Premier Power Renewable Energy 10Q 2010 Q1 Quarterly report

(unaudited)

1. ORGANIZATION AND NATURE OF BUSINESS

Premier Power Renewable Energy, Inc., a Delaware corporation (the “Parent”), through its wholly owned subsidiaries, Premier Power Renewable Energy, Inc., a California corporation (“Premier Power California”), and Rupinvest Sarl (“Rupinvest”), and Premier Power California’s two wholly owned subsidiaries, Bright Future Technologies LLC (“Bright Future”) and Premier Power Sociedad Limitada (“Premier Power Spain”), and Rupinvest’s wholly owned subsidiary, Premier Power Italy S.p.A. (“Premier Power Italy”) (collectively the “Company”), designs, engineers, and installs photovoltaic systems in the United States, Italy, and Spain.

On June 16, 2009, the Company sold to Vision Opportunity Master Fund (“Vision”) 2.8 million shares of Series B Convertible Preferred Stock (bearing no liquidation preference, no coupon payments, and no redemption rights) in exchange for the cancellation of 3.5 million Series A and Series B warrants held by Vision, and $3 million in cash. The cancellation of warrants resulted in the elimination of all the Company’s issued and outstanding warrants.

F-5

PREMIER POWER RENEWABLE ENERGY, INC.

Notes to Consolidated Financial Statements

(unaudited)

On July 31, 2009, the Company purchased 100% of the issued and outstanding equity ownership of Rupinvest, a corporation duly organized and existing under the laws of Luxembourg, from Esdras Ltd., a corporation duly organized and existing under the laws of Cyprus (“Esdras”). Rupinvest distributes, develops, and integrates ground mount and rooftop solar power systems in Italy through its then majority-owned subsidiary, Premier Power Italy (formerly known as ARCO Energy, SRL), a private limited liability company organized under the laws of Italy. Prior to the closing, Rupinvest was a wholly owned subsidiary of Esdras. The Company acquired 100% of the issued and outstanding equity ownership interest in Rupinvest from Esdras in exchange for: (a) a cash payment by us to Esdras in the amount of twelve thousand five hundred Euros (€12,500, or approximately $18,292); and (b) the potential transfer to Esdras of up to three million shares of the Company’s restricted common stock, with the number of shares to be transferred, if any, to be calculated based on achieving certain sales by Premier Power Italy over a three-year period. Pursuant to the closing of this transaction, the Company conducts operations in Italy through Premier Power Italy. On December 31, 2009, Rupinvest purchased the remaining 10% interest of Premier Power Italy from Esdras at Esdras’ initial capital contribution per the Share Exchange Agreement, and Premier Power Italy became the wholly owned subsidiary of Rupinvest.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. They should be read in conjunction with the consolidated financial statements and related notes to the Company’s consolidated financial statements for the years ended December 31, 2009 and 2008 appearing in the Company’s Form 10-K for the fiscal year ended December 31, 2009 that is filed with the Securities and Exchange Commission. The March 31, 2010 and 2009 unaudited interim consolidated financial statements on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for smaller reporting companies. Certain information and note disclosures normally included in the annual financial statements on Form 10-K have been condensed or omitted pursuant to those rules and regulations, although the Company’s management believes the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year.

The consolidated financial statements include the accounts of the Parent and its subsidiaries. Intercompany balances, transactions, and cash flows are eliminated on consolidation.

Concentrations and Credit Risk – Two customers accounted for 10.9% and 10.2%, respectively, of the Company’s sales for the three months ended March 31, 2010. Three customers accounted for 27%, 10%, and 9%, respectively, of the Company’s sales for the three months ended March 31, 2009. Accounts receivable primarily consist of trade receivables and amounts due from state agencies and utilities for rebates on solar systems installed. At March 31, 2010, the Company had three customers that accounted for 23.5%, 10.7%, and 8.5% of the Company’s accounts receivable. At March 31, 2009, the Company had four customers that accounted for 20%, 18%, 17%, and 14% of the Company’s accounts receivable. The Company monitors account balances and follows up with accounts that are past due as defined in the terms of the contract with the customer. To date, the Company’s losses on uncollectible accounts receivable have been immaterial. The Company maintains an allowance for doubtful accounts receivable based on the expected collectability of its accounts receivable. The allowance for doubtful accounts is based on assessments of the collectability of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than historical experience, the allowance for doubtful accounts is increased. The allowance for doubtful accounts was $0.2 million and $0.1 million as of March 31, 2010 and 2009, respectively.

The Company purchases its solar modules from a limited number of vendors but believes that in the event it is unable to purchase solar panels from these vendors, alternative sources of solar modules will be available.

F-6

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Significant estimates include revenue recognition and derivative instruments, allowance for doubtful accounts, warranty reserves, the estimated useful life of property and equipment, valuation of the contingent consideration liability and derivative instrument, and income taxes. Actual results could differ from those estimates.

