1. Description of Business and Basis of Presentation

Description of Business

Solar Power, Inc. and its subsidiaries (collectively the “Company”) consist of the combination of the legacy reporting entity Solar Power, Inc. and Solar Green Technology S.p.A. (“SGT”) and their respective subsidiaries. Refer to Note 4—Acquisition of Solar Green Technology for further details of the accounting impact of the SGT acquisition.

The Company is a global solar energy facility (“SEF”) developer offering its own brand of high-quality, low-cost distributed generation and utility-scale SEF development services. Primarily, the Company works directly with and for developers around the world who hold large portfolios of SEF projects for whom it serves as an engineering, procurement and construction (“EPC”) contractor. The Company also performs as an independent, turnkey SEF developer for one-off distributed generation and utility-scale SEFs.

Basis of Presentation and Liquidity

The accompanying Condensed Consolidated Financial Statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.”) for interim financial information. They should be read in conjunction with the financial statements and related notes to the financial statements of Solar Power, Inc. for the years ended December 31, 2011 and 2010 appearing in Solar Power, Inc.’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 16, 2012. The September 30, 2012 and 2011 unaudited interim Condensed Consolidated Financial Statements on Form 10-Q have been prepared pursuant to the rules and regulations of the SEC for smaller reporting companies. The financial statements for prior periods have been recast due to the accounting guidelines for a transfer of an entity under common control (refer to Note 4—Acquisition of Solar Green Technology). 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 adjustments, necessary for a fair presentation of the results of operation 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.

In January 2012, the Company reassessed its reportable segments and determined that the former cable, wire and mechanical assemblies operating segment no longer meets the qualitative and quantitative characteristics that require separate reporting. The basis for the reassessment is the decline in revenues related to this former segment. As such, effective January 2012, the Company operates in one reportable segment: photovoltaic installation, integration, and sales, the results of which are reflected in the Condensed Consolidated Financial Statements.

The Condensed Consolidated Financial Statements include the accounts of Solar Power, Inc. and its subsidiaries. Intercompany balances, transactions and cash flows are eliminated on consolidation.

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to operate profitably, to generate cash flows from operations, and to pursue financing arrangements to support its working capital requirements.

Our parent company, LDK Solar Co., Ltd. (“LDK”), who owns 70% of the Company’s outstanding Common Stock, has disclosed publicly that it had a net loss and negative cash flows from operations for the year ended December 31, 2011 and has a working capital deficit and was not in compliance with certain financial covenants on its indebtedness at December 31, 2011. These factors raise substantial doubt as to LDK’s ability to continue as a going concern. While management of LDK believes that it has a plan to satisfy LDK’s liquidity requirements for a reasonable period of time, there is no assurance that its plan will be successfully implemented. As a result of our close business relationship with, and equity ownership by, LDK and the relationship between LDK and China Development Bank (“CDB”), we are experiencing the following risks and uncertainties in our business:

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The Company has a relationship with CDB for construction and project financing on its development projects in New Jersey and Greece. If CDB will no longer partner with the Company, the Company will need to seek construction financing from other sources. Further, the Company has and will continue to actively partner with financial institutions other than CDB and those not associated with LDK.

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A key term of existing project financing with CDB is that the Company must use solar panels manufactured by LDK. Currently, however, LDK has demanded payment in advance in order to procure their solar panels. If the Company is unable to make advance payments required, the Company has and will continue to need to request its customers to make the required cash payments for the LDK solar panels to be utilized in projects under development. The Company continues to maintain relationships with other solar panel manufacturers when circumstances call for an alternative to LDK’s line of solar panels.

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The Company was in default on its $7.5 million Cathay line of credit. Due to the loss before income taxes for the three months ended September 30, 2012, the Company did not meet the minimum $1.0 million pre-tax profit covenant. As a result of the second quarter 2012 reclassification of the CDB loan from long-term to short-term, the Company did not meet the current ratio covenant. Currently, a notice of default has not been issued by Cathay. The Company is in discussions to obtain a waiver on the violated covenants or modification to the terms of the Business Loan Agreement. Should the bank declare the amounts immediately due and payable, the Company does not have the ability to make the payments without additional sources of financing or accelerating the collection of outstanding receivables.

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The Company’s existing CDB loans and Cathay line of credit contain material adverse change (“MAC”) clauses under which the banks can declare amounts immediately due and payable. Due to the subjectivity of the MAC clauses, it is not clear whether the events described above regarding LDK would represent a material adverse change. Should the banks declare amounts immediately due and payable under the MAC clauses, the Company does not have the ability to make the payments without additional sources of financing or accelerating the collection of its outstanding receivables.

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As of September 30, 2012 and December 31, 2011, the Company had accounts payable to LDK of $52.9 million and $62.2 million, respectively. The $52.9 million is comprised of $35.4 million due to LDK primarily related to U.S. and Greek project solar panel purchases and $17.3 million due to LDK for solar panels purchased for various Italian solar development projects. Of the $35.4 million due to LDK noted above, approximately $26.0 million is currently contractually due and payable to LDK. Payment for the solar development project related panels was contractually past due to LDK within four months of their purchases; however the payment terms with the customer were negotiated to be collected within nine to eleven months from sale. Although this portion of the payable to LDK is currently contractually past due, LDK has indicated that it will not demand payment until the receivable from the customer has been collected. Should LDK change its position and demand payment for the past due amount prior to collection of the related receivable from the customer, the Company does not have the ability to make the payment currently due without additional sources of financing or accelerating the collection of its outstanding receivables.

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With LDK as a majority shareholder, the significant risks and uncertainties noted at LDK could have a significant negative impact on the financial viability of Solar Power, Inc.

The significant risks and uncertainties described above could have a significant negative impact on the financial viability of Solar Power, Inc. and raise substantial doubt about the Company’s ability to continue as a going concern. Management has made changes to the Company’s business model to increase working capital by managing cash flow, securing project financing before commencing further project development, and requesting that the Company’s customers make cash payments for solar panels for projects under development. If the noted banks should call the debt or LDK demand payment of amounts owed by the Company prior to collection of the related receivables, management plans to obtain additional debt or equity financing. There is no assurance that management’s plans to accelerate the collection of outstanding receivables or to obtain additional debt or equity financing will be successfully implemented, or implemented on terms favorable to the Company. The Condensed Consolidated Financial Statements do not include any adjustments related to the recoverability and classification of recorded assets or the amounts and classification of liabilities or any other adjustments that might result from the outcome of this uncertainty.