Table of Contents





UNITED
STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549


FORM 10-Q


(Mark
One)


þ
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the quarterly period ended: March 31,
2009


OR


o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the transition period from: 
to


Commission
File Number: 000-53105


CLEAR SKIES SOLAR,
INC.


(Exact
name of Registrant as Specified in Its Charter)


DELAWARE
                        
                        30-0401535(State
      or Other Jurisdiction of Incorporation or
                        
                        (I.R.S.
      Employer Identification No.)Organization)200
      Old Country Road, Suite 610Mineola, New
      York
                        
                        11501-4241(Address
      of Principal Executive Offices)
                        
                        (Zip
      code)


(516) 282-7652


(Registrant’s Telephone Number, Including Area Code)
  (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
  Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 þ      
NO o






o o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 Large accelerated filer o
              
              Accelerated filer o
              
              Non-accelerated filer o
              
              Smaller reporting
                company þ(Do not check if a smaller
                reporting company)


YES o      
NO þ




As of May
11, 2009, 40,498,844 shares of the issuer’s common stock, $0.001 par value per
share, were outstanding.









Table of Contents




PagePART
      I FINANCIAL INFORMATION
                    
                    
                    3Item 1.
      Financial Statements
                    
                    
                    3Condensed
      Consolidated Balance Sheet as at March 31, 2009 (unaudited) and
      Condensed Consolidated Balance Sheet as at December 31,
      2008
                    
                    
                    3Unaudited
      Condensed Consolidated Statements of Operations for the three months ended
      March 31, 2009 and March 31, 2008
                    
                    
                    4Unaudited
      Condensed Consolidated Statements of Cash Flows for the three months ended
      March 31, 2009 and March 31, 2008
                    
                    
                    5Notes
      to Unaudited Condensed Consolidated Financial Statements
                    
                    
                    6Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    
                    15Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
                    
                    
                    18Item 4T.
      Controls and Procedures
                    
                    
                    19PART
      II OTHER INFORMATION
                    
                    
                    20Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
                    
                    
                    20Item 6.
      Exhibits
                    
                    
                    20Signatures
                    
                    
                    21Section
      302 Certification of Principal Executive OfficerSection
      302 Certification of Principal Financial OfficerSection
      906 Certification of Principal Executive Officer and Principal Financial
      Officer




2




Table of Contents




PART I — FINANCIAL
INFORMATION


Item 1.
Financial Statements


CLEAR
SKIES SOLAR, INC. AND SUBSIDIARIES


Condensed
Consolidated Balance Sheets


(Unaudited)


March 31, 2009
                                                                          
                                                                          
                                                                          December 31, 2008ASSETSCash
      and cash equivalents
                                                                          
                                                                          $
                                                                          8,477
                                                                          
                                                                          
                                                                          $
                                                                          155,577Accounts
      receivable, less allowance for doubtful accounts of $65,275 at
      March 31, 2009 and December 31, 2008,
    respectively
                                                                          
                                                                          
                                                                          29,542
                                                                          
                                                                          
                                                                          
                                                                          157,225Inventory
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          11,113Costs
      and estimated earnings in excess of billings
                                                                          
                                                                          
                                                                          0
                                                                          
                                                                          
                                                                          
                                                                          0Total
      current assets
                                                                          
                                                                          
                                                                          38,019
                                                                          
                                                                          
                                                                          
                                                                          323,915Property
      and equipment, net
                                                                          
                                                                          
                                                                          186,560
                                                                          
                                                                          
                                                                          
                                                                          192,653Prepaid
      expenses and investor relations fees
                                                                          
                                                                          
                                                                          167,041
                                                                          
                                                                          
                                                                          
                                                                          195,273Security
      deposits
                                                                          
                                                                          
                                                                          113,634
                                                                          
                                                                          
                                                                          
                                                                          113,634Other
      assets
                                                                          
                                                                          
                                                                          73,607
                                                                          
                                                                          
                                                                          
                                                                          44,801Total
      Assets
                                                                          
                                                                          $
                                                                          578,861
                                                                          
                                                                          
                                                                          $
                                                                          870,276LABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)CCurrent
      liabilitiesAccounts
      payable and accrued expenses
                                                                          
                                                                          $
                                                                          1,436,342
                                                                          
                                                                          
                                                                          $
                                                                          1,274,563Billings
      in excess of costs and estimated earnings
                                                                          