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand or in the bank and short-term investment securities with remaining maturities of 90 days or less at date of purchase. The Company maintains its cash in bank deposit accounts that, at times, may exceed the statutory insured limits of the jurisdiction in which the accounts are held. The Company has not experienced any losses on these investments. At March 31, 2010, the Company had $0.6 million in cash in bank accounts in excess of the various deposit insurance limits of the jurisdictions in which the balances were held.

Inventories – Inventories, consisting of raw materials and finished goods, are recorded using the average cost method and are carried at the lower of cost or market.

Property and Equipment – Property and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives of 5 years, or in the case of leasehold improvements, the lease term, if shorter. Maintenance and repairs are expensed as they occur. Upon disposition, the cost and related accumulated depreciation are removed from the accounts, and the resulting gain or loss is reflected in current operations.

Stock-Based Compensation – The Company accounts for stock-based compensation under the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 (Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” ), which requires the Company to measure the stock-based compensation costs of share-based compensation arrangements based on the grant date fair value and generally recognizes the costs in the financial statements over the employee’s requisite service period. Stock-based compensation expense for all stock-based compensation awards granted was based on the grant date fair value estimated in accordance with the provisions of FASB ASC 718.

Goodwill and Other Intangible Assets – The Company does not amortize goodwill, but rather tests goodwill for impairment at least annually. We determine the fair value using a weighted market and income approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we calculate the fair value of the reporting unit using selected comparable companies’ revenue multiples and apply an average of such companies’ multiples to the Company’s revenue. If the fair value of the reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets including goodwill exceeds the fair value of the reporting unit, then we determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment of goodwill has occurred and we recognize an impairment of loss for the difference between the carrying amount and the implied fair value of goodwill as a component of operating income. We did not recognize any goodwill impairment charges for the three months ended March 31, 2010 and 2009. Intangible assets, consisting of a customer list, trademarks, and an employee contract, are amortized over their estimated useful lives ranging from 2-17 years.

Fair Value of Financial Instruments – The carrying value reported for cash equivalents, accounts receivable, prepaid expenses, other receivables, accounts payable, and accrued liabilities approximated their respective fair values at each balance sheet date due to the short-term maturity of these financial instruments. The fair value of the contingent consideration liability and our borrowings have been determined in accordance with the methodology as disclosed in Note 16.

Revenue Recognition – Revenue on solar power projects installed by the Company for customers under installation contracts is recognized using the percentage of completion method of accounting. At the end of each period, the Company measures the cost incurred on each project and compares the result against its estimated total costs at completion. The percent of cost incurred determines the amount of revenue to be recognized. Payment terms are generally defined by the installation contract and as a result may not match the timing of the costs incurred by the Company and the related recognition of revenue. Such differences are recorded as either costs or estimated earnings in excess of billings on uncompleted contracts or billings in excess of costs and estimated earnings on uncompleted contracts. The Company determines a customer’s credit worthiness at the time an order is accepted. Sudden and unexpected changes in a customer’s financial condition could put recoverability at risk.

F-7

Contract costs include all direct material and labor costs attributable to a project as well as certain indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.

The percentage of completion method requires the ability to estimate several factors, including the ability of the customer to meet its obligations under the contract, including the payment of amounts when due. If we determine that collectability is not assured at the onset of a contract, we will defer revenue recognition and use methods of accounting for the contract such as completed contract method until such time we determine that collectability is reasonably assured or through the completion of the project.

Advertising – The Company expenses advertising costs as they are incurred. Advertising costs were $0.1 million and $0.2 million for the three months ended March 31, 2010 and 2009, respectively.

Product Warranties – The Company warrants its projects for labor and materials associated with its installations. The Company’s warranty is ten years in California and generally five to ten years elsewhere in the U.S. depending upon each state’s specific requirements. Premier Power Italy provides a ten year warranty covering the labor and materials associated with its installations. Premier Power Spain provides a one year warranty for all contracts signed after December 31, 2006. Since the Company does not have sufficient historical data to estimate its exposure, we have looked to our historical data and the historical data reported by a peer company solar system installer. Solar panels and inverters are warranted by the manufacturer for 25 years and 10 years, respectively. Activity in the Company’s accrued warranty reserve for the three months ended March 31, 2010 and 2009 were as follows:

	March 31,
	2010			2009
	(in thousands)
Beginning accrued warranty balance	$	359		$	367

Accruals related to warranties issued during period		23			113

Reduction for labor payments and claims made under the warranty		(27	)		(148	)

Ending accrued warranty balance	$	355		$	332

F-8

Foreign Currency – The functional currency of Premier Power Italy and Premier Power Spain is the Euro. Their assets and liabilities are translated at year-end exchange rates including goodwill, except for certain non-monetary balances, which are translated at historical rates. All income and expense amounts of Premier Power Italy and Premier Power Spain are translated at average exchange rates for the respective period. Translation gains and losses are not included in determining net income but are accumulated in a separate component of shareholders’ equity. Foreign currency transaction gains and losses are included in the determination of net income (loss) in the period in which they occur. For the three months ended March 31, 2010 and 2009, the foreign currency transaction gain was $0.08 million and $0.04 million, respectively.

