NOTE 16—TRANSACTION WITH ZHEN FA NEW ENERGY (U.S.) CO., LTD. AND ZHENFA ENERGY GROUP CO., LTD.

On August 11, 2014 (the “Effective Date”), the Company entered into certain definitive agreements with Zhenfa Energy Group Co., Ltd., a Chinese limited liability company (“Zhenfa”) and its indirect wholly-owned subsidiary, Zhen Fa New Energy (U.S.) Co., Ltd., a Nevada corporation (the “Purchaser”).

Stock Purchase Agreement

On the Effective Date, the Company and the Purchaser entered into a Stock Purchase Agreement (the “Purchase Agreement”) pursuant to which the Company agreed to issue and sell to the Purchaser, and the Purchaser agreed to purchase from the Company, an aggregate of 27,632,130 shares (the “Purchased Shares”) of the Company’s authorized but unissued common stock, par value $0.01 per share (the “Common Stock”), for an aggregate purchase price (“Purchase Price”) of approximately $21,664, or $0.784 per share (the “Transaction”). The Purchased Shares are expected to represent approximately 51% of the Company’s outstanding shares upon the closing of the Transaction (the “Closing”).

In connection with the execution of the Purchase Agreement, the Purchaser paid to the Company a deposit of $3,200 (the “Deposit”). The Purchaser had also previously paid the Company $200 in connection with the negotiation of the Purchase Agreement (the “Prior Payment”). Upon the Closing, the Deposit and the Prior Payment will be credited against the Purchase Price and, subject to certain conditions, are refundable to the Purchaser if the Closing does not occur. If the Closing does not occur as a result of a breach of the Agreement by the Purchaser, the Company’s sole and exclusive remedy will be to retain the Deposit and Prior Payment.

Immediately prior to the Closing, the Company shall declare a special dividend (the “Special Dividend”) to be paid post-Closing to all stockholders of record of the Company (other than the Purchaser) in an amount equal to $0.85 per common share. The record date for the Special Dividend will be as soon as practicable after the Closing. The Purchase Agreement also anticipates that the Company will seek approval from the stockholders for a reverse stock split following the payment of the Special Dividend. The Purchaser’s obligations under the Purchase Agreement are not conditioned on the receipt of financing.

Immediately following the Closing, the Company has agreed to reconstitute the Board, such that, subject to certain conditions and the fiduciary duties of the Board, the Board shall consist of seven directors, of which (i) up to four directors shall be designated by the Purchaser (the “Purchaser Directors”), at least two of whom shall be independent directors (in accordance with the applicable rules and regulations of the New York Stock Exchange and the Securities Exchange Act of 1934, as amended), (ii) at least two shall be continuing existing independent directors of the Company (the “Continuing Directors”) and (iii) one shall be the Chief Executive Officer of the Company. From the Closing until the Company’s 2017 annual meeting of stockholders (the “2017 Annual Meeting”) the Continuing Directors shall constitute a new standing committee of the Board (the “Continuing Directors Committee”). The Continuing Directors Committee will have the power and authority, among other things, to (i) represent the Company in enforcing all matters under the Purchase Agreement and (ii) review and approve certain related party transactions with the Purchaser and its affiliates. In addition, until the 2017 Annual Meeting, the Purchaser has agreed, among other things and subject to applicable fiduciary duties, (i) to vote its shares of Common Stock for the election of the nominees for Continuing Directors; (ii) that at least one Continuing Director shall serve on each committee of the Board; and (iii) that a Continuing Director shall be appointed as chair of all standing committees.

From the Effective Date through the date of the 2017 Annual Meeting, the parties also agreed that, unless otherwise consented to by the Purchaser and the Continuing Directors Committee, the Company will: (i) use commercially reasonable efforts to retain its listing on the New York Stock Exchange; (ii) continue to file all required reports with the SEC; (iii) continue to carry on its business as a manufacturer of solar panel encapsulant products in the ordinary course consistent with past practice; and (iv) use commercially reasonable efforts to preserve substantially intact its present business organization, and to continue the employment and services of its current executive officers and key technical personnel.

For a period of two years following the Closing, the Purchaser has agreed that, without the consent of the Continuing Directors Committee, neither it nor any of its affiliates will acquire any further shares of Common Stock, provided, however, that subject to certain limitations, the Purchaser may from time to time purchase shares in order to continue to maintain an ownership interest up to an aggregate of 52% of the issued and outstanding Common Stock.