                                                                          
                                                                          42,553
                                                                          
                                                                          
                                                                          
                                                                          40,332Obligation
      to issue options and warrants
                                                                          
                                                                          
                                                                          47,500
                                                                          
                                                                          
                                                                          
                                                                          47,500Notes
      Payable
                                                                          
                                                                          
                                                                          4,587
                                                                          
                                                                          
                                                                          
                                                                          —Payroll
      liabilities
                                                                          
                                                                          
                                                                          69,842
                                                                          
                                                                          
                                                                          
                                                                          31,047Provision
      for estimated warranty liability
                                                                          
                                                                          
                                                                          56,964
                                                                          
                                                                          
                                                                          
                                                                          56,964Estimated
      loss on uncompleted contracts
                                                                          
                                                                          
                                                                          109,305
                                                                          
                                                                          
                                                                          
                                                                          109,305Total
      current liabilities
                                                                          
                                                                          
                                                                          1,767,093
                                                                          
                                                                          
                                                                          
                                                                          1,559,711Commitments
      and contingenciesStockholders’
      Equity (deficit)Preferred
      stock, $.001 par value, 10,000,000 shares authorized, none issued and
      outstandingCommon
      stock, $.001 par value, 100,000,000 shares authorized, 31,921,066 and
      31,696,066 shares issued and outstanding at March 31, 2009 and
      December 31, 2008, respectively
                                                                          
                                                                          
                                                                          31,921
                                                                          
                                                                          
                                                                          
                                                                          31,696Additional
      paid-in capital
                                                                          
                                                                          
                                                                          11,423,774
                                                                          
                                                                          
                                                                          
                                                                          10,767,217Accumulated
      (deficit)
                                                                          
                                                                          
                                                                          (12,643,927
                                                                          )
                                                                          
                                                                          
                                                                          (11,488,348
                                                                          )TTotal
      stockholders’ equity (deficit)
                                                                          
                                                                          
                                                                          (1,188,232)
                                                                          
                                                                          
                                                                          
                                                                          (689,435
                                                                          )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
                                                                          
                                                                          $
                                                                          578,861
                                                                          
                                                                          
                                                                          $
                                                                          870,276




See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


3




Table of Contents




Clear
Skies Solar, Inc. and Subsidiaries


Unaudited Condensed Consolidated
Statements of Operations





For the three months ended March 31,2009
                                    
                                    
                                    2008RevenuesContract
      revenue
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    138,224Subcontract
      revenue
                                    
                                    
                                    —
                                    
                                    
                                    
                                    0Other
                                    
                                    
                                    11,113
                                    
                                    
                                    
                                    15,000Total
      revenues
                                    
                                    
                                    11,113
                                    
                                    
                                    
                                    153,224Cost
      of revenues
                                    
                                    
                                    27,946
                                    
                                    
                                    
                                    193,348Gross
      margin
                                    
                                    
                                    (16,833)
                                    
                                    
                                    
                                    (40,124)Operating
      expensesSelling
      expenses
                                    
                                    
                                    91,255
                                    
                                    
                                    
                                    233,959General
      and administrative expenses
                                    
                                    
                                    1,040,474
                                    
                                    
                                    
                                    1,401,957Research
      and development
                                    
                                    
                                    2,135
                                    
                                    
                                    
                                    2,614Total
      operating expenses
                                    
                                    
                                    1,133,864
                                    
                                    
                                    
                                    1,638,530Loss
      from operations
                                    
                                    
                                    (1,150,697
                                    )
                                    
                                    
                                    (1,678,654
                                    )Other
      income (expense)Interest
      income
                                    
                                    
                                    470
                                    
                                    
                                    
                                    32,347Interest
      expense
                                    
                                    
                                    (5,352)
                                    
                                    
                                    
                                    (5,930)Provision
      for income taxes
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Net
      loss
                                    
                                    $
                                    (1,155,579
                                    )
                                    
                                    $
                                    (1,652,237
                                    )Loss
      per share, basic and diluted
                                    
                                    $
                                    (0.04
                                    )
                                    
                                    $
                                    (0.05
                                    )Weighted
      average common shares outstanding, basic and diluted
                                    
                                    
                                    31,556,792
                                    
                                    
                                    
                                    30,886,678




See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


4




Table of
Contents




Clear Skies Solar, Inc. and
Subsidiaries


Unaudited Condensed Consolidated
Statements of Cash Flows





For the three months ended March 31,
                                                                                                
                                                                                                
                                                                                                