F-9

PREMIER POWER RENEWABLE ENERGY, INC.

Notes to Consolidated Financial Statements

(unaudited)

Comprehensive Income – FASB ASC Topic 220 (Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,”) establishes standards for reporting comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income, as defined, includes all changes in equity during the period from non-owner sources, such as foreign currency translation adjustments.

Income Taxes – The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon the weight of available evidence, including expected future earnings. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized. Prior to September 2008, the Company was not subject to federal income tax.

Effective September 1, 2008, the Company adopted FASB ASC 740-10 (Financial Accounting Standards Interpretation FIN No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48)). FASB ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the implementation of FASB ASC 740-10, the Company recognized no change in the liability for unrecognized tax benefits related to tax positions taken in prior periods and no corresponding change in retained earnings. As a result of the implementation of FASB ASC 740-10, the Company recognized no material adjustment in the liability for unrecognized income tax benefits as of the September 2008 adoption date and at December 31, 2009. Also, the Company had no amounts of unrecognized tax benefits that, if recognized, would affect its effective tax rate.

Premier Power Italy is recognized under the laws of Italy and is subject to federal and provincial taxes. Premier Power Spain is organized under the laws of Spain and is subject to federal and provincial taxes.

Contingent Consideration Liability – In connection with the acquisition of Rupinvest, contingent consideration liability of approximately $12 million was recorded at the time of the purchase. The contingent consideration liability relates to the contingent issuance of 3 million shares to the sellers of Rupinvest. In accordance with FASB ASC 820, the Company estimates the fair value of the contingent consideration liability at each reporting period, with changes in the estimated fair value recorded in income.

The fair value measurement assumes that the contingent consideration liability is transferred to a market participant at the valuation date and that the nonperformance risk related to the contingent consideration liability remains constant. The Company estimates the fair value using the market price of its shares since it believes this represents the present value of its future stock returns, discounted at the Company’s required rate of return. The Company also estimates the number of shares to be issued based on a number of financial scenarios weighted based on their relative probability. The Company considers the effect of counterparty performance risk in its fair value estimate. The Company estimates the counterparty performance risk by comparing its borrowing rate to those of U.S. treasury notes and uses the underlying spread to discount the estimated fair value.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (Topic 820) — Fair Value Measurements and Disclosures (ASU 2010-06) to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. Levels 1, 2 and 3 of fair value measurements are defined in Note 17 below. We are currently evaluating the impact of its pending adoption on our consolidated financial statements.

F-10

In February 2010, the FASB issued an update to Subsequent Events (ASC 855), which amends the previous definition of an SEC filer and removed the requirement that an SEC filer disclose the date through which subsequent events have been evaluated in both issued and revised financial statements. Subsequent Events defines the period after the balance sheet date that entities should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements and establishes the circumstances under which entities should recognize and the disclosures that should be made about events or transactions that occur after the balance sheet date. The Company has adopted this guidance with no material impact to our consolidated financial statements.

In April 2010, the FASB issued an update to Compensation-Stock Compensation (ASC 718), which clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance or service condition. Therefore, an entity would not classify such an award as a liability if the award otherwise qualifies as equity. The standard is effective for interim and annual periods ending after December 15, 2010 and should be applied prospectively. The adoption of this standard is not expected to have a material impact to our consolidated financial statements.

In June 2009, the FASB issued FASB ASC 810 (SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC 810 applies to FASB ASC 105 entities and is effective for annual financial periods beginning after November 15, 2009 and for interim periods within those years. Earlier application is prohibited. A calendar year-end company must adopt this statement as of January 1, 2010. The Company has adopted this guidance with no material impact to our consolidated financial statements.

F-11

In June 2009, the FASB issued FASB ASC 860 (SFAS No. 166, “Accounting for Transfer s of Financial Assets-an amendment of FASB Statement No. 140”). FASB ASC 860 applies to all entities and is effective for annual financial periods beginning after November 15, 2009 and for interim periods within those years. Earlier application is prohibited. A calendar year-end company must adopt this statement as of January 1, 2010. This statement retains many of the criteria of FASB ASC 860 (FASB 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”) to determine whether a transfer of financial assets qualifies for sale accounting, but there are some significant changes as discussed in the statement. Its disclosure and measurement requirements apply to all transfers of financial assets occurring on or after the effective date. Its disclosure requirements, however, apply to transfers that occurred both before and after the effective date. In addition, because FASB ASC 860 eliminates the consolidation exemption for Qualifying Special Purpose Entities, a company will have to analyze all existing QSPEs to determine whether they must be consolidated under FASB ASC 810. The Company has adopted this guidance with no material impact to our consolidated financial statements.

