**UnitedStates**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-KSB/A**

**(AmendmentNo. 1)**

 
| **x**                                       | **ANNUAL REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------|------------------------------------------------------------------------------------------|
| ** **                                  | ** **                                                                               |
| **For  the fiscal year ended May 31, 2007** |
| ** **                                  | ** **                                                                               |
| **OR**                                      |
| ** **                                  | ** **                                                                               |
| **o**                                       | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |

 

**Commissionfile number 000-50450**

 

**OPENENERGY CORPORATION**

(Name of small businessissuer in its charter)

 

| **Nevada**                                        | ** ** | **98-0370750**                        |
|---------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or |       | (I.R.S. Employer  Identification No.) |
| organization)                                     |       |                                  |
|                                              |       |                                  |
| **514  Via de la Valle, Suite 200**               | ** ** | ** **                            |
| **Solana  Beach, California**                     | ** ** | **92075**                             |
| (Address of principal  executive offices)         |       | (Zip Code)                            |

 

**(858)794-8800**

(Issuer’s telephonenumber, including area code)

 

Securities registeredpursuant to Section 12 (b) of the Exchange Act:

 

| ** **               | ** ** | **Name of  each exchange on** |
|--------------------------|------------|-------------------------------|
| **Title  of each class** | ** ** | **which  registered**         |
| None                     |       | None                          |

 

Securities registeredpursuant to Section 12 (g) of the Exchange Act:

 

**CommonStock, par value $0.001 per share**

(Title of class)

 
| Indicate by check mark if the registrant is not  required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.     Yes  o     No  x                                                                                                                                                                                                         |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                |
| Check whether the issuer (1) filed all reports  required to be filed by Section 13 or 15(d) of the Exchange Act during the  past 12 months (or for such shorter period that the registrant was required  to file such reports), and (2) has been subject to such filing requirements  for the past 90 days.  Yes  x     No  o                               |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| Check if there is no disclosure of delinquent filers  in response to Item 405 of Regulation S-B contained in this form, and no  disclosure will be contained, to the best of registrant’s knowledge, in  definitive proxy information statements incorporated by reference in Part III  of this Form 10-KSB or any amendment to this Form 10-KSB or any amendment to  this Form 10-KSB. o |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| Indicate by check mark whether the registrant is a  shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| State issuer’s revenues for its most recent fiscal  year: $4,292,000                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                |
| The aggregate market value of the voting and  non-voting common equity on May 31, 2007 held by non-affiliates* of the  registrant (based on the average bid and asked price of such stock on such  date) was approximately $47,955,000.   (See definition of affiliate  in Rule 12b-2 of the Exchange Act.)                                                                               |

 

At August 27, 2007, there were 121,878,623 shares outstanding of theissuer’s common stock, the only class of common equity.

 

Transitional Small Business Disclosure Format (Check one) Yes  o   No  x

 

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*             Without acknowledging that any individual director of registrant is anaffiliate, all directors have been included as affiliates with respect toshares owned by them.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the informationrequired by Part III of this Form 10-KSB are incorporated by reference from ourdefinitive proxy statement to be delivered to stockholders in connection withour 2007 Annual Meeting of Stockholders.

 

Transitional SmallBusiness Disclosure Format (check one Yes  o   No x

 

 

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**Explanatory Note: This Amendment No.1 to Annual Report on Form 10-KSB for the fiscal year ended May 31, 2007, isbeing filed solely to: amend and restate Part II, Item 6, to include the effecton the Company’s financial position from the $20 million convertible note thatclosed on September 19, 2007 and to clarify the current terms of our 0%, 5% and10% convertible notes;****to update Part II, Item 5 “RecentSales of Unregistered Securities” to include sales that have occurred sinceApril 2006; and to add a risk factor to Part I, Item 1 and update disclosuresto Part II, Item 8A regarding our disclosure controls**. **Otherthan as provided above, no other changes have been made to our Annual Report onForm 10-KSB that we filed on September 13, 2007. In order to preserve thenature and character of the disclosures set forth in the original Form 10-KSB,this Amendment No. 1 does not reflect events occurring after September 19, 2007(the date of closing the $20 million convertible note). Accordingly, thisAmendment No. 1 should be read in conjunction with our original Form 10-KSB,filed on September 13, 2007, and with the other filings we have made with theSecurities and Exchange Commission subsequent to that date.**

 

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**PART I**

 

**ITEM 1. DESCRIPTION OF BUSINESS**

 

**RISKS RELATED TO OUR BUSINESS**

 

*Investors should carefully considerthe risks described below before deciding whether to invest in our commonstock. The risks described below are not the only ones we face. Additionalrisks not presently known to us or that we currently believe are immaterial mayalso impair our business operations and financial results. If any of thefollowing risks actually occurs, our business, financial condition or resultsof operations could be adversely affected. In such case, the trading price ofour common stock could decline and you could lose all or part of yourinvestment. Our filings with the Securities and Exchange Commission alsocontain forward-looking statements that involve risks and uncertainties. Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of certain factors, including the riskswe face described below. See* “*Forward-Looking Statements.*“

 

***We have identified material weaknesses in our disclosure controls andprocedures and our internal control over financial reporting, which, if notremedied effectively, could prevent us from reporting our financial results ona timely and accurate basis and result in a decrease in the trading price ofour common stock and otherwise seriously harm our business.***

 

Management hasconcluded that our disclosure controls and procedures and our internal controlover financial reporting had material weaknesses as of May 31, 2007. We havetaken actions to begin to address those material weaknesses, but as of the dateof this report had not yet completed our remediation efforts.

