cost per kWh.
• Reduced capital costs. With solar power becoming a better known phenomenon, previously associated high risks with solar investments are being reduced, which should ultimately result in decreased capital costs. Decreased capital costs associated with new (plant) investments result in lower capital costs per unit of production.
Company challenges
The Dutch GiraSolar BV group, which is 51% owned by GiraSolar Inc., focused on building its market presence and volume during the first 3 years of its existence. It achieved that goal by growing to approximately $60 million in revenue, however this revenue number is partly attributable to faster than expected delivery on contracts in 2006 as mentioned before. The company is now also turning towards capitalizing on its decades of accumulated solar experience in engineering and problem solving. In the coming years our company expects to maintain a strong focus on volume in which we will still face many of the same major challenges, such as securing the flow of material through our company, while silicon remains in short supply. Currently the company procures silicon from a network of suppliers in the USA, Europe and Asia.
The company now also actively pursues opportunities for more value adding activities to bring it to its next development phase. Value added activities are sought in project design, development and execution and co-ownership of projects in markets with favorable conditions for on and off-grid power generation. These activities typically require upfront investments and capacity that may be locked up for longer periods of time. In pursuing value adding activities the company faces several challenges as a consequence of this shift of attention, notably in the areas of:
• Financing. The company may need to attract additional financing to avoid diverting its limited financial means to long term investments; if the company invests long term but is unable to attract additional financing on acceptable terms, there may be less available working capital for its present core business activities which may impede volume growth
• Capacity. The company may need to attract qualified personnel to strengthen its capacity and to enable successful penetration of local markets as to avoid diversion of existing resources from its core business activities. The company currently employs 15 employees including management and we anticipate that we will need to be hiring additional employees to continue our development regardless of whether or not we pursue the value added activities.
OUR TECHNOLOGY SOLUTIONS
We believe parts of our company's innovations, technologies and processes are unique among our competitors. Examples of recent or ongoing R&D and innovation projects are:
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• Reduced installation costs. Together with industry partners our company developed the patented Click-Fit installation system. This unique and cost effective mounting system reduces time and effort when installing solar systems on tiled roofs with 40%. Further developments to improve flat surface and wall mounting are being developed.
• Increased efficiency, output and lower costs. GiraSolar BV, DutchSolar BV and/or affiliated companies such as GiraSol International and ISA BV, both significant shareholders in GiraSolar BV, have been and/or are project leader and/or participant in EU and/or Dutch Government funded product development projects ranging from improved cell technology to module integrated reflection for bi-facial solar cells. Through introduction of these technologies and innovations within operations of industry partners, the company may benefit from increased cell efficiency at reduced costs of cells. DutchSolar BV, a 100% owned subsidiary of GiraSolar BV, is now part of the EU funded SELFLEX and REFLECTS project teams. Further, GiraSolar is developing a new technology for producing solar grade poly silicon. Our company recently filed a patent request and international PTC for what we believe is a break-through technological development in solar grade poly silicon production for which proof of principal has been achieved. The company achieved proof of principle and is actively pursuing opportunities for further development of the process.
• Integrated battery management system for rural electrification. Our "BattMan" battery management system is currently actively marketed in rural electrification projects. The system will reduce cost of ownership for project owners in this field of solar application, where the battery component is the single largest cost, when measured over the life time of an electrification project.
• Anti-theft device for solar panels. The "SolAlert" anti-theft device is a cost effective and simple innovation to inhibit the theft of solar panels from off-grid solar systems in remote areas.
OUR BUSINESS STRATEGY
Our business strategy is to continue to develop, manufacture and market solar power products in commercial applications around the world. Our focus is in the following areas:
- Continue to develop the GiraSolar brand of products.
- Expand our network through partnerships, joint-ventures and joint stock companies.
- Secure additional protection for our intellectual property.
- Diversify and differentiate our product lines and markets.
- Secure the flow of material through our company, i.e. through additional sources for raw materials, intermediate products, half-fabricates and finished products and establishing a manufacturing facility through acquisition or joint venture.
PRODUCTS MADE OR SOLD BY THE COMPANY
General
Solar power products in general are built-up through five stages of production:
• Polysilicon & base materials. At the beginning of the production chain of solar products, pure poly silicon is required. Besides polysilicon, also remeltable high purity polysilicon products can be used. These are generally referred to as remelt and scrap silicon.
• Ingots. A crystalline silicon Ingot is a crystal pulled or cast from poly silicon with a certain diameter, crystalline structure, purity, resisitivity and lifetime. The specifications of the Ingot determine whether the material is useable for solar and or semi-conductor devices. Ingots are typically cut into blocks from which wafers are sawn.
• Wafers. A crystalline silicon wafer is a flat piece of crystalline silicon that is cut from a silicon ingot, which can be processed into a solar cell. Wafers we use currently measure 125x125 to 156 x 156 millimetres and are approximately 220 microns thick, with 180-200 micron thick wafers already introduced in commercial manufacturing in 2006. Wafer thickness for conventional silicon cells with that significantly reduced with roughly 100micron from 320micron in 2004, which constitutes a major advancement in this technology.
• Solar Cells. A solar cell is a device made from a silicon wafer that converts sunlight into electricity by means of a process known as the photovoltaic effect. Solar cells produce ±2.5 Wattpeak at 125 x 125mm or ±4Wp at 156 x 156mm of power each. Smaller or larger sizes have corresponding less or higher power. The efficiency of solar cells has increased dramatically as well to about 21% in 2006 for the best commercially available cells.
• Solar Modules. A solar module is an assembly of solar cells that have been electrically interconnected and laminated in a physically durable and weather-tight package. A typical solar module can produce from 5 to 300 watts of power. A single 100 Wattpeak solar module can power a standard 100-watt light bulb for several hours, the exact number of hours depending on solar radiation in the region of use. 4,500 Wattpeak of solar modules represents the power requirements of a typical home in the United States or the EU, excluding air conditioner use. Our company's main focus is on 80Wp for off-grid applications to over 200Wp modules for on-grid applications and on OEM modules.