In August 2009, the FASB issued ASU 2009-05, “Measuring Liabilities at Fair Value.” ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of FASB ASC 820, “Fair Value Measurements and Disclosures.” ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance, October 1, 2009 for the Company. The Company has adopted this guidance with no material impact to our consolidated financial statements.

In August 2009, an update was made to Fair Value Measurements and Disclosures – Measuring Liabilities at Fair Value.” This update permits entities to measure the fair value of liabilities, in circumstances in which a quoted price in an active market for an identical liability is not available, using a valuation technique that uses a quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets or the income or market approach that is consistent with the principles of Fair Value Measurements and Disclosures. Effective upon issuance, the Company has adopted this guidance with no material impact to our consolidated financial statements.

In October 2009, the FASB ratified FASB ASC 605-25 (the EITF’s final consensus on Issue 00-21, “Revenue Arrangements with Multiple Deliverables”). FASB ASC 605-25 is effective for fiscal years beginning on or after June 15, 2010. Earlier adoption is permitted on a prospective or retrospective basis. The Company is currently evaluating the impact of this pronouncement on its consolidated financial statements.

3. EARNINGS PER SHARE

Earnings per share is computed in accordance with the provisions of FASB ASC Topic 260 (SFAS No. 128, “Earnings Per Share”). Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding during the period, as adjusted for the dilutive effect of the Company’s outstanding convertible preferred shares using the “if converted” method and dilutive potential common shares. Potentially dilutive securities include convertible preferred stock, employee stock options, restricted shares, and contingently issuable shares for the purchase of Rupinvest.

F-12

At March 31, 2010 and 2009, there were stock options for 1,922,729 and 1,142,479 shares of common stock, respectively, which were anti-dilutive as their weighted average exercise price exceeded the average market price of the Company’s common stock. For the three months ended March 31, 2010 and 2009, there were 6,300,000 and 0, respectively, of potentially dilutive shares of common stock excluded from the computation of diluted earnings per share as their effect was anti-dilutive.

	Three Months Ended March 31,
	2010			2009
	(in thousands, except per share data)
Net (loss) income	$	(806	)	$	721
Earnings Per Share:
Basic		($0.03	)	$	0.03
Diluted		($0.03	)	$	0.02
Weighted Average Shares Outstanding:
Basic		26,619			26,049
Diluted effect of convertible preferred stock, series A		-			3,500
Diluted effect of warrants		-			980
Diluted		26,619			30,529

4. INTANGIBLE ASSETS

Intangibles consist of amortizing intangibles and goodwill. At March 31, 2010 and December 31, 2009, such amounts were as follows:

	March 31, 2010		December 31, 2009
Amortizing Intangibles	(in thousands)
Trademark	$	801	$	814
Customer List		75		89
Employee contract		45		67
		921		970
Goodwill		11,532		12,254
	$	12,453	$	13,224

Amortization periods for the intangibles are as follows: trademark – 17 years, customer list – 3 years, and employee contract – 2 years. Amortization for the three months ended March 31, 2010 and 2009 was $0.04 million and $0.06 million, respectively. Accumulated amortization was $0.3 million and $0.1 million at March 31, 2010 and 2009, respectively. The change of $0.7 million for the three months ended March 31, 2010 was due to changes in foreign currency translation rates.

The Company expects amortization expense for the next five years to be as follows (in thousands):

Year	Amount
2010	$	109
2011		85
2012		71
2013		52
2014		52

F-13

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	March 31, 2010			December 31, 2009
	(in thousands)
Equipment	$	217		$	217
Furniture and computers		202			204
Vehicles		650			651
		1,069			1,072
Less: accumulated depreciation		(499	)		(457	)
	$	570		$	615

Depreciation expense was $0.05 million and $0.04 million for the three months ended March 31, 2010 and 2009, respectively.

6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

	March 31, 2010		December 31, 2009
	(in thousands)
Payroll	$	464	$	363
Warranty reserve		355		359
Accrued subcontractors		301		998
Other operational accruals		169		147
Sales and local taxes		57		176
	$	1,346	$	2,043

F-14

The effective tax rate for the periods presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. Our provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes and earnings considered as indefinitely reinvested in foreign operations. Our effective tax rate was 30.5% and 47.2% for the three months ended March 31, 2010 and 2009, respectively.

7. INCOME TAXES

Our net deferred tax assets increased from $1.8 million as of December 31, 2009 to $2.1 million as of March 31, 2010, primarily as a result of losses incurred for the first three months of the 2010 fiscal year. The Company believes it is more likely than not that the net deferred tax assets will be realized in the foreseeable future. Realization of our net deferred tax assets is dependent upon our generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain benefit from the reversal of temporary differences, net operating loss carryforwards, and tax credit carryforwards. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change.