                                                                                                2009
                                                                                                
                                                                                                
                                                                                                2008Net
      loss
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                (1,155,579
                                                                                                )
                                                                                                
                                                                                                $
                                                                                                (1,652,237
                                                                                                )Adjustment
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                6,094
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,120Stock-based
      compensation
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                656,782
                                                                                                
                                                                                                
                                                                                                
                                                                                                156,843Estimated
      loss on uncompleted contracts
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                27,969Bad
      debt expense
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                9,000Increase
      (decrease) in cash and cash equivalents attributable to changes in
      operating assets and liabilities:Accounts
      receivable
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                127,683
                                                                                                
                                                                                                
                                                                                                
                                                                                                (131,407
                                                                                                )Inventory
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                11,113
                                                                                                
                                                                                                
                                                                                                
                                                                                                —Costs
      and estimated earnings in excess of billings
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (8,244)Prepaid
      expenses and investor relations fees
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                28,232
                                                                                                
                                                                                                
                                                                                                
                                                                                                291,750Other
      assets
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (28,807
                                                                                                )
                                                                                                
                                                                                                
                                                                                                282Accounts
      payable and accrued expenses
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                161,779
                                                                                                
                                                                                                
                                                                                                
                                                                                                25,684Billings
      in excess of costs and estimated earnings
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                2,221
                                                                                                
                                                                                                
                                                                                                
                                                                                                1,427Payroll
      liabilities
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                38,795
                                                                                                
                                                                                                
                                                                                                
                                                                                                (99,376)Customer
      deposits
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (5,000)Net
      cash used in operating activities
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (151,687
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (1,381,189
                                                                                                )Net
      cash flows used in investing activitiesPurchases
      of equipment
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (8,941
                                                                                                )Net
      cash flows from financing activitiesAdvances
      from related party
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                
                                                                                                (104,410)Notes
      payable
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,587
                                                                                                
                                                                                                
                                                                                                
                                                                                                0—
                                                                                                
                                                                                                
                                                                                                
                                                                                                0Net
      cash provided by financing activities
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                4,587
                                                                                                
                                                                                                
                                                                                                
                                                                                                (104,410)Net
      decrease in cash and cash and cash equivalents
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                (147,100
                                                                                                )
                                                                                                
                                                                                                
                                                                                                (1,494,540
                                                                                                )Cash
      and cash equivalents, beginning of the period
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                155,577
                                                                                                
                                                                                                
                                                                                                $
                                                                                                4,866,842Cash
      and cash equivalents at end of period
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                8,477
                                                                                                
                                                                                                
                                                                                                $
                                                                                                3,372,302Supplemental
      Disclosures of cash flow informationCash
      paid for interest
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                —
                                                                                                
                                                                                                
                                                                                                $
                                                                                                5,390Supplemental
      disclosure of non-cash financing and investment activitiesValue
      of shares of common stock issued to consultants
                                                                                                
                                                                                                
                                                                                                
                                                                                                $
                                                                                                5,000
                                                                                                
                                                                                                
                                                                                                
                                                                                                13,500Reclassification
      of prepaid investor relations to other receivable
                                                                                                
                                                                                                
                                                                                                
                                                                                                
                                                                                                —
                                                                                                
                                                                                                
                                                                                                $
                                                                                                167,988




See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements


5




Table of Contents




NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS





1. Basis of presentation, current
status and nature of operations





The
accompanying unaudited condensed consolidated financial statements as of March
31, 2009 and for the three month periods ended March 31, 2009 and 2008 have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information, and with the rules
and regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, these interim financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of the Company, these unaudited condensed
consolidated financial statements include all adjustments necessary to present
fairly the information set forth therein. All such adjustments are of a normal
recurring nature. Results for interim periods are not necessarily indicative of
results to be expected for a full year. The condensed consolidated balance sheet
information as of December 31, 2008 was derived from the audited financial
statements and notes thereto, together with management’s discussion and analysis
or plan of operations  included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2008. The interim financial statements
contained herein should be read in conjunction with that Report.





In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, the Company is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. On an ongoing basis, the Company evaluates
estimates, including those related to bad debts, inventory reserves, and
warranty expense. The Company bases its estimates on historical data and
experience, when available, and on various other assumptions that are believed
to be reasonable under the circumstances, the combined results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates.