The Purchase Agreement also contains customary covenants, representations and warranties of the parties, including, among others, a covenant by the Company to conduct its business in the ordinary course during the interim period between the Effective Date and the Closing and not to engage in certain kinds of activities during such period. In addition, subject to certain exceptions, the Purchase Agreement contains certain restrictions on the Company’s ability to solicit or participate in discussions regarding alternative transactions. For example, the Purchase Agreement contains a “fiduciary-out” provision that allows the Board, in response to an Intervening Event (as defined in the Purchase Agreement), to change its recommendation to the Company’s stockholders and, in response to a Superior Proposal (as defined in the Purchase Agreement), to change its recommendation to the Company’s stockholders and terminate the Purchase Agreement in order to enter into a definitive agreement providing for implementation of such Superior Proposal, subject to the Purchaser’s right to match the proposal.

The Closing is expected to occur in the fourth quarter of 2014 and consummation of the Transaction is subject to the satisfaction of a number of conditions, including, but not limited to: (i) the approval of the sale and issuance of the Purchased Shares by the Company’s stockholders, (ii) receipt of all required regulatory approvals, including clearance by the Committee on Foreign Investment in the United States and certain Chinese governmental authorities, (iii) declaration of the Special Dividend by the Company, (iv) the absence of a material adverse effect with respect to certain Company representations and warranties as of the date when made, and the Company’s compliance with its covenants.

The Purchase Agreement contains certain termination rights of the Purchaser and the Company. Upon the termination of the Purchase Agreement under certain circumstances, including a change in recommendation of the Board, the Company is required to pay the Purchaser a termination fee of $860 (the “Termination Fee”). Subject to certain exceptions, if the Purchase Agreement is terminated by the Purchaser under certain circumstances, the Company is required to reimburse the Purchaser for costs and expenses incurred in connection with the Transaction in an aggregate amount not to exceed $500. If the Purchase Agreement is terminated and a termination fee is payable to the Purchaser, the termination fee shall be reduced by the amount of any expense reimbursement.

Sales Service Agreement

In connection with the execution of the Purchase Agreement, Specialized Technology Resources, Inc., a subsidiary of the Company, entered into a sales service agreement (the “Sales Service Agreement”) with Zhenfa whereby Zhenfa has agreed, among other things, to assist the Company in a number of endeavors, including, without limitation, marketing and selling the Company’s products in China, acquiring local raw materials, hiring and training personnel in China, and complying with Chinese law. Pursuant to the Sales Service Agreement, Zhenfa has also provided the Company with an option to lease a manufacturing facility owned by Zhenfa. Such facility will be at least 10,000 square meters and will be rent free for a period of at least five years. If the Company wishes to extend its lease, rent will be at 50% of market rent for a second five year term. The Sales Service Agreement becomes effective on the date of Closing, has an initial term of two years following the date of Closing and is automatically extended for one year periods unless terminated earlier. The Sales Service Agreement may also be terminated by either party at such time as Zhenfa and its affiliates own less than 10% of the outstanding Common Stock of the Company.

Guarantee Agreement

In connection with the execution of the Purchase Agreement, the Company entered into a guarantee agreement (the “Guarantee Agreement”) with Zhenfa, pursuant to which Zhenfa has agreed to guarantee all obligations of the Purchaser under the Purchase Agreement, including, but not limited to, the payment of the Purchase Price and the performance of all covenants and agreements of the Purchaser in the Purchase Agreement.

For further information on the the Stock Purchase Agreement, the Sales Service Agreement, the Guarantee Agreement and the Transaction, refer to the proxy statement filed with the SEC on October 8, 2014.

Capitalization

The following table sets forth our cash and cash equivalents and our capitalization as of September 30, 2014 on an:

actual basis; and

as adjusted basis giving effect to the sale of $21,664 shares of our common stock to the Purchaser at a price per share of $0.784, after deducting estimated offering expenses paid by us of approximately $2,500, and after giving effect to the Special Dividend of an aggregate of approximately $22,545.