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• Systems. A solar system is an assembly of one or more solar modules that have been physically mounted and electrically interconnected, often with batteries or power electronics, to produce electricity. Typical residential on-grid systems range from a few hundred to many thousands of Wattpeak, typical solar power plants range from a few kilowatt-peak to several Megawatt-peak.
Marketing and Distribution
Our company is relatively young. Legend Investment discontinued its previous activities upon the acquisition of its majority interest in GiraSolar BV. Following the acquisition, Legend Investment Corp. changed its name, creating a new public solar energy company under the name of GiraSolar Inc. Nonetheless, the operational entity GiraSolar BV was already established in the Netherlands in 2003.
We focus on B2B (Business-to-Business) channels through intensive networking and bring our solar power products and services to market using manufacturers, distributors, system integrators and other value-added clients. Our clients often add value through system design by incorporating our modules, associated with electronics, structures and wiring systems. Most of our clients have a specific geographic, technological or application focus. Our channel partners include companies that are exclusively solar clients as well as others for whom solar power is an extension of their core business, such as engineering or design firms or other energy product marketers. Additionally our company is shifting more attention to the development of solar power plants and projects, moving closer towards large scale end-users.
Further to this, we expect to collaborate closely with a relatively small number of selected clients throughout the world. We currently have approximately 35 partners and clients worldwide and are actively working to refine our sales network by very careful addition of a few new accounts and channel partners. We intend to selectively pursue additional strategic relationships with other companies worldwide for the joint marketing, distribution and manufacturing of our products and for the development of projects. These clients range from large, sometimes multinational, corporations to middle sized and even small installation companies and some start-up companies, each with their particular expertise or strategic value. We believe that these relationships will enable us to leverage the marketing, manufacturing and distribution capabilities of other companies, explore opportunities for additional product development and more easily and cost-effectively enter new geographic markets, attract new customers and develop advanced solar power applications.
In addition to our mainly network based marketing and sales, we market our products through trade shows, on-going customer communications, promotional material, our web site and advertising. Our staffs provide customer service, application and engineering support to our partners, while also gathering information on current product performance and future product requirements and market developments.
Sales
The company has limited operating history and its network of relations is still developing in the fast changing solar market. Since our network and sales revenue are continuing to develop, performance over the past year cannot be taken as an indication of future performance. As we continue to develop our company, we anticipate developing relationships with additional customers and decreasing our dependence on any single customer. To date, all our revenue has been generated by GiraSolar BV and its subsidiaries.
For fiscal year ended December 31, 2006, consolidated revenue amounted to approximately USD 56 million or Euro 44 million, of which sales to our 10 largest customers accounted for more than 90% of our total product revenues in that fiscal period. During the fiscal year ended December 31, 2006, approximately 31% of our revenue was generated from the sale of end products (i.e. panels, BOS and systems), 29% from the sale of half-fabricates (cells and other) and 39% from the sale of poly silicon. Approximately 48.5% of our product sales were made to customers in Europe and an approximate same percentage to customers in South-East Asia, whereas nearly 3% of our revenues were generated in Canada, the USA and other countries. These figures show extremely strong growth in the South-East Asian region compared to sales made by Girasolar, BV in 2005 prior to the merger which however in part is due to the faster than expected execution of certain supply contracts intended to extend well into 2007, which had a total value of approximately USD 16 million. Though delays or faster deliveries occur regularly we believe that the faster than expected execution of such supply contracts in 2006 is of significant importance due to the volume involved, its positive impact on ‘06 revenue and its negative impact on 2007 revenues.
MANUFACTURING
Currently the majority of our brand product is produced in partnership with third parties. Products are now manufactured in Germany, Turkey, China and the USA. The company has made investments in equipment for solar module, balance of system and other manufacturing during this fiscal period of GiraSolar BV. We believe that our long term success is dependent upon our ability to increase the manufacturing capacity for our products. Establishing manufacturing capacity within the company today is however considered a decision that should only be taken if certain strategic benchmarks are met. In view of the current overcapacity in the solar industry and in an effort to avoid the costs and long term commitments associated with the establishment or purchase of manufacturing facilities as well as the difficulties of obtaining financing for the purchase of manufacturing facilities, we expect to continue manufacturing in existing facilities owned by third parties for the mid term. This shift in our implementation plan is a strategic choice which is instigated by our belief that there is significant overcapacity in existing manufacturing facilities which is not being utilized. We believe that currently silicon supply capacity and end-user demand are in balance when measured in tons of silicon, while solar product manufacturing capacity world wide is still increasing. This has caused a relative short term shortage of silicon to remain however we believe that no absolute shortage of significance remains under the current market conditions. The continued relative shortage of silicon world wide nevertheless translates into absolute shortages for many manufacturers with recently expanded but underutilized overcapacity. This relative silicon shortage therewith stems from the disparity between silicon supply capacity on one side and ingot, wafer, cell
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and module manufacturing capacity on the other and thus from demand from industry rather than from end-user demand. In an effort to avoid investments which would in our opinion add to already existing over capacity at high opportunity costs to the company and to use our working capacity more efficiently, we consequently shifted our focus to using third party overcapacity to be able to use our over capacity. Nevertheless, we will continue to pursue opportunities to work with majority owned facilities for obvious reasons, but only when we believe the terms and conditions of such arrangements to be satisfactory. The currently indecisive market direction requires careful maneuvering in which we believe mid-term establishment of facilities seems more appropriate in order to avoid an unnecessary burden on the company’s resources, whereas abundant third party capacity is available, providing high quality product while maintaining flexibility and agility.