Current
Status





At this
time, Clear Skies has no active projects under construction.  Our last
contract was completed in December 2008, except for several small residential
projects that were ordered from us in 2007 or before and have been delayed for a
variety of reasons.  We had no revenue in the first quarter of 2009,
except for the sale of approximately $11,000 of excess solar panel
inventory.  It is not certain when we will begin generating revenues
again.  We are negotiating with several parties for the financing and
construction of a number of solar energy projects, however there can be no
assurance that we will be successful in these negotiations or that such projects
would be profitable.  Even if we are successful in negotiating finance
and construction agreements, since we recognize revenue under the percentage of
completion method, it could be several months after signing before we begin
performance and are able to report revenue on our financial
statements.





As of May
8, 2009, our available cash balance was approximately $20,000. Notwithstanding
our recent sale of convertible notes for gross proceeds of $400,000 and
borrowings of $248,464 from an unrelated third party, we will need to raise
additional funds to pay outstanding vendor invoices.  Our future cash
flows depend on our ability to enter into, and be paid under, contracts for the
construction of solar energy projects and our ability to sell our debt and
equity securities on terms satisfactory to us.  While management
believes these can be accomplished, there can be no assurance that we will be
successful in entering into construction contracts or selling our securities, in
which case we shall probably not be able to continue as a going
concern.





Nature of
Operations





Clear
Skies Group, Inc. was formed in New York in September 2003 for the purpose
of providing turnkey solar electricity installations and renewable energy
technology solutions to commercial and residential customers across the United
States. CSG commenced operations in August 2005 and received its initial funding
in September 2005. The Company also has proprietary and patented remote
monitoring technology under the name XTRAX® with
applications in the solar electricity production industry and other potential
markets.





Unless
the context requires otherwise, references to the “Company” for periods prior to
the closing of the Reverse Merger (Note 2) on December 20, 2007 refer to
Clear Skies Group, Inc., a private New York corporation that is now Clear Skies
Solar, Inc.’ s wholly-owned subsidiary, and such references for periods
subsequent to the closing of the Reverse Merger on December 20, 2007, refer
to Clear Skies Solar, Inc., a publicly traded Delaware corporation formerly
known as Clear Skies Holdings, Inc. (“CSH”), together with its subsidiaries,
including Clear Skies Group, Inc.


6




Table of Contents




2. Business combination and
subsequent financing





The reverse
merger





On
December 13, 2007, BIP Oil, Inc., a Nevada corporation (“BIP”), and Clear
Skies Holdings, Inc., a Delaware corporation (“CSH”) and wholly owned subsidiary
of BIP, entered into an Agreement and Plan of Merger. On December 18, 2007,
BIP merged with and into CSH, so that BIP and CSH became a single corporation
named Clear Skies Holdings, Inc., which exists under, and is governed by, the
laws of the State of Delaware (the “Reincorporation”).  Immediately
following the Reincorporation, there were 59,841,923 shares of Clear Skies
Holdings, Inc. issued and outstanding to stockholders of record.





On
December 20, 2007, Clear Skies Acquisition Corp., a newly formed wholly
owned subsidiary of Clear Skies Holdings, Inc., was merged with and into Clear
Skies Group, Inc. (the “Reverse Merger”), and Clear Skies Group, Inc., as the
surviving corporation, became a wholly owned subsidiary of Clear Skies Holdings,
Inc. Prior to the Reverse Merger, certain stockholders of Clear Skies Group,
Inc. agreed to surrender an aggregate of 60,000 shares of Clear Skies Group,
Inc. (exchangeable for an aggregate of 116,276 shares of common stock of Clear
Skies Holdings, Inc. in the Reverse Merger) for cancellation. Pursuant to the
Reverse Merger, the outstanding shares of common stock of Clear Skies Group,
Inc. were exchanged for an aggregate of 8,492,067 shares of Clear Skies
Holdings, Inc. at a conversion rate of 1.937943 shares of Clear Skies Holdings,
Inc. for each share of Clear Skies Group, Inc. In addition, pursuant to the
Reverse Merger, outstanding warrants to purchase an aggregate of 760,000 shares
of common stock of Clear Skies Group, Inc. were exchanged for an aggregate of
416,656 shares of common stock of Clear Skies Holdings, Inc.