 

If we fail tocomplete our remediation or if we complete the remediation but fail to maintainthe adequacy of our internal controls, we may not be able to ensure that we canconclude on an ongoing basis that we have effective internal control overfinancial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.Failure to achieve and maintain an effective internal control environment couldprevent us from reporting our financial results on a timely and accurate basisor cause investors to lose confidence in our reported financial information.These effects could in turn result in a decrease in the trading price of ourcommon stock.

 

Prior to theremediation of these material weaknesses, there remains risk that thetransitional controls on which we currently rely will fail to be sufficientlyeffective, which could result in a material misstatement of our financialposition or results of operations and require a restatement. If this were tooccur, investors may not be able to rely on the financial statements containedin our public filings. In addition, even if we are successful in strengtheningour controls and procedures, such controls and procedures may not be adequateto prevent or identify irregularities or facilitate the fair presentation ofour financial statements or SEC reporting.

 

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**PART II**

 

**ITEM 5.**

 

**Recent Sales of UnregisteredSecurities**

 

Through September 19, 2007, we issued the following securities withoutregistration under the Securities Act.

 

*6% Convertible Note and Related Warrants*

 

On September 19, 2007, Open Energy Corporation entered into aSecurities Purchase Agreement with an accredited investor for the privateplacement of (i) a convertible note in the principal amount of $20 million and(ii) a warrant to acquire up to 40 million shares of common stock. The netproceeds from the transaction totaled $18.46 million. This amount is notreflected in the financial statements as of August 31, 2007.

 

The maturity date on the Note is three years from September 19, 2007,which may be extended at the option of the investor if (i) a trigger event (asdefined in the Note) has occurred and is continuing on the maturity date, and(ii) through the date that is ten business days after the consummation of achange of control in the event that a change of control is publicly announced.Open Energy does not have the right to prepay the note in whole or in partwithout penalty prior to the maturity date. If a trigger event occurs withrespect to the Note, the investor may require Open Energy to redeem all or anyportion of the Note.

 

The Note will accrue interest at a rate of 6% per annum, with accruedinterest due and payable quarterly in arrears on each January 1, April 1, July1 and October 1 beginning on the first such date after September 19, 2007. TheNote will be convertible into shares of common stock at an initial price of$0.50 per share, which is subject to downward adjustment as described in theAgreement.

 

The Warrant is exercisable for up to 40 million shares of Common Stockat an exercise price of $0.506 per share, subject to downward adjustment asdescribed in the Agreement.

 

*8/31/07 Note*

 

On August 31, 2007, Open Energy Corporation closed a securitiespurchase agreement with an accredited investor for the private placement of aconvertible promissory note in the principal amount of $1,000,000 (the “8/31/07Note”) and a related warrant to acquire up to 1,200,000 shares of common stock(the” 8/31/07 Warrant”) for a purchase price of $950,000. The 8/31/07 Notematures six months after August 31, 2007 but the Company has the right toprepay it in whole or in part without penalty prior to the maturity date.Commencing on the maturity date, the 8/31/07 Note accrues interest at the rateof 10% per annum. The principal and accrued interest is convertible into commonstock of the Company at $0.50 per share. However, the Investor may not convertif the conversion shares issued would result in the Investor beneficiallyowning greater than 4.99% of Open Energy’s outstanding common stock.

 

In the event of default, the 8/31/07 Note will accrue interest at arate of 10% per annum and the Investors may convert any or all of theoutstanding principal and interest into common stock at a fixed conversionprice equal to $0.1868 per share. In no event shall the conversion price belower than $0.05.

 

The 8/31/07 Warrant is exercisable through August 31, 2012. Theexercise price is $0.709, subject to adjustments and anti dilutionprovisions which include a price floor of $0.05 per share.

 

4

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*6/15/07 Note*

 

On June 15, 2007, the Company entered into a Note and Warrant PurchaseAgreement with an accredited investor for the private placement of a $950,000promissory note (the “6/15/07 Note”) and a related warrant to acquire up to4,000,000 shares of common stock (the “6/15/07 Warrant) for a purchase price of$750,000. In connection with this transaction, the Company’s Chief ExecutiveOfficer entered into a Stock Pledge Agreement pursuant to which certain of hisshares of the Company’s common stock were pledged to secure the performance ofthe 6/15/07 Note, and he agreed to guaranty any deficiency above and beyond thevalue of the shares. Had there been an event of a default with respect to the6/15/07 Note, the investor had the option to either (i) foreclose on the commonstock pledged or (ii) convert all unpaid amounts due under the 6/15/07 Noteinto (A) a debenture which is convertible into shares of common stock of OpenEnergy and (B) a warrant exercisable for shares of common stock.

 

The maturity date of the 6/15/07 Note was October 15, 2007, and it waspaid in full on October 5, 2007. The Note was purchased at a discount, thus theeffective interest paid was $200,000. The 6/15/07 Warrant is exercisable forthree years, and is subject to anti dilution provisions and a floor exerciseprice of $0.05 per share. In addition, a warrant to purchase 400,000 shares ofcommon stock at the rate of $.50 per share that expires on June 15, 2012, wasissued to an investment banker for services rendered in connection with thefinancing.

 

*10%Secured Convertible Debentures and Related Warrants*

 

On March 30, 2007, Open Energy Corporation entered into an agreementwith Cornell Capital Partners, L.P. for the private placement of (i) aConvertible Secured Debenture in the original principal amount of $3,000,000and (b) a Warrant to purchase up to 6,000,000 shares of our common stock, parvalue $0.001 per share, which were issued and sold for an aggregate purchaseprice of $3,000,000. We received gross proceeds of $3,000,000, before expenses,from the financing transaction, which were used for general corporate andworking capital purposes. The Debenture accrues interest at a rate of 10% perannum and matures on March 30, 2008. No payments of interest or principal aredue under the Debenture until maturity. Subject to limitations contained in theDebenture for the maximum amount that may be converted, the Debenture isconvertible at any time at Cornell’s option into shares of our common stock ata conversion rate which is calculated by dividing (i) the amount of theoutstanding and unpaid principal and interest of the Debenture to be convertedinto shares of common stock by (ii) the conversion price of $0.50. Theconversion price is subject to adjustment in the event we issue shares ofcommon stock for a consideration per share less than the conversion price ineffect immediately prior to such issuance or sale, except for issuances inconnection with an approved stock plan, the conversion, exchange or exercise ofan outstanding security, an acquisition, or conversion of the Debenture. TheWarrant issued to Cornell has an initial exercise price of $0.50 per share,subject to adjustment, and a term of five years from the issuance date. Theissuance of the March 30, 2007 debentures and warrants caused a reduction inthe warrant exercise price for the previously issued Cornell warrants to $0.50per share.