RESEARCH AND DEVELOPMENT
During the past three years, the company has only spent limited resources of its own on R&D and innovation. A total of approximately $ 300,000 was spent on research and development. These expenses consisted of labor, infrastructure and cash. The larger part of R&D cost have been incurred by subsidizing entities and have mostly been distributed directly to research partners, such as universities and consulting companies. Further, the company’s labor expenses have been subsidized with tax incentives, reducing direct labor expense to the company. To date all of our research subsidies and revenue were generated within the European Union.
In total our R&D and Innovation portfolio contains up to 10 projects in different phases. GiraSolar BV, DutchSolar and affiliated companies take part in several EU and Kingdom of the Netherlands funded R&D and Innovation projects. The Dutch government is particularly stimulating R&D and innovation through subsidies and labor tax incentives. The EU is particularly stimulating R&D through generic project subsidies.
Our most recent Dutch Government funded or partly funded projects are amongst other: ClickFit, GiraSi!, BattMan and FlatFix. These are all co-financed through the Dutch Government agencies SenterNovem and EVD.
Our most recent EU Commission funded projects in which the company and affiliates take part in one way or another are amongst other: Reflects, Selflex, Helsolar and SolarWater. Reflects and Selflex have the potential of IPR protection through patenting.
Intellectual Property Rights & Patents
Obtaining patent protection is costly. Whether the temporary protection by filing a patent request and executing the necessary PTC, which together provide protection for about 2 years, can be turned into full patent protection will depend on whether GiraSolar Inc. can raise the funds necessary for financing the follow-up procedures and developments. Without such funding, GiraSolar BV and affiliates may be forced to enter into partnerships with other companies and into sharing IPR or may have to abandon projects all together.
We believe that our commercial success can be supported by protection of our intellectual property rights underlying our proprietary technologies. We seek national and international patent protection only for major developments. Depending upon successful financing of future proceedings, patents to be (co-)owned are expected to cover the following areas: Solar grade poly silicon production, Module support structures, Internal reflectors for bi-facial solar cells and Self formation cell technology.
IPR derived from EU funded projects in general is shared with the project partners while Dutch Government funded projects yield IPR for the company alone. There can nevertheless be no assurance that such protection when required will be obtained or if obtained that it will be broad enough to protect all of the uses of our technology.
Concerning our R&D efforts, there are no intellectual property rights pertaining to the assembly process of solar modules nor are we pursuing developments in that direction. However, as a result of R&D and innovation two patent requests have been filed for products in which our company has a significant interest. One requested patent pertains to more efficient module mounting (the ClickFit mounting system) and has been filed by one of the shareholders in GiraSolar BV (GiraSol International BV) and the other, pertaining to a new process for silicon production through electro-refining, has been filed by GiraSolar BV. We do not seek patent protection for all of our products. Previously undertaken R&D projects on improved cell manufacturing technology and certain Balance of System components have not lead to the conclusion that a patent is either necessary or worthwhile, because the technological advance over competing products is deemed sufficient or because patent protection cannot be fully achieved.
Trademarks and Copyrights
We intend to have several United States and foreign trademark registrations associated with our business, including registrations for the trademarks including GiraSolar, DutchSolar and the GiraSolar group logo.
Trade Secrets and Other Confidential Information
With respect to, among other things, proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements to protect our interests. We believe that several elements of our solar power products and used manufacturing processes involve proprietary know-how, technology or data, which are not covered by patents or patent applications, including selected materials, technical processes, equipment designs, algorithms and procedures. We have taken security measures to protect our proprietary know-how, technologies and confidential data, and we continue to explore additional methods of protection. While we require all employees, key consultants and other third parties to enter into confidentiality agreements with us, we cannot be assured that proprietary information will not be disclosed inappropriately or that others will not independently develop substantially equivalent proprietary information
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and techniques or otherwise gain access to our trade secrets and networks, or that we can meaningfully protect these. Any material leak of such confidential or proprietary information into the public domain or to third parties could result in the loss of a competitive advantage in the solar power market.
COMPETITION
The solar power market is intensely competitive and rapidly evolving. Many of our competitors have established a market position more prominent than ours during their many years in business, and if we fail to secure our supply chain, attract and retain customers and establish a successful distribution network for our solar power products and services, we may be unable to increase our sales and market share. There are hundreds of companies in the world that produce solar power related products, including multinationals as BP Solar, Kyocera Corporation, Mitsubishi, Solar World AG, Sharp Corporation and Sanyo Corporation. We also expect that future competition will include new entrants to the solar power market, some offering new technological solutions. Further, many companies are developing and are currently producing products based on new solar power technologies, including new manufacturing technologies, that they believe will ultimately have costs similar to, or lower than, our projected costs.
We believe that our technology focus on crystalline solar modules, cells and solar grade poly silicon, has the best perspective in the long run. Other technologies rely heavily on scarce elements such as for example Indium (i.e. CIS/CGIS thin film technologies), which is in short supply, or Cadmium (CdTe thin films) which is highly poisonous. Silicon is however the second most abundant element on earth and the production and supply capacity of pure silicon is rapidly increasing, while the per Wattpeak required quantity of silicon for conventional silicon cells is rapidly decreasing through technological advances such as the use of thinner cells and increased efficiency of crystalline solar cells in general.
Technologies, using i.e. new thin film technology, nano-technology, polymers or biological or dye cells have been developing towards practical application for years, but efficiency and longevity of large scale produced materials are not yet known and none of these products have had an impact on the solar market yet. In general we expect no significant competition for our applications from i.e. thin film technologies – whether foil, polymer or glass/glass - due to the still unmatched higher efficiency of crystalline technology and other till date unmatched price/quality features. We believe that the high, stable quality of crystalline solar cells cannot yet be matched by any other emerging technology and that crystalline technologies will maintain a lead position in commercial terrestrial solar application for another decade or more and that the end of improvements on conventional crystalline silicon solar cells is not yet in sight.