Immediately
following the closing of the Reverse Merger, Clear Skies Holdings, Inc.
transferred all of its pre-Reverse Merger operating assets and liabilities to
its newly formed wholly owned subsidiary, BIP Holdings, Inc., a Delaware
corporation, and transferred all of BIP Holdings, Inc.’s outstanding capital
stock to Clear Skies Holdings, Inc.’s then-majority stockholders in exchange for
cancellation of 53,866,923 shares of Clear Skies Holdings, Inc. common stock
held by those stockholders (such transaction, the “Split-Off”). The remaining
pre-Reverse Merger stockholders of Clear Skies Holdings, Inc. continued to hold
5,975,000 shares of Clear Skies Holdings, Inc. after the split-off. After the
Reverse Merger, Clear Skies Holdings, Inc. succeeded to the business and
activities of Clear Skies Group, Inc. as its sole line of business and all of
Clear Skies Holdings, Inc.’s then-current officers and directors resigned and
were replaced by Clear Skies Group, Inc.’s officers and directors.





On
January 25, 2008, Clear Skies Holdings, Inc. changed its name to Clear
Skies Solar, Inc.





The
Reverse Merger was accounted for as a reverse acquisition and recapitalization
of Clear Skies Group, Inc. for financial accounting purposes. Consequently, the
assets and liabilities and the historical operations that are reflected in the
Company’s consolidated financial statements for periods prior to the Reverse
Merger are those of Clear Skies Group, Inc. and have been recorded at the
historical cost basis of Clear Skies Group, Inc., and the Company’s consolidated
financial statements for periods after completion of the reverse merger include
both the Company’s and Clear Skies Group, Inc.’s assets and liabilities, the
historical operations of Clear Skies Group, Inc. prior to the Reverse Merger and
the Company’s operations from the closing date of the Reverse
Merger.





The private
placement





Following
the business combination discussed above, the Company completed a private
placement offering of 16,000,000 shares of its common stock for an aggregate
gross purchase price of $8,000,000, including $745,000 of exchanged debt. The
cash costs of the private placement of common stock and the prior issuance of
$745,000 of bridge notes were approximately $1.2 million in the aggregate,
and the Company issued warrants expiring in December 2010 in connection
with both financings to the placement agent and its designees to purchase an
aggregate of up to 732,401 shares of the Company’s common stock at $.50 per
share. The common stock of Clear Skies Solar, Inc. trades on the over the
counter bulletin board under the symbol CSKH.OB.


7




Table of Contents





3. Summary of significant accounting
policies





Accounts
Receivable and Allowance for Doubtful Accounts


The
Company regularly evaluates the collectability of its accounts receivable. The
Company carries its accounts receivable at cost less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its accounts receivable and
establishes an allowance for doubtful accounts, if necessary, based on a history
of past bad debts and collections and current credit
conditions.  Accounts receivable are written-off as uncollectible on a
case-by-case basis at the discretion of management.  Accounts
receivable consist of trade receivables and when applicable amounts due from
state agencies for rebates on state-approved solar systems installed. A total of
$29,542 of rebates was included in accounts receivable at March 31, 2009.
When the Company sells systems with a rebate component, the savings is passed
directly to the customer and the Company takes ownership of the rebate
receivable from the applicable state agency.





Inventories


Inventories
are valued at the lower of cost or market. Cost is determined by the first-in,
first-out method or the weighted average method. The inventory balance, which
includes materials, labor and manufacturing overhead costs, is recorded net of
an allowance for obsolete or unmarketable inventories. Such allowance is based
upon both historical experience and management’s understanding of market
conditions and forecasts of future product demand. In addition, items in
inventories in excess of one year’s usage are compared to the allowance for
adequacy. If the actual amount of obsolete or unmarketable inventories
significantly exceeds the estimated allowance, the Company’s cost of sales,
gross profit and net earnings would be significantly affected.





Revenue
Recognition


The
Company delivers turnkey solar electricity installations and renewable energy
technology solutions to commercial, industrial and residential developer
customers. The Company’s primary business is the design and installation of
photovoltaic (sometimes called “solar electric” or “PV” for short) solar power
systems for the commercial, industrial and residential developer markets. Based
on its design the Company orders components from manufacturers, has them shipped
to the job site and then completes the job. The Company will also order extra
solar panels for inventories and hold them until needed for a particular
job.