 

5

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*5% SecuredConvertible Debentures and Related Warrants*

 

In March 2006, the Company entered into a securities purchase agreementwith Cornell Capital Partners, L.P. (“Cornell”), pursuant to which, assubsequently amended, the Company agreed to issue and sell to Cornell up to anaggregate of $15.0 million of secured convertible debentures (“5% Debentures)and warrants to purchase up to an aggregate of 13,250,000 shares of the Company’scommon stock. On March 31, 2006, Cornell purchased $10,000,000 of the 5%Debentures and the Company issued to Cornell warrants to purchase up to anaggregate of 7,000,000 shares of common stock. Cornell also agreed to purchasean additional $5,000,000 of 5% Debentures and warrants to purchase up to3,000,000 shares of common stock on the date the Company’s registrationstatement covering the shares issuable upon conversion of the 5% Debentures andexercise of the warrants was declared effective. Initially, the warrants wereto have an exercise price of $1.50 per share and a term of five years. Each 5%Debenture matures three years from its date of issuance and bears interest atfive percent (5%) per annum.

 

The conversion price of the 5% Debentures is the lower of (i) a fixedconversion price (initially $1.50) or (ii) 95% of the lowest volume weightedaverage price of the common stock during the 30 trading days immediatelypreceding the conversion date. The 5% Debentures are secured pursuant to theterms of (1) a pledge and escrow agreement among the Company, Cornell and DavidGonzalez, Esq., as escrow agent, and (2) security agreements among the Company,Cornell and two of the Company’s subsidiaries. In accordance with the pledgeand escrow agreement, the Company deposited 44,117,647 newly issued shares ofthe Company’s common stock into escrow, and granted to Cornell a securityinterest in those shares to secure the Company’s obligations to Cornell underthe 5% Debentures and related agreements.

 

Under the security agreements, the Company and its subsidiaries grantedto Cornell a blanket security interest in the Company’s consolidated assets.The 5% Debentures holders agreed to subordinate their security interests forcertain transactions occurring in the normal course of business.

 

The Company agreed to file with the SEC by May 15, 2006, which date theCompany refers to as the filing date, a registration statement including theshares underlying the 5% Debentures and warrants, and to use its best effortsto have such registration statement declared effective by July 29, 2006, whichdate the Company refers to as the effectiveness date. (This date wassubsequently extended by mutual agreement). If a registration statement was notfiled by the filing date or declared effective by the effectiveness date, asapplicable, the Company would have become obligated to pay to Cornell, eitherin cash or in shares of common stock, liquidated damages equal to 1% of theliquidated value (subsequently capped at 15%) of the 5% Debentures outstandingfor each 30 day period (pro-rated for partial periods) that the registrationstatement was not filed or declared effective, as applicable. The Company isobligated to keep the registration statement effective until all the shareshave been sold or are eligible for sale without volume restrictions pursuant toRule 144(k) promulgated under the Securities Act of 1933.

 

In July 2006, the Company and Cornell agreed to amend the investmentagreements relating to the debentures and warrants, effective as of theiroriginal issue dates, as follows:

 

•             to provide for afloor price of $0.05 on the adjustable conversion price of the 5% Debentures;

 

•             toprovide for a floor price of $0.05 per share on the exercise price of thewarrants applicable to adjustments with respect to certain future issuances ofsecurities by us, and upon certain distributions of assets and similarrecapitalization events;

 

•             toextend the deadline for having the registration statement declared effectiveuntil August 12, 2006; and

 

•             tocap liquidated damages payable in respect of failure to have an effectiveregistration statement at 15% of the liquidated value of the debenturesoutstanding.

 

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In August 2006, the Company and Cornell agreed to further amend theinvestment agreements described above, effective as of their original issuedates, as follows:

 

•             toprovide for the purchase by Cornell of $1,500,000 of the remaining securedconvertible debentures as of the date of the amendment, with the remaining$3,500,000 to be purchased by Cornell upon the effectiveness of theregistration statement that we are required to file pursuant to the investorregistration rights agreement, subject to customer closing conditions;

 

•             towaive any breaches of the investment agreements with Cornell related to certainof our tax withholding liabilities;

 

•             to further extend thedeadline for having the registration statement declared effective untilSeptember 5, 2006; and

 

•             toprovide that instead of a third warrant being issued to Cornell upon the lastclosing, such warrant was issued on August 17, 2006, at an exercise price of$0.80 (rather than $1.50) per share, and is exercisable for 6,250,000 shares(rather than 3,000,000 shares).

 

In addition, Cornell granted us a waiver of certain of the restrictivecovenants contained in the investment agreements to permit us to take certainremedial actions relative to our tax withholding liabilities described under “PayrollWithholding Taxes” below, including the following with respect to any officeror employee: repurchasing vested shares, canceling any unvested shares,granting substitute equity awards, or permitting such persons to sell, pledgeor transfer their shares.