The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company adopted the provisions of accounting for uncertain tax positions in accordance with the Income Taxes (ASC 740) topic on September 8, 2008, and accordingly, performed a comprehensive review of the Company’s uncertain tax positions as of that date. In this regard, an uncertain tax position represents its expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes.

The Company does not expect there to be any material changes to the assessment of uncertain tax positions over the next twelve months. The Company is subject to routine corporate income tax audits in the United States and foreign jurisdictions. The statute of limitations for the Company’s 2008 tax years remains open for U.S. purposes. Most foreign jurisdictions have statute of limitations that range from three to six years.

The liability for uncertain tax positions is recorded in accrued expenses in the Company’s consolidated balance sheet. The Company recognizes interest and penalties related to uncertain tax positions in the income tax provision. Interest and penalties are computed based upon the difference between its uncertain tax positions under ASC 740 and the amount deducted or expected to be deducted in its tax returns. During 2009 and 2008, the Company did not accrue or pay for any interest and penalties.

8. BORROWINGS

Notes Payable

Notes payable were $0.8 million and $0.6 million at March 31, 2010 and December 31, 2009, respectively. Notes payable of $0.1 million are secured by vehicles and have maturities through 2014. Additionally, we have $0.2 million short term unsecured notes associated with various insurance policies. The annual interest rates on the notes range from 2.9% to 6.4%. Premier Power Spain has two unsecured loans for $0.5 million with Instituto de Crédito Oficial as of March 31, 2010, with the first payment due on December 18, 2010 and the other due June 18, 2011 each additional payment due six months thereafter until June 18, 2012, which is the last payment due date. Payment amounts are $0.1 million each.

F-15

On July 13, 2009, the Company entered into a loan agreement with Umpqua Bank, an Oregon corporation, for a line of credit of up to $12 million, maturing on July 13, 2011. The loan agreement provides for an initial line of credit of $7 million, provided, however, that the Company may request no more than twice prior to the maturity date that the line of credit be increased to an amount not to exceed $12 million in the event the Company acquires another subsidiary and require additional working capital for such subsidiary. The line of credit is secured by the Parent’s assets and by the assets of Premier Power California and Bright Future. The line of credit bears interest at the prime rate, provided, however, that the interest rate will not be less than five percent (5%) per annum. At March 31, 2010, the interest rate was 5%. As of March 31, 2010, there was $1.4 million outstanding under the agreement with Umpqua Bank. Additionally, certain financial ratios under the agreement with Umpqua Bank restricts the amount that we can borrow.

Lines of Credit

The loan agreement with Umpqua Bank contains the following financial condition covenants: (i) minimum debt service charge, (ii) minimum current ratio, (iii) maximum debt-to-tangible net worth ratio, and (iv) minimum tangible net worth. Under the loan agreement, the Company is also subject to customary non-financial covenants including limitations on secured indebtedness and limitations on dividends and other restricted payments. As of March 31, 2010, the Company was out of compliance with the minimum current ratio and the maximum debt-to-tangible net worth ratio. These ratios did not take into account our contingent consideration liability as described in Note 12 below. The bank is aware of the non-compliance and has not waived the non-compliance. The bank has indicated that it does not intend to issue a notice of default, nor institute default rates, nor cut funding under the line. We are in discussions with the bank to redefine the financial covenants to account for the contingent consideration liability; in the event, however, that the bank does subject the Company to default provisions, our interest rate would increase to 5% above the then-current rate and our ability to borrow would be limited. Additionally, the bank has the right to request repayment of all outstanding obligations. We believe that our current cash balances and the anticipated increase from operating cash flows resulting from increased collections from accounts receivable are sufficient to meet working capital needs should the bank issue a notice of default and demand repayment of all obligations or cut off funding under the line. We do not expect any of these events to occur, though, and believe we have the ability to comply with these covenants once the financial covenants are redefined. Without the redefinition of terms, we are unable to comply with the current ratios with which we are out of compliance.

The future principle payments on these balances as of March 31, 2010 are as follows:

	(in thousands)
2010	$	1,704
2011		296
2012		206
2013		6
2014		3
	$	2,215

9. EQUITY

Preferred Stock

The Company has authorized 20,000,000 shares of preferred stock, par value $ 0.0001 per share (“Preferred Stock”). The Preferred Stock may be issued from time to time in series having such designated preferences and rights and qualifications and to such limitations as the Board of Directors may determine.

F-16

The Company has designated 5,000,000 shares of Preferred Stock as Series A Convertible Preferred Stock (“Series A Stock”). The holders of Series A Stock have no voting rights except with regards to certain corporate events, enjoys a $2.40 liquidation preference per share, subject to adjustment, over holders of common stock, and may convert each share of Series A Stock into one share of common stock at any time. Series A stock converts automatically upon the occurrence of an offering meeting certain criteria. Holders of the Series A Stock have certain redemption rights. The Company has determined that the events triggering such rights are either in control of the Company or in the case of such events where the Company is not deemed to exercise control; the redemption right is limited to the ability to convert into shares of the Company’s common stock. As of March 31, 2010 and 2009, there were 3,500,000 shares of Series A Stock outstanding.