You should read this table in conjunction with the information contained in “The Transaction—Use of Proceeds;” and “Selected Historical Consolidated Financial Data” in our proxy statement filed with the SEC on October 8, 2014 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, as well as the consolidated financial statements and the notes thereto included thereto.

	As Of September, 30, 2014
				Adjustments
	Actual Basis			Share Issuance		Special Dividend			Transaction Expenses			As Adjusted
	(unaudited, in thousands, except share data)
Cash and cash equivalents	$	22,780		$	18,264	$	(22,545	)	$	(895	)	$	17,604
Total debt	$	—		$	—	$	—		$	—		$	—
Stockholders’ equity
Preferred stock, $0.01 par value, 20,000,000 shares authorized; no shares issued and outstanding	$	—		$	—	$	—		$	—		$	—
Common stock, $0.01 par value, 200,000,000 shares authorized; 26,527,607 shares issued and 26,523,885 shares outstanding	$	264		$	276	$	—		$	—		$	540
Treasury stock, at cost	$	(57	)	$	—	$	—		$	—		$	(57	)
Additional paid-in capital	$	210,602		$	21,388	$	—		$	(2,500	)	$	229,490
Accumulated deficit	$	(132,612	)	$	—	$	(22,545	)	$	—		$	(155,157	)
Accumulated other comprehensive income	$	(3,288	)	$	—	$	—		$	—		$	(3,288	)
Total stockholders’ equity	$	74,909										$	71,528
Common Shares:
Authorized	200,000,000			—		—			—			200,000,000
Issued	26,527,607			27,632,130		—			—			54,159,737		(1)
Outstanding	26,523,885			27,632,130		—			—			54,156,015		(1)

(1)Does not take into account the completion of a reverse stock split, if any.

The Purchaser is a Nevada entity with its principal place of business in Arizona, which was formed in 2013 as part of the Zhenfa Group’s (as defined below) expansion of its engineering, procurement, and construction business globally. While the Purchaser has been researching potential solar projects in the United States in which to invest, it has not completed any investments or begun any projects in the United States to date. The Purchaser is an indirect wholly owned subsidiary of Jiangsu Zhenfa Holding Group Co., Ltd., formerly known as Jiangsu Zhenfa Investment and Development Co., Ltd., referred to as Jiangsu Zhenfa, which is 98%-owned by its Chairman, Zha Zhengfa, who is a Chinese national. Jiangsu Zhenfa and its subsidiaries are not controlled by any Chinese governmental entity. Jiangsu Zhenfa is the parent company of approximately 60 entities, mostly within China and including subsidiaries in North America, Australia, Japan, Singapore, Turkey, Zimbabwe and Dubai, referred to collectively as the Zhenfa Group.

Zhenfa Energy Group Co. Ltd., referred to as Zhenfa Energy, is a leading solar systems integrator, engineering, procurement, and construction company and solar power station owner-operator within China. At the end of 2013, the Zhenfa Group had developed and installed approximately two gigawatts of solar power in China, including unique utility scale solar projects in which solar arrays are constructed and utilized in conjunction with fisheries in intertidal zones and agricultural projects in desertification areas. The Zhenfa Group holds Chinese patents in a self-adaptive sun tracking system for solar arrays that increases the efficiency of solar projects by up to 25% over fixed tracking systems, and in 2013 won a bid to construct a 13 megawatt ground mounted solar project in Canberra, Australia. Zhenfa Energy has commenced the initial phase of that project, but construction has yet to begin.

The Company entered into this proposed Transaction for the following strategic considerations:

that China has become one of the world’s largest solar module manufacturing markets. The Company has struggled to effectively penetrate that market in order to compete effectively. The Zhenfa Group is owned and headquartered in China and represents a significant customer of many top-tier Chinese module manufacturers;

that the proposed Transaction should enhance the Company’s presence in China and could significantly improve the Company’s operating results if the Zhenfa Group were to be successful in assisting the Company in marketing and selling the Company’s products to China-based solar module manufacturers;

that the Sales Service Agreement contemplates that the Zhenfa Group will provide the Company with the opportunity to lease on favorable terms a manufacturing facility in China, and other valuable assistance in doing business in China; and

that, given their complementary businesses, additional opportunities may be available to the Zhenfa Group and the Company to successfully expand their cooperation.

For further information on the transaction or Zhenfa refer to the proxy filed on October 8, 2014.