 

On August 30, 2006, the Company filed a registration statement on FormSB-2 covering, among others, the shares issuable upon conversion of thedebentures and exercise of the warrants, which was declared effective onOctober 27, 2006 (the “SB-2 registration statement”).

 

On May 21, 2007, the Company entered into a Letter Agreement (the “Amendment”)with Cornell Capital Partners, L.P. which amended certain terms of the securedconvertible debentures issued by the Company to Cornell pursuant to aSecurities Purchase Agreement dated March 30, 2006, as amended. The amendmentwas entered into in exchange for Cornell agreeing to exercise 1,000,000 oftheir warrants. Pursuant to the Amendment (i) the ownership cap set forth inSection 3(b)(i) of each debenture, which limits the holder’s ability to convertthe debenture or receive shares of common stock as payment of interest on thedebenture, was increased from 4.99% to 9.99%, and (ii) the Company permanentlywaived the conversion limitation set forth in Section 3(b)(ii) of eachdebenture, which would have limited the principal amount of the debenture thatcould be converted at the market conversion price in any 30-day period.

 

On August 29, 2007, the Company entered into a Letter Agreement (the “Amendment”)with Cornell Capital Partners, L.P. which amended certain terms of the securedconvertible debentures issued by the Company to Cornell pursuant to aSecurities Purchase Agreement dated March 30, 2006, as amended. Specifically,the Company (i) agreed to consider registering 4,000,000 shares of common stockpursuant to Rule 462(b) of the 1933 Securities Act, as amended; however OECwill only register additional shares in an amount and at a price that togetherrepresent no more than 20% of the shares originally subject to the InitialRegistration Statement that remain unsold; (ii) Cornell agreed to not requestfurther registration until 90 days after the effective date of the newregistration statement; (iii) their right of first negotiation was waived withrespect to the Capital Raising Offer letter sent to Cornell August 6, 2007 andthey provided their consent to complete the transaction; (iv) they consented tothe Company increasing the number of shares allocated to Open Energy’s stockoption plan by 8,000,000 for a total of 16,500,000; and (v)  Cornellconfirmed that none of the previous debentures are in default.

 

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During the fiscal year ended May 31, 2007 Cornell converted thefollowing principal amounts of 5% Debentures, and the Company hascorrespondingly issued the following shares of common stock to Cornell, all ofwhich were included in the SB-2 registration statement:

 
| ** **               | ** ** | ** **    | ** ** | **Shares of** | ** ** |
|--------------------------|------------|---------------|------------|--------------------|------------|
| ** **               | ** ** | **Principal** | ** ** | **Common**         | ** ** |
| **Conversion Date** | ** ** | **Amount**    | ** ** | **Stock**          | ** ** |
| August 22, 2006          |       | $             | 200,000    |               | 342,877    |   |
| September 5, 2006        |       | 800,000       |       | 1,371,507          |       |
| December 22, 2006        |       | 200,000       |       | 695,652            |       |
| January 12, 2007         |       | 200,000       |       | 695,652            |       |
| January 24, 2007         |       | 200,000       |       | 695,652            |       |
| March 29, 2007           |       | 200,000       |       | 670,241            |       |
| April 13, 2007           |       | 800,000       |       | 2,751,978          |       |
| May 15, 2007             |       | 600,000       |       | 2,063,983          |       |
| May 16, 2007             |       | 200,000       |       | 687,994            |       |
| May 22, 2007             |       | 1,100,000     |       | 3,670,337          |       |
| May 31, 2007             |       | 305,000       |       | 969,793            |       |
|                     |       | $             | 4,805,000  |               | 14,615,666 |   |

 

During the three months ended August 31, 2007, Cornell convertedprincipal amounts of 5% Debentures totaling $6,770,000 into 18,070,519 sharesof common stock. Giving effect to these conversions, as of August 31, 2007,Cornell had outstanding debentures of $6,425,000 and accrued interest of$924,000.

 

*0% Convertible Debentures andRelated Warrants*

 

On September 20, 2006, Coach Capital LLC, Eversource Group Limited andNadelson Internacional S.A. converted an aggregate of $3,750,000 principalamount of 0% Debentures, representing the entire principal amount of 0%Debentures that were issued to them at $0.5833 per share, and the Companycorrespondingly issued 2,571,576 shares of its common stock to Coach CapitalLLC, 2,571,576 shares of common stock to Eversource Group Limited and 1,285,788shares of common stock to Nadelson Internacional S.A.

 

As of January 15, 2007, the remaining 0% Debentures held by Bank Sal.Oppenheim jr. & Cie. (Schweiz) AG were convertible into 5,217,391 shares ofthe Company’s common stock at $0.2875 per share, subject to certainrestrictions, and subject to adjustment as described above. On February 22,2007, Bank Sal. Oppenheim jr. & Cie. (Schweiz) AG converted the remaining$1,500,000 principal amount of 0% Debentures at $0.2875 per share and the Companycorrespondingly issued 5,217,391 shares of its common stock.

 

As of May 31, 2007all of the 0% Debentures, originally issued in February 2006, have beenconverted and are no longer outstanding.

 

As of May 31, 2007, the warrants were still outstanding and wereexercisable into 2,354,261 shares of the Company’s common stock. The warrantexercise price which were initially set at $2.23 per share, became $0.2875 pershare on December 22, 2006, and are subject to further adjustment upon theoccurrence of certain specified events including, but not limited to, theissuance of securities at a deemed price below the current exercise price,stock dividends, stock splits, mergers or reorganizations, and the Company’sfailure to meet certain revenue milestones.

 

*Miscellaneous*

 

Pursuant to a license agreement with Dr. Melvin L. Prueitt, we grantedDr. Prueitt 100,000 shares of common stock in July, 2006. The shares wereissued as restricted securities exempt from registration pursuant to Section4(2) of the Securities Act, and an appropriate legend was placed on the stockcertificate. On December 29, 2006, 100,000 shares of common stock previouslyissued in connection with the technology license agreement related to theSunconeTM CSP technology were returned to the Company and cancelled.