The entire solar industry also faces competition from other power generation sources, both conventional sources as well as other emerging technologies. Solar power has certain advantages and disadvantages when compared to other power generating technologies. The advantages include the ability to deploy products in many sizes and configurations, to install products almost anywhere in the world, to provide reliable power for many applications, to serve as both a power generator and the skin of a building and to eliminate air, water and noise emissions. Whereas solar generally is cost effective for off-grid applications, the high up-front cost of solar relative to most other solutions is the primary market barrier for application. Furthermore, unlike most conventional power generators, which can produce power on demand, solar power cannot generate power where daylight is not available, although it is often matched with battery storage to provide highly reliable power solutions and eliminate the intermittent nature of solar power supply. With fast progress in solar technologies and energy storage technology, the intermittent nature of solar electricity generation may soon become less of an important feature. Photovoltaic solar energy remains one of the most versatile and easily applicable renewable energy technologies with a relative high output; i.e. compared to bio-fuels an acre of solar panels produces a much higher net energy output than for instance an acre of rape seed. We therefore believe that solar energy will play an ever increasing role in the irrevocably necessary diversified energy economy of the near future.
ENVIRONMENTAL REGULATIONS
We are subject to a variety of foreign, federal, state and local governmental regulations related to the storage, use and disposal of hazardous materials. We believe that we have all environmental permits necessary to conduct our business. We believe that we have properly handled our hazardous materials and wastes and have not contributed to any contamination at any of our past or current premises. In fact, our business activities rarely use, generate or discharge toxic, volatile or otherwise hazardous chemicals and wastes in our research and development and manufacturing activities. We are not aware of any environmental investigation, proceeding or action by foreign, federal or state agencies involving our past or current facilities. If we fail to comply with present or future environmental regulations, we could be subject to fines, suspension of production or a cessation of operations. Any failure by us to control the use of or to restrict adequately the discharge of hazardous substances could subject us to substantial financial liabilities, operational interruptions and adverse publicity, any of which could materially and adversely affect our business, results of operations and financial condition. In addition, under some foreign, federal and state statutes and regulations, a governmental agency may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for the release or otherwise was not at fault.
RISK FACTORS
Certain Factors Which May Affect Future Results
Investors and potential investors should carefully consider the risks described below before making any investment decisions. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations and financial results. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment.
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Our filings with the Securities and Exchange Commission also contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face described below.
Risks Relating to Our Industry, Products, Financial Results and Operations
Evaluating our business and future prospects may be difficult due to the rapidly changing market landscape.
There is limited historical information available about our company upon which you can base your evaluation of our business and prospects. Relative to the entire solar industry, we have shipped only a limited number of solar power modules and have recognized limited revenues relative to the total market volume.
The market we are addressing is rapidly evolving and is experiencing technological advances and new market entrants. We are only in the early stages of development and we have limited experience upon which to predict whether we will be successful. As a result, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as an early-stage company seeking to develop and market new products in a growing and rapidly evolving market.
We have a history of losses, may incur substantial further losses and may not achieve or maintain profitability in the future, which may decrease the market value of our stock.
For the year ended December 31, 2006 we had a net operating loss of $1,921,399. We do not know whether our revenues will continue to grow or grow rapidly enough to absorb expenses, and our limited operating history makes it difficult to assess the extent of expenses or their impact on our operating results.
We may need to raise significant additional capital in order to continue to grow our business and to fund our operations which subject us to the risk that we may be unable to maintain or grow our business as planned and that our stockholders may be subject to substantial additional dilution.
We do not know whether or not we will be able to raise additional financing or financing on terms favorable to us. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, develop and expand our manufacturing operations and distribution network, maintain our research and development efforts or otherwise respond to competitive pressures would be significantly impaired. In such a case, our stock price would likely be materially and adversely impacted.
In addition, if we raise additional funds through the issuance of equity or convertible or exchangeable securities, the percentage ownership of our existing stockholders will be reduced. These newly issued securities may have rights, preferences and privileges senior to those of existing stockholders.
Our future success substantially depends on our ability to significantly increase and/or contract our procurement, manufacturing and sales capacity through the acquisition or development of additional entities and manufacturing facilities. We may be unable to achieve our expansion goals as a result of a number of risks, which would limit our growth potential, impair our operating results and financial condition and cause our stock price to decline.
Our future success depends on our ability to increase our sourcing, manufacturing and sales capacity. If we are unable to do so, we may not be able to achieve the sales volumes and per unit costs that will allow us to meet customer demand, maintain our competitive position and achieve profitability. Our ability to develop additional manufacturing facilities and new entities is subject to significant risk and uncertainty, including:
• we may need to raise significant additional capital through the issuance of equity or convertible or debt securities in order to finance the costs of development of any additional facility, which we may be unable to do on reasonable terms or at all, and which could be dilutive to our existing stockholders;
• the acquisition of any additional entity or facility will be subject to the risks inherent in the development of a facility or entity, including risks of delays and cost overruns as a result of a number of factors, many of which may be out of our control, such as delays in government approvals or problems with supplier relationships;
• we may be required to depend on third parties or strategic partnerships, which may subject us to risks that such third parties do not fulfill their obligations to us under our arrangements with them;
• the establishment of any new entity or facility will require significant management attention, and our management team, which has limited experience in the development of such facilities, may be unable to execute the expansion plan effectively; and
• if a new entity or facility is established internationally, we may encounter legal restrictions and liability, encounter commercial restrictions and incur taxes and other expenses to do so and otherwise be subject to the risks inherent in conducting business in a foreign jurisdiction as described elsewhere in this section.
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If we are unable to develop and successfully operate additional entities or facilities, or align ourselves with strategic partnerships for the manufacture of our products or if we encounter any of the risks described above or any other risks presently unknown or considered immaterial, we may be unable to scale our business to the extent necessary to achieve profitability, which would cause our stock price to decline. Moreover, there can be no assurance that if we do expand our capacity that we will be able to generate customer demand for our solar power products at these volumes or that we will increase our revenues or achieve profitability.