The Company has designated 2,800,000 shares of Preferred Stock as Series B Convertible Preferred Stock (“Series B Stock”). The holders of Series B Stock have no voting rights except with regards to certain corporate events and may convert each share of Series B Stock into one share of common stock at any time. Series B stock converts automatically upon the occurrence of an offering meeting certain criteria. Holders of the Series B Stock have certain redemption rights. The Company has determined that the events triggering such rights are either in control of the Company or in the case of such events where the Company is not deemed to exercise control; the redemption right is limited to the ability to convert into shares of the Company’s common stock. As of March 31, 2010 and 2009, there were 2,800,000 and 0 Series B Stock outstanding, respectively.

Warrants

In September 2008, the Company issued Series A Warrants and Series B Warrants to purchase 1,750,000 and 1,750,000 shares of common stock, respectively, in connection with the issuance of Series A Stock. Both the Series A and B Warrants had four year lives. The Company had the right to call for cancellation of each outstanding Series A Warrant or Series B Warrant under certain circumstances. The Series A Warrants had an exercise price of $2.50 and a fair value of $.15 per warrant. The Series B Warrants had an exercise price of $3.00 and a fair value of $.13 per warrant. All of the issued and outstanding Series A Warrants and Series B Warrants were cancelled on June 16, 2009 in connection with a sale of our Series B Stock.

The significant assumptions used to determine the fair values of the warrants are as follows:

Risk-free interest rate at grant date		4.5	%
Expected stock price volatility		95	%
Expected dividend payout		-
Expected option life-years	4 yrs

In September 2008, the Company issued 3,500,000 units, consisting each of 1 share of Series A Stock, ½ of a Series A Warrant, and ½ of a Series B Warrant, in exchange for $7,000,000 in gross proceeds. The fair value of the Series A Stock was calculated based on the estimated fair value and underlying number of common shares it would convert into at the time of the transaction. The estimated fair value of our common stock on the transaction date was $.42 per share, and the Series A Stock would have converted into 3,500,000 shares of common stock, thus deriving a fair value of $1,475,000 for the underlying common stock.

10. RELATED PARTY TRANSACTIONS

Certain stockholders have guaranteed certain obligations under the Company’s borrowings and operating leases.

11. COMMITMENTS AND CONTINGENCIES

Premier Power Spain is party to three non-cancelable leases for operating facilities in Navarro, Madrid, and Barcelona, Spain, which expire in 2012, 2013, and 2014, respectively. Premier Power Italy is party to a non-cancelable lease for operating facilities in Campobasso, Italy, which expires in 2015. Premier Power California is party to a non-cancelable lease for operating facilities in Redlands, California, which expires in 2010. These leases provide for annual rent increases tied to the Consumer Price Index. The leases require the following payments as of March 31, 2010, subject to annual adjustment, if any:

	(in thousands)
2010	$	73
2011		74
2012		66
2013		55
2014		30
Thereafter		17
	$	315

F-17

We are not currently involved in any material legal proceedings, and we are not aware of any material legal proceedings pending or threatened against us. We are also not aware of any material legal proceedings involving any of our directors, officers, or affiliates or any owner of record or beneficially of more than 5% of any class of our voting securities.

12. CONTINGENT CONSIDERATION LIABILITY

In connection with the acquisition of Rupinvest, contingent consideration liability of approximately $12.0 million was recorded at the time of the purchase to reflect the estimated fair value of 3 million contingently issuable shares of the Company’s common stock.

The conditions that must be met and the amount of the 3 million shares, if any, to be issued are described below:

(i)

375,000 shares for each ten million Euros ( € 10 million, or approximately $14.2 million) worth of net sales achieved by Premier Power Italy from July 9, 2009, the escrow opening date, to December 31, 2009 (the “First Issuance ”), with the maximum number of shares released as part of the First Issuance to be 1,500,000 shares (any number of shares not issuable as part of the First Issuance solely due to the fact that the 1,500,000 shares threshold was exceeded is hereinafter referred to as the “ Excess Issuable Amount ” );

(ii)

50% of the Excess Issuable Amount, if any, plus 200,000 shares for each ten million Euros ( € 10 million, or approximately $14.2 million) worth of net sales achieved by Premier Power Italy from January 1, 2010 to December 31, 2010 (the “Second Issuance) ”). The maximum combined number of shares to be released as part of the First Issuance and the Second Issuance, in the aggregate, shall not exceed 3,000,000 shares; and

(iii)

100,000 shares for each ten million Euros ( € 10 million, or approximately $14.2 million) worth of net sales achieved by Premier Power Italy from January 1, 2011 to December 31, 2011 (the “Third Issuance ”). The maximum combined number of shares to be released as part of the First Issuance, the Second Issuance, and the Third issuance, in the aggregate, shall not exceed 3,000,000 shares.