 

Pursuant to an employment agreement with a non-executive employee, theCompany agreed to issue an aggregate of 75,000 shares of restricted commonstock to such employee, to be issued in quarterly installments through March31, 2009, subject to his continued employment. Through June 30, 2007, theCompany has issued a total 31,250 of such shares as restricted securitiesexempt from registration pursuant to Section 4(2) of the Securities Act, and anappropriate legend was placed on the stock certificate.

 

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**ITEM 6. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Liquidity and Capital Resources**

 

As of May 31, 2007, we had cash and cash equivalents of $319,000, andnegative working capital of $8,492,000. During the year ended May 31, 2007, wefunded our operations from private sales of equity and debt securities. OnAugust 31, 2007, we closed a securities purchase agreement with an accreditedinvestor for the private placement of a convertible promissory note in theprincipal amount of $1,000,000 (the “8/31/07 Note”) and a related warrant (See “*Financings”*below*).*On September 19, 2007, weentered into a Securities Purchase Agreement with an accredited investor forthe private placement of (i) a convertible note in the principal amount of $20million and (ii) a warrant to acquire up to 40 million shares of common stock. Thenet proceeds from the transaction totaled $18.46 million. Neither of thesefinancings are reflected in our financial statements as of May 31, 2007. Due tothese additional financings, we believe we now have the capital resourcesneeded to carry out our revisedcorporate strategy over the next nine to twelve months. Other than cashand cash equivalents and the proceeds from the subsequent financing, theCompany has no unused sources of liquidity.

 

For the year ended May 31, 2007, we used $9,239,000 of cash inoperations. Investment activities used $832,000 of cash during the year, whichwas primarily related to acquisition of property and equipment. Financingactivities provided $7,639,000 of cash during the year, with $8,000,000 ingross proceeds from convertible debentures with warrants and $500,000 inproceeds from warrants that were exercised.

 

The cost of PV cells, which is the primary cost of sales for solarroofing products, is volatile. The Company is uncertain of the extent to whichthis will affect its working capital in the near future. The fluidity of thecurrent cell supply from the Company’s current major cell suppliers could causea disruption or a complete stoppage of the Company’s manufacturing operationputting even greater strain on its liquidity and cash flow needs.

 

Our current cash requirements are significant due to PV cell and tilelaminate inventory purchases; a build-up in personnel to support the EagleRoofing sales channel; delays in product shipments as a result of the shift tooutsourcing and the suspension of membrane product shipments; research anddevelopment expenses; and other operational expenses. We expect to continue touse significant sources of cash to fund our operations during fiscal 2008.

 

The Company has incurred losses since its inception totalingapproximately $52,453,000 through May 31, 2007. The Company has been unable tosell its products in quantities sufficient to be operationally profitable andis unsure if or when it will become profitable. To date, the Company has beenunable to meet forecasted sales and margin projections and as a result hasexperienced significant negative cash flow for an extended period of time.Based on its current cash usage rate, the Company estimates that it currentlyhas adequate cash to fund operations only through the end of September 2007.The ability of the Company to continue as a going concern is dependent onobtaining additional financing to support its production and working capitalrequirements. Management is pursuing a number of possible debt and equityfinancing opportunities in an effort to address these requirements. However,the Company cannot currently predict the likelihood of being able to raiseadditional debt or equity financing in an amount, nature or on terms that wouldbe acceptable to the Company and the Company currently does not have any commitmentsfor future debt and/or equity financing. If the Company is unable to obtainadditional financing prior to the end of September 2007, the Company may nothave sufficient cash to satisfy all on-going and previously incurredliabilities and will have to substantially curtail or cease operations.

 

**Subsequent Events**

 

*6% Convertible Note and Related Warrants*

 

On September 19, 2007, Open Energy Corporation entered into aSecurities Purchase Agreement with an accredited investor for the privateplacement of (i) a convertible note in the principal amount of $20 million and(ii) a warrant to acquire up to 40 million shares of common stock. The netproceeds from the transaction totaled $18.46 million. This amount is notreflected in the financial statements as of May 31, 2007.

 

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The maturity date on the Note is three years from September 19, 2007,which may be extended at the option of the Investor if (i) a trigger event (asdefined in the Note) has occurred and is continuing on the maturity date, and(ii) through the date that is ten business days after the consummation of achange of control in the event that a change of control is publicly announced.Open Energy does not have the right to prepay the note in whole or in partwithout penalty prior to the maturity date. If a trigger event occurs withrespect to the Note, the Investor may require Open Energy to redeem all or anyportion of the Note.

 

The Note will accrue interest at a rate of 6% per annum, with accruedinterest due and payable quarterly in arrears on each January 1, April 1, July1 and October 1 beginning on the first such date after September 19, 2007. TheNote will be convertible into shares of common stock at an initial price of$0.50 per share, which is subject to downward adjustment as described in theAgreement.

 

The Warrant is exercisable for up to 40 million shares of Common Stockat an exercise price of $0.506 per share, subject to downward adjustment asdescribed in the Agreement.

 

*8/31/07 Note*

 

On August 31, 2007, Open Energy Corporation closed a securitiespurchase agreement with an accredited investor for the private placement of aconvertible promissory note in the principal amount of $1,000,000 (the “8/31/07Note”) and a related warrant to acquire up to 1,200,000 shares of common stock(the” 8/31/07 Warrant”) for a purchase price of $950,000. The 8/31/07 Notematures six months after August 31, 2007 but the Company has the right toprepay it in whole or in part without penalty prior to the maturity date.Commencing on the maturity date, the 8/31/07 Note accrues interest at the rateof 10% per annum. The principal and accrued interest are convertible intocommon stock of the Company at $0.50 per share. However, the Investor may notconvert if the conversion shares issued would result in the Investorbeneficially owning greater than 4.99% of Open Energy’s outstanding commonstock.