Because we depend on suppliers for a number of specialized materials, including silicon, necessary to manufacture solar power products, we are susceptible to supplier and industry-wide supply shortages and price volatility, which could adversely affect our ability to meet existing and future customer demand for our products and cause us to make fewer shipments, generate lower than anticipated revenues and may cause higher than expected product costs.
We have suppliers for a number of specialized materials, including silicon and scarce elements such as indium, necessary to manufacture solar power products, which makes us susceptible to quality issues, shortages and price changes for these materials. Demand for and pricing of silicon has increased significantly over the past years. Further increases in the demand for silicon may cause us to encounter shortages or delays in obtaining the specialized silicon to be used in the manufacture of solar power products, which could result in customer dissatisfaction and decreased revenues. Additionally, further increases in the price of available silicon could negatively impact our results of operations in any given period.
Our dependence on a limited number of third party suppliers for raw materials, key components for solar power products and systems could prevent us from delivering our products to our customers within required timeframes, which could result in for example order cancellations, loss of market share and penalties.
We procure, manufacture and distribute our and third party products using resources and materials procured from a limited number of third-party suppliers. If we fail to develop or maintain our relationships with these or our other suppliers, we may be unable to obtain our products or our products may be available only at a higher cost or after a long delay, which could prevent us from delivering our products to our customers within required timeframes and we may experience order cancellation and loss of market share. We currently do not have contracts with many of our suppliers and may not be able to procure sufficient quantities of the materials, components and resources, necessary for our products on acceptable commercial terms or at all. To the extent the processes that our suppliers use to manufacture materials and components are proprietary; we may be unable to obtain comparable materials and components from alternative suppliers. The failure of a supplier to supply materials and components in a timely manner, or to supply materials and components that meet our quality, quantity and cost requirements could impair the ability to manufacture our products or increase their costs, particularly if we are unable to obtain substitute sources of these materials and components on a timely basis or on terms acceptable to us. For example, a supplier’s failure to supply cells in a timely manner, with adequate quality and on terms acceptable to us, could delay our expansion and otherwise disrupt our growth plans or increase our cost of products.
We may fail to successfully bring to market new solar power related products under development, which may prevent us from achieving increased sales and market share.
We expect to derive a substantial portion of our revenues from sales of our new solar power related products that are under development and not yet commercially available. If we fail to successfully develop our new solar power related products or technologies, we will likely be unable to recover the expenses we have incurred to develop these products and technologies and may be unable to increase our sales and market share and to become profitable. Many of our new product and manufacturing technologies are novel and represent a departure from current solar power related technologies and methods, and it is difficult to predict whether we will be successful in completing their development. For example our new poly silicon manufacturing technology has been tested only in laboratory tests and, in other cases, only limited pre-production prototypes of our new products have been field-tested or limited sales have been achieved with new products.
Our products may not gain market acceptance, which would prevent us from achieving increased sales and market share.
The development of a successful market for our products may be adversely affected by a number of factors, many of which are beyond our control, including:
- our failure to produce products that compete favorably against other products on the basis of cost, quality and performance;
- our failure to produce solar power products that compete favorably against conventional energy sources and alternative distributed generation technologies, such as wind and biomass, on the basis of cost, quality and performance;
- whether or not customers will accept our new products under development and the techniques we have developed to mount them; and
- our failure to develop and maintain successful relationships with distributors, systems integrators and other clients, as well as strategic partners.
If our products fail to gain market acceptance, we would be unable to increase our sales and market share and to achieve and sustain profitability through these products.
Technological changes in the solar power industry could render our products uncompetitive or obsolete, which could reduce our market share and cause our sales to decline.
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Our failure to further refine our technologies and innovations and develop and introduce new products could cause our products to become uncompetitive or obsolete, which could reduce our market share and cause our sales to decline. The solar power industry is rapidly evolving and competitive. We will need to invest significant financial resources in research and development to keep pace with technological advances in the solar power industry and to effectively compete in the future. We believe that a variety of competing solar power related technologies are under development by other companies that could result in lower manufacturing costs or higher product performance than those expected for our solar power products. Our development efforts may be rendered obsolete by the technological advances of others and other technologies may prove more advantageous for the commercialization of solar power products.
Our ability to increase market share and sales depends on our ability to successfully maintain our existing distribution relationships and expand our distribution channels.
We currently sell our products primarily to distributors, system integrators and other value-added clients within the EU and Asia. During our fiscal year ending December 31, 2006, we sold our products to approximately 35 clients, manufacturers, system integrators and other value-added clients. If we are unable to successfully refine our existing distribution relationships and expand our distribution channels, our revenues and future prospects will be materially harmed. As we seek to grow our sales by entering new markets in which we have little experience selling our products, our ability to increase market share and sales will depend substantially on our ability to expand our distribution channels by identifying, developing and maintaining relationships with clients both nationally an internationally. We may be unable to enter into relationships with clients in the markets we target or on terms and conditions favorable to us, which could prevent us from entering these markets or entering these markets in accordance with our plans. Our ability to enter into and maintain relationships with clients will be influenced by the relationships between these clients and our competitors, market acceptance of our products and our low brand recognition as a new entrant.
We face risks associated with the marketing, distribution and sale of products internationally, and if we are unable to effectively manage these risks, it could impair our ability to expand our business abroad.