At March 31, 2010 and December 31, 2009, the Company estimated the fair value of the contingent consideration liability at $6,471,000 and $7,725,000, respectively, assuming 2,724,270 and 2,801,875 shares of its common stock, respectively, would be issued, a share price of $2.45 and $2.75, respectively, transaction costs, and its determination that the adjustment for counterparty performance risk of $224,000 was taken into consideration at March 31, 2010. As of March 31, 2010, the Company determined the amount of earnable shares by the seller was approximately 560,000 for period ended December 31, 2009.

13. DERIVATIVE INSTRUMENT

On January 1, 2009, the Company adopted FASB ASC 815 (EITF 07-5, Determining Whether an Instrument (or embedded Feature) is Indexed to an Entity’s Own Stock. As part of the adoption of FASB ASC 815, the Company determined that its warrants are not indexed to its stock as a result of the basis of an exercise price reset that occurs when the Company sells its common stock at a lower price, even if such price is at fair value. Thus, the value of the warrants has been recorded as a liability.

The Company recorded a warrant liability in the amount of $11.1 million upon adoption of FASB ASC 815. The liability was then adjusted to fair value, $9.6 million as of March 31, 2009, resulting in a decrease in the liability and other income of $1.5 million for the three months ended March 31, 2009.

F-18

The Company recorded the following cumulative effect of change in accounting principle pursuant to its adoption of EITF 07-05 as of January 1, 2009:

	Other			Other		Retained
	Paid-In-Capital			Current Liability		Earnings
	(in thousands)
Record January 1, 2009, derivative instrument liability related to warrants	$	-		$	11,119	$	-
Record January 1, 2009, the reversal of prior accounting related warrants		(1,794	)		-		(9,325	)
	$	(1,794	)	$	11,119	$	(9,325	)

The Company used the Black-Scholes pricing model to calculate fair value of its warrant liability. Key assumptions used are as follows:

Number of Shares included in Warrant	Dividend Yield		Volatility		Risk-Free Rate		Expected Life (in years)	Stock Price

1,750,000	0.0	%	95.0	%	4.5	%	4.0	$	2.50

1,750,000	0.0	%	95.0	%	4.5	%	4.0	$	3.00

14. STOCK-BASED COMPENSATION EXPENSE AND VALUATION OF STOCK OPTIONS AND RESTRICTED STOCK-BASED AWARDS

The Company’s 2008 Equity Incentive Plan (the “Incentive Plan”) provides for the issuance of incentive stock options and non-statutory stock options. The board of directors determines to whom grants are made and the vesting, timing, amounts, and other terms of such grants, subject to the terms of the Incentive Plan. Incentive stock options may be granted only to employees of the Company, while non-statutory stock options may be granted to the Company’s employees, officers, directors, certain consultants, and certain advisors. Options under the Incentive Plan vest as determined by the Board. The term of the options granted under the Incentive Plan may not exceed 10 years, and the maximum number of shares of common stock that may be issued pursuant to stock options and stock awards granted under the Incentive Plan is 2,951,875 shares in the aggregate. The Company granted 602,000 options in the three months ended March 31, 2010. An aggregate of 1,922,729 stock options (net of forfeitures) were outstanding under the Incentive Plan as of March 31, 2010.

Restricted stock awards granted under the Incentive Plan are independent of option grants and are subject to restrictions. Awards, which have been issued since 2009, are subject to forfeiture if employment or services are terminated prior to the release of restrictions, which generally occurs on a ratable basis over three to four years from the date of grant. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is expensed ratably over the period the restriction lapse. At March 31, 2010 and 2009, there were an aggregate of 150,500 and 150,000, respectively, stock awards outstanding.

Stock-based compensation is included in the following operating expense line items in our consolidated statement of operations:

	Three Months Ended March 31,
	2010		2009
	(in thousands)
Cost of sales	$	90	$	47
Sales and marketing		25		30
General and administrative		131		68
	$	246	$	145

F-19

We estimate the fair value of our stock option grants using the Black-Scholes-Merton option-pricing model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models, including the Black-Scholes-Merton option-pricing model, require the input of assumptions, including stock price volatility. Changes in the input assumptions can materially affect the fair value estimates and ultimately how much we recognize as stock-based compensation expense. The fair values of our stock options were estimated at the date of grant. The weighted average input assumptions used and resulting fair values were as follows for the three months ended March 31, 2010 and 2009:

	Three Months Ended March 31,
	2010			2009
Expected volatitity		83.44	%		93.60	%
Expected dividend		0	%		0	%
Expected term	6.5 years			6.5 years
Risk-free interest rate		2.71	%		1.88	%
Weighted-average fair value per share	$	1.60			3.32

Valuation and Amortization Method — The estimated fair value of stock options is amortized over the requisite service periods of the awards, which is generally the vesting period. Stock options typically have a ten-year life from date of grant and vesting periods of three to five years. The fair value of the Company’s restricted stock award is based on its value as determined by market prices of the Company’s stock on the date of grant. Compensation expense is recognized on a straight-line basis over the respective vesting period.