 

In the event of default, the 8/31/07 Note will accrue interest at arate of 10% per annum and the Investors may convert any or all of theoutstanding principal and interest into common stock at a fixed conversionprice equal to $.1868 per share. In no event shall the conversion price belower than $0.05.

 

The 8/31/07 Warrant is exercisable until August 31, 2012. The exerciseprice is $.709, subject to adjustments and anti dilution provisions whichinclude a price floor of $0.05 per share.

 

*6/15/07 Note*

 

On June 15, 2007, the Company entered into a Note and Warrant PurchaseAgreement with an accredited investor for the private placement of a $950,000promissory note (the “6/15/07 Note”) and a related warrant to acquire up to4,000,000 shares of common stock (the “6/15/07 Warrant) for a purchase price of$750,000. In connection with this transaction, the Company’s Chief ExecutiveOfficer entered into a Stock Pledge Agreement pursuant to which certain of hisshares of the Company’s common stock were pledged to secure the performance ofthe 6/15/07 Note, and he agreed to guaranty any deficiency above and beyond thevalue of the shares. Had there been an event of a default with respect to the6/15/07 Note, the investor had the option to either (i) foreclose on the commonstock pledged or (ii) convert all unpaid amounts due under the 6/15/07 Noteinto (A) a debenture which is convertible into shares of common stock of OpenEnergy and (B) a warrant exercisable for shares of common stock.

 

The maturity date of the 6/15/07 Note was October 15, 2007, and it waspaid in full on October 5, 2007. The Note was purchased at a discount, thus theeffective interest paid was $200,000. The 6/15/07 Warrant is exercisable forthree years, and is subject to anti dilution provisions and a floor exerciseprice of $0.05 per share. In addition, a warrant to purchase 400,000 shares ofcommon stock at the rate of $.50 per share that expires on June 15, 2012, wasissued to an investment banker for services rendered in connection with thefinancing.

 

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**Financings**

 

*10% Secured Convertible Debentures and Related Warrants*

 

On March 30, 2007, Open Energy Corporationentered into an agreement with Cornell Capital Partners, L.P. for the privateplacement of (i) a Convertible Secured Debenture in the original principalamount of $3,000,000 and (b) a Warrant to purchase up to 6,000,000 shares ofour common stock, par value $0.001 per share, which were issued and sold for anaggregate purchase price of $3,000,000. We received gross proceeds of$3,000,000, before expenses, from the financing transaction, which were usedfor general corporate and working capital purposes. The Debenture accruesinterest at a rate of 10% per annum and matures on March 30, 2008. No paymentsof interest or principal are due under the Debenture until maturity. Subject tolimitations contained in the Debenture for the maximum amount that may beconverted, the Debenture is convertible at any time at Cornell’s option intoshares of our common stock at a conversion rate which is calculated by dividing(i) the amount of the outstanding and unpaid principal and interest of theDebenture to be converted into shares of common stock by (ii) the conversionprice of $0.50. The conversion price is subject to adjustment in the event weissue shares of common stock for a consideration per share less than theconversion price in effect immediately prior to such issuance or sale, exceptfor issuances in connection with an approved stock plan, the conversion,exchange or exercise of an outstanding security, an acquisition, or conversionof the Debenture. The Warrant issued to Cornell has an initial exercise priceof $0.50 per share, subject to adjustment, and a term of five years from theissuance date. The issuance of the March 30, 2007 debentures and warrantscaused a reduction in the warrant exercise price for the previously issuedCornell warrants to $0.50 per share.

 

*5%  SecuredConvertible Debentures and Related Warrants*

 

In March 2006, the Company entered into asecurities purchase agreement with Cornell Capital Partners, L.P. (“Cornell”),pursuant to which, as subsequently amended, the Company agreed to issue andsell to Cornell up to an aggregate of $15.0 million of secured convertibledebentures (“5% Debentures) and warrants to purchase up to an aggregate of13,250,000 shares of the Company’s common stock. On March 31, 2006, Cornellpurchased $10,000,000 of the 5% Debentures and the Company issued to Cornellwarrants to purchase up to an aggregate of 7,000,000 shares of common stock.Cornell also agreed to purchase an additional $5,000,000 of 5% Debentures andwarrants to purchase up to 3,000,000 shares of common stock on the date theCompany’s registration statement covering the shares issuable upon conversionof the 5% Debentures and exercise of the warrants was declared effective.Initially, the warrants were to have an exercise price of $1.50 per share and aterm of five years. Each 5% Debenture matures three years from its date ofissuance and bears interest at five percent (5%) per annum.

 

The conversion price of the 5% Debentures is thelower of (i) a fixed conversion price (initially $1.50) or (ii) 95% of thelowest volume weighted average price of the common stock during the 30 tradingdays immediately preceding the conversion date. The 5% Debentures are securedpursuant to the terms of (1) a pledge and escrow agreement among the Company,Cornell and David Gonzalez, Esq., as escrow agent, and (2) security agreementsamong the Company, Cornell and two of the Company’s subsidiaries. In accordancewith the pledge and escrow agreement, the Company deposited 44,117,647 newlyissued shares of the Company’s common stock into escrow, and granted to Cornella security interest in those shares to secure the Company’s obligations toCornell under the 5% Debentures and related agreements.

 

Under the security agreements, the Company andits subsidiaries granted to Cornell a blanket security interest in the Company’sconsolidated assets. The 5% Debentures holders agreed to subordinate theirsecurity interests for certain transactions occurring in the normal course ofbusiness.