We expect that our sales to clients worldwide will continue to be significant. It will require significant management attention and financial resources to successfully develop our international sales channels. In addition, the marketing, distribution and sale of our products internationally expose us to a number of markets with which we may have limited experience. If we are unable to effectively manage these risks, it could impair our ability to grow our business abroad. These risks include:
- difficult and expensive compliance with the commercial and legal requirements of international markets, with which we may have only limited experience;
- inability to obtain, maintain or enforce intellectual property rights;
- encountering trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could affect the competitive pricing of our products and reduce our market share in some countries;
- fluctuations in currency exchange rates relative to the United States dollar;
- difficulty in recruiting and retaining individuals skilled in international business operations;
- increased costs associated with maintaining international marketing efforts;
- difficulty of enforcing revenue collection internationally; and
- inability to develop, manufacture, market and sell our products and services in international markets due to, for example, third-party intellectual property rights.
We expect that a portion of our international sales will be denominated in United States dollars. As a result, increases in the value of the United States dollar relative to foreign currencies would cause our products to become less competitive in international markets and could result in limited, if any, sales and profitability. For the foreseeable future, market conditions will require us to denominate a significant part of our sales in local currencies, principally Euro, which will further expose us to foreign exchange gains or losses.
Our dependence on a small number of clients may cause significant fluctuations or declines in our product revenues.
Since inception, our 10 largest clients accounted for over 90% of our product sales. Historically, many of our sales to these clients are made through purchase orders without long-term commitments, including under arrangements that may be cancelled without cause on short notice and that generally do not require them to make minimum purchases. Consequently, our clients are generally permitted to obtain products from other providers of solar power products without further obligation to us. The concentration of our product sales also exposes us to credit risks associated with the financial viability of these clients. We anticipate that sales of our solar power products to a limited number of key clients will continue to account for a significant portion of our total product revenues for the foreseeable future. Consequently, any one of the following events may cause material fluctuations or declines in our product revenues and negatively impact our operating results:
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- Reduction, delay or cancellation of orders from one or more of our significant clients;
- Selection by one or more of our significant clients of products competitive with ours;
- Loss of one or more of our significant clients and our failure to recruit additional or replacement clients; and
- Failure of any of our significant clients to make timely payment of our invoices.
Problems with product quality or product performance may cause us to incur warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share.
As is consistent with standard practice in our industry, the duration of our product warranties is lengthy relative to expected product life and has recently been increasing. Our current standard product warranty for most products includes a one-year warranty period for defects in material and workmanship and up to a 25-year warranty period for declines in power performance of solar modules. We believe our warranty periods are consistent with industry practice. Due to the long warranty period, we bear the risk of extensive warranty claims long after we have shipped product and recognized revenues. We have sold solar modules since 2003. The possibility of future product failures could cause us to incur substantial expense to repair or replace defective products. Furthermore, widespread product failures may damage our market reputation and reduce our market share and cause sales to decline.
Our success in the future may depend on our ability to establish and maintain strategic alliances, and any failure on our part to establish and maintain such relationships would adversely affect our market penetration and revenue growth.
We intend to continue to establish strategic relationships with third parties in the solar power industry, particularly in international markets. Our ability to establish strategic relationships will depend on a number of factors, many of which are outside our control, such as the competitive position of our products relative to our competitors. We can provide no assurance that we will be able to establish other strategic relationships in the future.
In addition, other strategic alliances that we establish, will subject us to a number of risks, including but not limited to risks associated with sharing proprietary information, loss of control of operations that are material to our business and profit-sharing arrangements. Moreover, strategic alliances may be expensive to implement and subject us to the risk that the third party will not perform its obligations under the relationship, which may subject us to losses over which we have no control or expensive termination arrangements. As a result, even if our strategic alliances with third parties are successful, our business may be adversely affected by a number of factors that are outside of our control, which would in turn cause our stock price to decline.
The success of our business depends on the continuing contributions of our key personnel and our ability to attract and retain new qualified employees in a competitive labor market.
If we were to lose the services of Chief Officers and Directors of GiraSolar BV, or any of our other executive officers and key employees of the BV group, our business could be materially and adversely impacted. We do not carry key person life insurance on any of our senior management or other key personnel.
We had approximately 15 positions as of December 31, 2006, and we anticipate that we will need to hire a significant number of new highly-skilled technical, commercial and administrative personnel if we are to successfully develop and market our products. Competition for personnel is intense, and qualified technical personnel are likely to remain a limited resource for the foreseeable future. Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be costly and difficult. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to provide higher compensation or more training to our personnel than we currently anticipate. Moreover, any officer or employee can terminate his or her relationship with us at any time.
We may be affected by skilled labor shortages and labor disputes.
We require experienced sales and technical engineers to conduct our business. No assurance can be given that the supply of these skilled persons will always be adequate to meet our requirements or that we will be able to attract an adequate number of skilled persons. Labor disputes could also occur at any of the used facilities, which may affect our business. While our employees are not currently represented by labor unions or organized under collective bargaining agreements, labor disputes could occur at any of our facilities or our suppliers.
Extended business interruption at our facilities could result in reduced sales.
Our inability to fill customer orders during an extended business interruption could negatively impact existing customer relationships resulting in market share decreases.
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If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, this could have a material adverse effect on our business.
Effective internal controls over financial controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We have in the past discovered, and may in the future discover, areas of our internal controls over financial reporting that need improvement. Additionally, as we rapidly grow our business, our internal controls over financial reporting will become more complex and will require significantly more resources to ensure that they remain effective. Failure to design required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If a material weakness is discovered the disclosure of that fact, even if quickly remediated, could have a material adverse effect on our business.
Our management team may not be able to successfully implement our business strategies.
If our management team is unable to execute on its business strategies, then our product development, the expansion of our operations and distribution network and our sales and marketing activities would be materially and adversely affected. We have undergone and anticipate undergoing further rapid growth and/or changes in the scope of our operations, which is likely to place a significant strain on our management team and other resources. In addition, we may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by this rapid growth or changes. We may seek to augment or replace members of our management team or we may lose key members of our management team, and we may not be able to attract new management talent with sufficient skill and experience.
The reduction or elimination of government subsidies and economic incentives for on-grid applications could cause our revenues to decline.