The
Company recognizes revenue from its contracts over the contractual period under
the percentage-of-completion (“POC”) method of accounting. Under the POC method
of accounting, sales and gross profit are recognized as work is performed based
on the relationship between actual costs incurred and total estimated costs at
the completion of the contract. Recognized revenue that will not be billed under
the terms of the contract until a later date is recorded as an asset captioned
“Costs and estimated earnings in excess of billings on uncompleted contracts.”
Contracts where billings to date have exceeded recognized revenue are recorded
as a liability captioned “Billings in excess of costs and estimated earnings on
uncompleted contracts.”  Changes to the original estimates may be
required during the life of the contract.  Estimates are reviewed
monthly and the effect of any change in the estimated gross margin percentage
for a contract is reflected in cost of sales in the period the change becomes
known. The use of the POC method of accounting involves considerable use of
estimates in determining revenue, costs and profits and in assigning the amounts
to accounting periods. As a result, there can be a significant disparity between
earnings (both for accounting and taxes) as reported and actual cash received by
the Company during any reporting period. The Company continually evaluates all
of the issues related to the assumptions, risks and uncertainties inherent with
the application of the POC method of accounting; however, it is not assured that
its estimates will be accurate. If the Company’s estimates are not accurate or a
contract is terminated, it will be forced to adjust revenue in later periods.
Furthermore, even if its estimates are accurate, the Company may have a
shortfall in its cash flow and it may need to borrow money to fund its work in
process or to pay taxes until the reported earnings materialize in actual cash
receipts.


8




Table of Contents




From time
to time, the Company performs installation and other services as a
subcontractor. These services differ from contract revenue in that the Company
is entitled to be compensated for subcontractor work performed prior to
completion of the system, because the Company has no obligation or ownership of
the system so long as it completes its tasks satisfactorily. Revenues from
subcontractor projects are realized as they are completed.





Cost
Recognition


Contract
costs include all direct material, labor, and equipment costs and those indirect
costs related to contract performance such as indirect labor, supply, and tool
costs. The Company makes provisions for estimated losses on uncompleted
contracts 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 revenues are determined.





The
Company carries inventories as it needs to buy materials in advance of
anticipated orders due to possible long lead times at vendors. In addition, the
Company will have purchased material at job sites prior to installation and
completion of the job.





Loss Per
Share


The
Company complies with SFAS No. 128, “Earnings Per Share.” SFAS No. 128
requires dual presentation of basic and diluted income/loss per share for all
periods presented. Basic income/loss per share excludes dilution and is computed
by dividing income/loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted income/loss per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then share in the income/loss of
the Company. The difference between the number of shares used to compute basic
income/loss per share and diluted income/loss per share relates to additional
shares to be issued upon the assumed exercise of stock options and warrants, net
of shares hypothetically repurchased at the average market price with the
proceeds of exercise. As the Company reported a net loss for the three month
periods ended March 31, 2009 and 2008, the effects of the
10,944,979 shares issuable on exercise of outstanding warrants and options
and on the conversion of notes as of March 31, 2009 has not been considered
in the diluted net loss per common share since these dilutive securities would
reduce the loss per common share and become anti-dilutive.





Recent Accounting
Pronouncements


In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a
new single authoritative definition of fair value and provides enhanced guidance
for measuring the fair value of assets and liabilities and requires additional
disclosures related to the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and the
effect of fair value measurements on earnings. SFAS 157 is effective as of
November 15, 2007. The adoption of this statement did not have a material
effect on the Company’s financial position or results of
operations.




In
February 2007, the FASB issued SFAS No. 159, ''The Fair Value Option
for Financial Assets and Liabilities, including an amendment of FASB Statement
No. 115”, (''SFAS 159’’). This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS 159 is effective
as of the beginning of fiscal 2008. The adoption of this statement did not have
a material effect on our financial position or results of operations since the
Company did not elect to measure any applicable assets and liabilities at fair
value.




9




Table of Contents




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.” SFAS No. 141(R) provides companies with principles and
requirements on how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
non-controlling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. SFAS No. 141(R)
also requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. SFAS No. 141(R) is effective for business
combinations occurring in fiscal years beginning after December 15, 2008,
which will require the Company to adopt these provisions for business
combinations occurring in fiscal 2009 and thereafter. Early adoption of SFAS
No. 141(R) is not permitted.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — An Amendment of ARB No. 51”. SFAS
No. 160 requires reporting entities to present noncontrolling
(minority) interests as equity as opposed to as a liability or mezzanine
equity and provides guidance on the accounting for transactions between an
entity and noncontrolling interests. SFAS No. 160 is effective the first
fiscal year beginning after December 15, 2008, and interim periods within
that fiscal year. SFAS No. 160 applies prospectively as of the beginning of
the fiscal year SFAS No. 160 is initially applied, except for the
presentation and disclosure requirements which are applied retrospectively for
all periods presented subsequent to adoption. The adoption of SFAS No. 160
will not have a material impact on the financial statements; however, it could
impact future transactions entered into by the Company.