 

The Company agreed to file with the SEC by May15, 2006, which date the Company refers to as the filing date, a registrationstatement including the shares underlying the 5% Debentures and warrants, andto use its best efforts to have such registration statement declared effectiveby July 29, 2006, which date the Company refers to as the effectiveness date.(This date was subsequently extended by mutual agreement). If a registrationstatement was not filed by the filing date or declared effective by theeffectiveness date, as applicable, the Company would have become obligated topay to Cornell, either in cash or in shares of common stock, liquidated damagesequal to 1% of the liquidated value (subsequently capped at 15%) of the 5%Debentures outstanding for each 30 day period (pro-rated for partial periods)that the registration statement was not filed or declared effective, asapplicable. The Company is obligated to keep the registration statementeffective until all the shares have been sold or are eligible for sale withoutvolume restrictions pursuant to Rule 144(k) promulgated under the SecuritiesAct of 1933.

 

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In July 2006, the Company and Cornell agreed toamend the investment agreements relating to the debentures and warrants,effective as of their original issue dates, as follows:

 

•                  toprovide for a floor price of $0.05 on the adjustable conversion price of the 5%Debentures;

 

•                  to provide for a floor price of $0.05 per shareon the exercise price of the warrants applicable to adjustments with respect tocertain future issuances of securities by us, and upon certain distributions ofassets and similar recapitalization events;

 

•                  to extend the deadline for having the registration statement declared effectiveuntil August 12, 2006; and

 

•                  tocap liquidated damages payable in respect of failure to have an effectiveregistration statement at 15% of the liquidated value of the debenturesoutstanding.

 

In August 2006, the Company and Cornell agreedto further amend the investment agreements described above, effective as oftheir original issue dates, as follows:

 

•                  to provide for the purchase by Cornell of $1,500,000 of the remaining securedconvertible debentures as of the date of the amendment, with the remaining$3,500,000 to be purchased by Cornell upon the effectiveness of theregistration statement that we are required to file pursuant to the investorregistration rights agreement, subject to customer closing conditions;

 

•                  to waive any breaches of the investment agreements with Cornell related tocertain of our tax withholding liabilities;

 

•                  to further extend the deadline for having the registration statement declaredeffective until September 5, 2006; and

 

•                  toprovide that instead of a third warrant being issued to Cornell upon the lastclosing, such warrant was issued on August 17, 2006, at an exercise price of$0.80 (rather than $1.50) per share, and is exercisable for 6,250,000 shares(rather than 3,000,000 shares).

 

In addition, Cornell granted us a waiver ofcertain of the restrictive covenants contained in the investment agreements topermit us to take certain remedial actions relative to our tax withholdingliabilities described under “Payroll Withholding Taxes” below, including thefollowing with respect to any officer or employee: repurchasing vested shares,canceling any unvested shares, granting substitute equity awards, or permittingsuch persons to sell, pledge or transfer their shares.

 

On August 30, 2006, the Company filed aregistration statement on Form SB-2 covering, among others, the shares issuableupon conversion of the debentures and exercise of the warrants, which wasdeclared effective on October 27, 2006 (the “SB-2 registration statement”).

 

On May 21, 2007, the Company entered into aLetter Agreement (the “Amendment”) with Cornell Capital Partners, L.P. whichamended certain terms of the secured convertible debentures issued by theCompany to Cornell pursuant to a Securities Purchase Agreement dated March 30,2006, as amended. The amendment was entered into in exchange for Cornellagreeing to exercise 1,000,000 of their warrants. Pursuant to the Amendment (i)the ownership cap set forth in Section 3(b)(i) of each debenture, which limitsthe holder’s ability to convert the debenture or receive shares of common stockas payment of interest on the debenture, was increased from 4.99% to 9.99%, and(ii) the Company permanently waived the conversion limitation set forth inSection 3(b)(ii) of each debenture, which would have limited the principalamount of the debenture that could be converted at the market conversion pricein any 30-day period.

 

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On August 29, 2007, the Company entered into aLetter Agreement (the “Amendment”) with Cornell Capital Partners, L.P. whichamended certain terms of the secured convertible debentures issued by theCompany to Cornell pursuant to a Securities Purchase Agreement dated March 30,2006, as amended. Specifically, the Company (i) agreed to consider registering4,000,000 shares of common stock pursuant to Rule 462(b) of the 1933 SecuritiesAct, as amended; however OEC will only register additional shares in an amountand at a price that together represent no more than 20% of the sharesoriginally subject to the Initial Registration Statement that remain unsold;(ii) Cornell agreed to not request further registration until 90 days after theeffective date of the new registration statement; (iii) their right of firstnegotiation was waived with respect to the Capital Raising Offer letter sent toCornell August 6, 2007 and they provided their consent to complete thetransaction; (iv) they consented to the Company increasing the number of sharesallocated to Open Energy’s stock option plan by 8,000,000 for a total of16,500,000; and (v)  Cornell confirmed that none of the previousdebentures are in default.

 

During the three months ended August 31, 2007,Cornell has converted the following principal amounts of 5% Debentures totaling$6,770,000 into 18,070,519 shares of common stock. Giving effect to theseconversions, as of August 31, 2007, Cornell had outstanding debentures of$6,425,000 and accrued interest of $924,000.

 

*0%Convertible Debentures and Related Warrants*

 

As of May 31, 2007 all of the 0% Debentures, originally issued inFebruary 2006, have been converted and are no longer outstanding.

 

As of May 31, 2007, the warrants were stilloutstanding and were exercisable into 2,354,261 shares of the Company’s commonstock. The warrant exercise price which were initially set at $2.23 per share,became $0.2875 per share on December 22, 2006, and are subject to furtheradjustment upon the occurrence of certain specified events including, but notlimited to, the issuance of securities at a deemed price below the currentexercise price, stock dividends, stock splits, mergers or reorganizations, andthe Company’s failure to meet certain revenue milestones.