F-20

Expected Volatility — Because there is minimal history of stock price returns, the Company does not have sufficient historical volatility data for its stock option grants. Accordingly, the Company has chosen to use rates for similar publicly traded U.S.-based competitors to calculate the volatility for its granted options.

Expected Dividend — The Company has never paid dividends on its common shares and currently does not intend to do so. Accordingly, the dividend yield percentage is zero for all periods.

Expected Term — The Company’s expected term represents the period that the Company’s stock options are expected to be outstanding. For awards granted subject only to service vesting requirements, the Company utilizes the simplified method under the provisions of FASB ASC 718-10-S99-1 (Staff Accounting Bulletin No. 107) for estimating the expected term of the stock options.

Risk-Free Interest Rate — The Company bases the risk-free interest rate used in the Black-Scholes-Merton valuation method upon the implied yield curve currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.

15. EMPLOYEE BENEFITS

The Company has a 401(k) Plan for its employees. Employees are eligible to make contributions when they attain an age of twenty-one and have completed at least one year of service. The Company makes discretionary matching contributions to employees who qualify for the Plan and were employed on the last day of the Plan year. Such contributions totaled $0 and $12 thousand for the three months ended March 31, 2010 and 2009, respectively. Employees are vested 100% after 3 years of service. Neither Bright Future, Premier Power Italy, nor Premier Power Spain offers defined contribution or defined benefit plans to employees.

F-21

Notes to Consolidated Financial Statements

(unaudited)

16. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. In accordance with FASB ASC 820 (SAS No. 157 Fair Value Measurements), the Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued.

The following disclosure is made in accordance with FASB ASC 820 (FASB Staff Position (FSP) FAS 107-1, Interim Disclosures about Fair Value of Financial Instruments ): The carrying amounts of cash and cash equivalents and accounts receivable, prepaid expenses, costs and estimated earnings in excess of billings, accounts payable, billings in excess of costs and estimated earnings on uncompleted contracts, and accrued liabilities approximate their fair values at each balance sheet date due to the short-term maturity of these financial instruments. The fair value of the Company’s borrowings is based upon current interest rates for debt instruments with comparable maturities and characteristics and approximates carrying values.

FASB ASC 820 (SFAS No. 157) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

●

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets.

●

Level 2, defined as observable inputs other than Level 1 prices. They include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in a market that is not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

●

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The table below sets forth the Company’s Level 3 financial assets and liabilities that are accounted for at fair value:

	March 31, 2010						December 31, 2009
	(in thousands)						(in thousands)
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Liabilities: Contingent consideration	$	-	$	-	$	6,471	$	-	$	-	$	7,725

	Contingent Consideration Liability
	(in thousands)

Beginning balance	$	7,725
Total gain recognized		(1,254	)
Ending balance	$	6,471

F-22

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company is not currently involved in any litigation, the outcome of which would, based on information currently available, have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

17. CONTINGENCIES

Legal Matters

Indemnifications

The Company indemnifies its directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by them in any action or proceeding to which any of them is, or is threatened to be, made a party by reason of his or her services in their role as a director or officer.

18. SEGMENT INFORMATION

The Company has adopted Segment Reporting (ASC 280) requiring segmentation based on the Company’s internal organization, reporting of revenue and other performance measures. Operating segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company’s segments are designed to allocate resources internally and provide a framework to determine management responsibility. There are three operating segments, as summarized below:

United States – consists of (i) commercial ground mount or rooftop solar energy projects generally ranging from 100kWh to 20MW provided to corporate, municipal, agricultural, and utility customers and (ii) residential that consists mainly of rooftop solar installations generally ranging from 5kWh to 40kWh provided to residential customers primarily in California and New Jersey.

Italy – consists of distribution, ground mount, roof mount, and solar power plant installations.

Spain – consists of rooftop solar installations generally ranging 5kWh to 1MW provided primarily to businesses that own commercial buildings or warehouses.

Prior to its acquisition of Premier Power Italy the Company determined that it operated as a single segment. In conjunction with the acquisition and changes in its management structure the Company determined that the three operating segments noted above are more reflective of its operations.

The Company refers to the Net Sales as the revenue earned from the installation projects or distribution sales. Currently, the Company does not separately allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, the segment information reported includes only net sales, cost of sales, and gross profit. The following tables present the operations by each operating segment:

	Three Months Ended March 31, 2010
	United States			Italy			Spain			Total
	(in thousands)
Net sales	$	971		$	926		$	1,502		$	3,399
Cost of sales		(1,184	)		(976	)		(1,208	)		(3,368	)
Gross profit	$	(213	)	$	(50	)	$	294			31
Total operating expenses											2,401
Operating loss										$	(2,370	)

F-23