In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The FASB believes the GAAP hierarchy should be
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of FASB 162 is not expected
to have a material impact on the Company’s consolidated financial
statements.





Stock Based
Compensation


The FASB
issued SFAS No. 123(R), “Accounting for Stock-Based Compensation
(Revised).” SFAS No. 123(R) focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS 123(R) requires an entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award (with limited exceptions). That cost will be recognized
during the period in which an employee is required to provide service in
exchange for the award. No compensation costs are recognized for equity
instruments for which employees do not render the requisite service. The Company
adopted SFAS No. 123(R) at commencement of operations.





4. Operations and Going
Concern





Since
inception, the Company has incurred losses and negative cash flows from
operations and at March 31, 2009, the Company had an accumulated deficit of
approximately $12.6 million.  At March 31, 2009 we had
approximately $8,500 in cash and cash equivalents.  Based on our
current plans and assumptions, which include our expectations relating to the
future sale of our equity and debt securities and entering into contracts for
the financing and installation of solar energy systems and the resulting cash
flows and revenues, we believe that we will have adequate resources to fund our
operations in 2009.  However, there can be no assurances that we will
be successful in entering into such contracts or arranging financing on terms
satisfactory to us, in which case there would be significant doubt as to our
ability to continue as a going concern.    Notwithstanding
our recent sale of convertible notes for gross proceeds of $400,000 and
borrowings of $248,464 from an unrelated third party, we will need to raise
additional funds to pay outstanding vendor invoices.


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Table of Contents




5. Prepaid expenses and investor
relations fees





Prepaid
expenses and prepaid investor relation fees at March 31, 2009 and
December 31, 2008 are as follows:





March
      31,
                            
                            
                            December
      31,2009
                            
                            
                            2008Payments
      to US public and investor relations firms
                            
                            $
                            166,667
                            
                            
                            $
                            191,667Prepaid
      insurance premiums
                            
                            
                            375
                            
                            
                            
                            3,607Totals
                            
                            $
                            167,042
                            
                            
                            $
                            195,274





The
Company has entered into agreements with several firms in the US to provide it
with both public relations and investor relations advice and services over
periods from one to three years. These agreements call for payments in both cash
and common stock and payments are being amortized over the period of each
agreement. In addition to the amounts above, the Company had committed to pay
monthly retainers to the above firms ranging from $5,000 to $15,000 per month
over the life of the agreement. The payment to a European firm was originally
pursuant to a six month agreement and represented an advance payment of
anticipated out of pocket expenses of the consultant in 2008. The agreement was
subsequently terminated and the European firm returned $167,988 on
April 24, 2008, which was the balance of uncommitted funds. In the first
three months of 2009, there was no charge to earnings.





6. Stock-based compensation and
common stock issued and agreed to be issued





Upon
commencement of operations, the Company entered into multiple agreements in
which the Company received consulting and other services in exchange for the
Company’s common stock or options to purchase the Company’s common stock. The
Company complies with SFAS 123(R) and records compensation expense for the fair
value of these services over the periods in which they are
provided.





In
September 2005, the Company agreed to grant 120,000 shares (exchanged for
232,553 shares in the Reverse Merger) to three individuals for agreeing to serve
on the Board of Directors for a three-year term. The fair value of these shares
at the date of such agreement was estimated to be approximately $96,000. For the
three months ended March 31, 2009 and 2008, the Company recorded Board of
Director fees and compensation expense, which are included in general and
administrative expenses, of approximately zero, and $13,000, respectively, for
these shares.  The balance of these costs were charged to earnings
during 2008 and therefore there was no amounts on the balance sheets as at March
31, 2009 or December 31, 2008.