 

**ITEM 8A.**  **CONTROLSAND PROCEDURES**

 

(a)           We are required tomaintain disclosure controls and procedures designed to ensure that materialinformation related to us, including our consolidated subsidiaries, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC rules and forms.

 

Underthe supervision and with the participation of our management, including ourprincipal executive officer and our chief financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedunder Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Basedon this evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were noteffective as of May 31, 2007, due to the following deficiencies:

 

1.               ineffectivecontrols over period end financial close and reporting processes and thepreparation and review of the annual consolidated financial statements,resulting in numerous post-closing journal entries and audit adjustments;

2.               insufficientpersonnel resources and technical accounting expertise within the accountingfunction to resolve non-routine or complex accounting matters;

3.               inadequatesegregation of duties in a number of accounting functions;

4.               inadequatedocumentation and support for certain transactions;

5.               a lack ofeffective record keeping and compliance assistance for reports required underSection 16(a) of the Exchange Act.

 

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Deficiencies1-4 noted above were identified by our independent public accounting firm,Squar Milner, Peterson, Miranda & Williamson, LLP, in connection with theiraudit of our financial statements for the year ended May 31, 2006. Deficiency 5noted above was identified by management during the audit of our financialstatements for the year ended May 31, 2006. These deficiencies have persisteddue to the resignation and reassignment of duties of two Chief FinancialOfficers during the year-ended May 31, 2007, which has impacted the ability ofthe Company to fully implement corrective measures. We hired Aidan Shields asour Chief Financial Officer on June 7, 2007 and are in the process ofimplementing remedial steps, which include greater oversight of our accountingand compliance functions, and an active search for additional internalaccounting and legal compliance resources is under way. To date, management hasnot been able to hire sufficient additional personnel to assist in the Company’sdisclosure controls and procedures and thus has not been able to conclude thatany of this deficiency has been remediated as of the filing date of thisreport.

 

Becauseof its inherent limitations, internal control over financing reporting cannotprovide absolute assurance of achieving financial reporting objectives and maynot prevent or detect all misstatements.  Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become ineffective because of the changes in conditions or that thedegree of compliance with established policies or procedures may deteriorate.

 

Weare not currently subject to the requirements of Section 404 of theSarbanes Oxley Act of 2002 which requires companies to implement an internalcontrol framework, test and report on the effectiveness of their internalcontrol over financial reporting. Under current proposals, we will becomesubject to Section 404 with the Company’s annual report for the yearending May 31, 2008. When we begin testing and reporting on the Company’sinternal controls, we may discover and be required to report materialweaknesses in those controls. In addition, we expect that the evaluationprocess and any required remediation, if applicable, will increase the Company’saccounting, legal and other costs and may divert management resources fromother operating objectives and concerns.

 

Our management, including our Chief ExecutiveOfficer and Chief Financial Officer, does not expect that our disclosurecontrols or internal controls over financial reporting will prevent all errorsor all instances of fraud. A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the controlsystem’s objectives will be met. Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within our company have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Controls can also be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the controls. The design of any system of controls isbased in part upon certain assumptions about the likelihood of future events,and any design may not succeed in achieving its stated goals under allpotential future conditions. Over time, controls may become inadequate becauseof changes in conditions or deterioration in the degree of compliance withpolicies or procedures. Because of the inherent limitation of a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

 

(b)           Changes in Internal Controls Over Financial Reporting

 

There have been no changes in the Company’s internalcontrol over financial reporting during the fourth quarter of our year endedMay 31, 2007 that have materially affected, or is reasonably likely, tomaterially affect, the Company’s internal control over financial reporting.

 

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 **PART III**

 

**ITEM 13.** **EXHIBITS**

 
| **Exhibit** **Number** | ** ** | **Exhibit**                                                                                                           |
|-----------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|                        |       |                                                                                                                  |
| 4.1*                        |       | Letter Agreement, dated  August 30, 2007, by and between Open Energy Corporation and YA Global  Investments, L.P.     |
|                        |       |                                                                                                                  |
| 31.1*                       |       | Certification of Principal  Executive Officer as required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                        |       |                                                                                                                  |
| 31.2*                       |       | Certification of Principal  Financial Officer as required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                        |       |                                                                                                                  |
| 32.1*                       |       | Certification of Principal  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              |
|                        |       |                                                                                                                  |
| 32.2*                       |       | Certification of Principal  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              |

 

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*Filed herewith.

 

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**SIGNATURES**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

**OPEN ENERGY CORPORATION**

 
| By:                                   | /s/ David P. Saltman |   |
|---------------------------------------|----------------------|--------|
| David P. Saltman                      |
| Chairman and Chief Executive  Officer |
|                                  |
| Date: October 31, 2007                |
|                                  |
| By:                                   | /s/ Aidan H. Shields |   |
| Aidan H. Shields                      |
| Chief Financial Officer               |
|                                  |
| Date: October 31, 2007                |

 

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**EXHIBIT** **INDEX**

 
| **Exhibit**** ****Number** | ** ** | **Exhibit**                                                                                                           |
|---------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
|                            |       |                                                                                                                  |
| 4.1*                            |       | Letter Agreement, dated  August 30, 2007, by and between Open Energy Corporation and YA Global  Investments, L.P.     |
|                            |       |                                                                                                                  |
| 31.1*                           |       | Certification of Principal  Executive Officer as required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                            |       |                                                                                                                  |
| 31.2*                           |       | Certification of Principal  Financial Officer as required pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|                            |       |                                                                                                                  |
| 32.1*                           |       | Certification of Principal  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              |
|                            |       |                                                                                                                  |
| 32.2*                           |       | Certification of Principal  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.              |

 

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*Filed herewith.

 

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