We believe that the growth of the majority of our target markets, particularly the market for on-grid applications, depends on the availability and size of government subsidies and economic incentives. Accordingly, the reduction or elimination of government subsidies and economic incentives would likely reduce the size of these markets and/or result in increased price competition, which could cause our revenues to decline. Today, the cost of solar power substantially exceeds the cost of power furnished by the electric utility grid, mainly due to the exclusion of social costs in grid power costs and hidden or direct subsidies to other energy sources. As a result, national, federal, state and/or local governmental bodies in many countries, most notably Japan, Germany, Spain, Italy, Greece, Belgium, France and the United States, have provided subsidies and/or support in the form of feed-in tariffs, investment incentives, cost reductions, tax write-offs and other incentives to end users, distributors, systems integrators and manufacturers of solar power products to promote the use of solar energy in on-grid applications and to reduce dependency on other forms of energy. These government subsidies and economic incentives could be reduced or eliminated altogether. For example, in 2006, there was a decline in world wide volume growth in the solar market, which we attribute in part to the long planned reduction of the Japanese promotion program as well as the foreseen yearly reduction of the German feed-in tariff for solar electricity.
If solar power technology is not suitable for widespread adoption or sufficient demand for solar power products does not develop or takes longer to develop than we anticipate, our sales would not significantly increase and we would be unable to achieve or sustain profitability.
The market for solar power products is emerging and rapidly evolving, and its future success is uncertain. If solar power technology proves unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, we would be unable to generate enough revenues to achieve and sustain profitability. In addition, demand for solar power products in the markets and geographic regions we target may not develop or may develop more slowly than we anticipate. Many factors will influence the widespread adoption of solar power technology and demand for solar power products, including:
• cost-effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies;
• performance and reliability of solar power products as compared with conventional and non-solar alternative energy products;
• success of alternative distributed generation technologies such as fuel cells, wind power and micro turbines;
• fluctuations in economic and market conditions that impact the viability of conventional and non-solar alternative energy sources, such as increases or decreases in the prices of oil and other fossil fuels;
• capital expenditures by customers that tend to decrease when the United States, EU or global economy slows;
• continued deregulation of the electric power industry and broader energy industry; and
• availability of government subsidies and incentives.
We face intense competition from other companies producing solar power and other energy generation products. If we fail to compete effectively, we may be unable to increase our market share and sales.
The solar power market is intensely competitive and rapidly evolving. Many of our competitors have established a market position more prominent than ours, and if we fail to attract and retain customers and establish a successful distribution network for our solar power products, we may be unable to increase our sales and market share. There are a large number of companies in the world that produce solar power products, including BP Solar, Kyocera Corporation, Sharp Corporation, Mitsubishi, Solar World AG and Sanyo Corporation. We also expect that future
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competition will include new entrants to the solar power market offering new technological solutions. Further, many of our competitors are developing and are currently producing products based on new solar power technologies, including other crystalline silicon and sheet technologies, that they believe will ultimately have costs similar to, or lower than, our projected costs. Most of our competitors are substantially larger than we are, have longer operating histories and have substantially greater financial, technical, manufacturing and other resources than we do. Our competitors’ greater size in some cases provides them with a competitive advantage with respect to manufacturing costs due to their ability to allocate fixed costs across a greater volume of production and purchase raw materials at lower prices. Many also have greater name recognition, a more established distribution network and a larger installed base of customers. In addition, many of our competitors have well-established relationships with our current and potential clients and their customers and have extensive knowledge of our target markets. As a result, our competitors may be able to devote greater resources to the research, development, promotion and sale of their products and respond more quickly to evolving industry standards and changing customer requirements than we can.
If we are unable to protect our intellectual property adequately, we could lose competitive advantages in the solar power market.
Our ability to compete effectively against competing solar power technologies will also partly depend on our ability to protect our current and future proprietary technology, product designs and manufacturing processes through a combination of patent, copyright, trademark, trade secret and unfair competition laws. We may not be able to adequately protect our intellectual property and may need to defend our products and services against infringement claims, either of which could result in the loss of our competitive advantage in the solar power market and materially harm our business and profitability. We face the following risks in protecting our intellectual property and in developing, manufacturing, marketing and selling our products and services:
• we cannot be certain that our pending patent applications will result in issued patents or that the claims allowed are or will be sufficiently broad to protect our technology or processes;
• given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important;
• third parties may design around our patented technologies or seek to challenge or invalidate our intellectual property rights and there is no assurance that our intellectual property rights will deter infringement or misappropriation of our intellectual property;
• we may incur significant costs and diversion of management resources in prosecuting or defending intellectual property infringement suits;
• we may not be successful in prosecuting or defending intellectual property infringement suits and, as a result, may need to seek to obtain a license of the third party’s intellectual property rights, which may not be available to us, whether on reasonable terms or at all;
• the contractual provisions we rely on to protect our trade secrets and proprietary information, such as our confidentiality and non-disclosure agreements with our employees, consultants and other third parties, may be breached and our trade secrets and proprietary information may be disclosed to competitors, strategic partners and the public.
If we are subject to litigation and infringement claims, they could be costly and disrupt our business.
In recent years, there has been significant litigation involving patents and other intellectual property rights in many technology-related industries. There may be patents or patent applications in the EU, the United States or other countries that are pertinent to our business of which we are not aware. The technology that we incorporate or intend to incorporate into and use to develop and manufacture our current and future products may be subject to claims that they infringe the patents or proprietary rights of others. The success of our technology efforts will also depend on our ability to develop new technologies without infringing or misappropriating the proprietary rights of others. We may receive notices from third parties alleging patent, trademark or copyright infringement, claims regarding trade secrets or contract claims. Receipt of these notices could result in significant costs as a result of the diversion of the attention of management from our technology efforts. No third party has a current filed intellectual property lawsuit, arbitration or other proceeding against us. If a successful claim were brought against us, we would have to attempt to license the intellectual property right from the claimant or to spend time and money to design around or avoid the intellectual property. Any such license may not be available at reasonable terms, or at all. We may, however, be involved in future lawsuits, arbitrations or other legal proceedings alleging patent infringement or other intellectual property rights violations. In addition, litigation, arbitration or other legal proceedings may be necessary to:
• assert claims of infringement or misappropriation of or otherwise enforce our intellectual property rights;
• protect our trade secrets or know-how; or
• determine the enforceability, scope and validity of our intellectual property rights or those of others.
We may be unsuccessful in defending or pursuing these lawsuits or claims. Regardless of the outcome, litigation can be very costly and can divert management’s efforts. An adverse determination may subject us to significant liabilities or require us to seek licenses to other parties’ intellectual property rights. We may also be restricted or prevented from developing, manufacturing, marketing or selling a solar power product or service that we develop. Further, we may not be able to obtain any necessary licenses on acceptable terms, if at all.
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In addition, we may have to participate in proceedings before the EU’s or United States Patent and Trademark office, or before other patent and trademark offices, with respect to our patents, patent applications, trademarks or trademark applications or those of others. These actions may result in substantial costs to us as well as a diversion of management attention. Furthermore, these actions could place our patents, trademarks and other intellectual property rights at risk and could result in the loss of patent, trademark or other intellectual property rights protection for the products and services on which our business strategy depends.
We may be unable to adequately protect or enforce our proprietary information, which may result in its unauthorized use or reduced sales or otherwise reduce our ability to compete.
Our business and competitive position may partly depend upon our ability to protect our proprietary technology, including any solar power products that we develop. Despite our efforts to protect this information, unauthorized parties may attempt to obtain and use information that we regard as proprietary. Any patents issued in connection with our efforts to develop new technology for solar power products may not be broad enough to protect all of the potential uses of the technology.
In addition, when we may not control the prosecution, maintenance and enforcement of certain important intellectual property, the protection of the intellectual property rights may not be in our hands. If the entity that controls the intellectual property rights does not adequately protect those rights, our rights may be impaired, which may impact our ability to develop, market and commercialize the related solar power products.
Our means of protecting our proprietary rights may not be adequate, and our competitors may:
• independently develop substantially equivalent proprietary information, products and techniques;
• otherwise gain access to our proprietary information; or
• design around our patents or other intellectual property.
We pursue a policy of having our employees, consultants and advisors execute proprietary information and invention agreements when they begin working for us. However, these agreements may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. If we fail to maintain trade secret and patent protection, our potential, future revenues may be decreased.
International intellectual property protection is particularly uncertain and costly, and we may not have obtained or sought patent or trademark protection in many foreign countries where our products and services may be developed, manufactured, marketed or sold.
Intellectual property law is uncertain and costly and is currently undergoing review and revision in many countries. Further, the laws of some foreign countries may not protect our intellectual property rights. Moreover, we have not sought, obtained or maintained patent and trademark protection in many foreign countries in which our products and services may be developed, manufactured, marketed or sold by us or by others.
Existing regulations and changes to such regulations may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products.
The market for electricity generation products is heavily influenced by foreign, national, federal, state and local government regulations and policies concerning the electric utility industry, as well as internal policies and regulations promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. In the United States and in a number of other countries, these regulations and policies are being modified and may continue to be modified. Customer purchases of, or further investment in the research and development of, alternative energy sources, including solar power technology, could be deterred by these regulations and policies, which could result in a significant reduction in the potential demand for our solar power products. For example, utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could increase the cost to our customers of using our solar power products and make them less desirable, thereby harming our business, prospects, results of operations and financial condition. We anticipate that our solar power products and their installation will be subject to oversight and regulation in accordance with national and local ordinances relating to building codes, safety and environmental protection, utility interconnection and metering and related matters. There is also a burden in having to track the requirements of individual countries and states and design equipment to comply with the varying standards. Any new government regulations or utility policies pertaining to our products may result in significant additional expenses to us and our clients and their customers and, as a result, could cause a significant reduction in demand for our solar power products.
Our reliance on government support to partially fund our research and development programs could slow our ability to commercialize our solar power technologies and would increase our research and development expenses.
We intend to continue our policy of selectively pursuing research, product development and market development programs funded by various agencies and governments to complement and enhance our own resources.
These government agencies may not continue their commitment to programs to which our development projects are applicable. Moreover, we may not be able to compete successfully to obtain funding through these or other programs. A reduction or discontinuance of these programs or of
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our participation in these programs would increase our research and development expenses, which could slow our ability to develop our solar power technologies. In addition, contracts involving government agencies may be terminated or modified at the convenience of the agency. Other risks include potential disclosure of our confidential information to third parties and the exercise of “march-in” rights by the US government for US funded projects. Our government-sponsored research projects are subject to audit and require that we provide regular written technical updates, and, at the conclusion of the research contract, a final report on the results of our technical research. Because these reports are generally available to the public, third parties may obtain some aspects of our sensitive confidential information. Moreover, the failure to provide these reports or to provide inaccurate or incomplete reports may provide the US government with rights to any intellectual property arising from the related US government funded research. “March-in” rights refer to the right of the United States government or government agency to require us to grant a license to the technology to a responsible applicant or, if we refuse, the United States government or government agency may grant the license itself. The United States government or government agency can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the technology or because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations or to give the United States industry preference. Currently the United States Government is not funding any of our research projects. “March-in” rights do not pertain to EU or Dutch Government funded projects. Funding from government contracts also may limit when and how we can deploy our technology developed under those contracts.
Compliance with environmental regulations can be expensive, and non-compliance with these regulations may result in adverse publicity and potentially significant monetary damages and fines.
We are required to comply with all foreign, federal, state and local regulations regarding protection of the environment. If more stringent regulations are adopted in the future, the costs of compliance with these new regulations could be su