As a
result of the above transactions, capital advances of $310,000 in
September 2005 and $200,000 in April 2006, and services performed in
exchange for shares issued prior to 2006, the Company became contractually
obligated to issue shares in excess of its 200 authorized shares (“Old Shares of
Clear Skies Group, Inc.”). As a result, the Company recorded a liability of
approximately $894,000 as of December 31, 2006 for the value of the
contractual obligations. Due to the contractual obligation to issue the excess
shares, the Board of Directors, with stockholder approval, passed a resolution
to increase the number of authorized shares to 10,000,000. On January 30,
2007, the certificate of incorporation (the “Charter”) was officially amended to
authorize the Company to issue 10,000,000 shares (“New Shares of Clear Skies
Group, Inc.”) of $0.01 par value common stock. Concurrently with the amendment
to the Charter, the Company’s sole shareholder was issued 1,570,000 New Shares
of Clear Skies Group, Inc. (exchanged for 3,042,570 shares in the Reverse
Merger) in exchange for the Old Shares of Clear Skies Group, Inc. previously
issued. Upon the amendment to the Charter, the obligation to issue 1,042,500
shares of CSG common stock (exchanged for 2,020,297 in the Reverse Merger) was
fulfilled and the liability was reclassified to Stockholders’ Equity as Common
Stock to the extent of par value with the excess classified as Additional
Paid-In Capital. The Company was obligated under a contract with a public
relations consultant to issue $4,500 worth of its common stock to the consultant
each month during the term of the contract which expired on September 30,
2008. The Board determined the value of the shares for each month at the closing
price of the Company’s common stock on the last trading day of the prior
month.


11




Table of Contents




7. Related party
transactions





In
April 2007, the Company issued 40,000 shares (exchanged for 77,517 shares
in the Reverse Merger) to an individual who was a director as compensation for
services rendered other than as a director. The fair value of these shares at
issuance was estimated to be approximately $33,000 which was recorded as service
fees and included in general and administrative expenses for the nine months
ended September 30, 2007. In June 2008, the Company issued an option
to an individual who was a director at that time as compensation for services
rendered other than as a director. The option allows the individual to purchase
up to 50,000 shares of the Company’s common stock at $1.21 per share and expires
in December 2009. The fair value of the option at issuance was estimated to
be $33,000 which was recorded as a service fee and included in general and
administrative expenses when the option was issued.





Several
of the Company’s officers and directors, or their affiliates, have from time to
time extended loans to the Company or agreed to defer compensation payable to
them in order to fund the Company’s operating expenses. In this regard:
(i) Quixotic Systems, Inc. (“Quixotic”) loaned $285,000 at 10% interest
compounded daily, which had been repaid in full as of December 31, 2007;
and (ii) Gelvin Stevenson loaned $20,000 all of which had been repaid in
full as of December 31, 2007. Furthermore, Ezra Green, the Company’s
Chairman and Chief Executive Officer, agreed to the deferral of $73,259 of his
compensation (of which $69,366 was unpaid and included in accrued expenses as of
December 31, 2007). As of March 18, 2008, Mr. Green’s deferred
compensation had been repaid in full. Mr. Green advanced $30,275 to the
Company in 2006 and an additional $70,037 in 2007 (which has been recorded as a
balance of $100,312 due to related party at December 31, 2007). This
related party balance was also repaid in full by March 18, 2008. Such loans
and other arrangements were interest free (except for Quixotic) and have not
been memorialized by written promissory notes. At December 31, 2007, there
were miscellaneous amounts due to related parties of approximately $4,000 which
were paid in March, 2008.  As of March 31, 2009 and December 31,
2008 no related party loans were outstanding.





8. Stock Options and
Warrants





In
accordance with Statement on Auditing Standards ("SAS") No. 123(R), the
Company uses the Black-Scholes option pricing model to measure the fair value of
its Option awards granted in 2007 as part of or after the Reverse Merger
described in Note 1. All Option awards granted prior to the Reverse Merger
transaction described in Note 2 were exchanged for common stock as part of that
transaction. The Black-Scholes model requires the input of highly subjective
assumptions including volatility, expected term, risk-free interest rate and
dividend yield. As the Options were granted to non-employee consultants the
resulting fair value is recorded as consulting expense on a straight-line basis
over the period of service of the consultants, in this case one year. The amount
of this expense charged to earnings for the three month periods ended March 31,
2009 and 2008 was zero and $9,000, respectively. There will be no charge against
earnings in 2009.




12




Table of Contents




In
December 2007, the Company’s shareholders approved its 2007 Equity
Incentive Plan which provides for the granting to both employees and
non-employees of up to 2,500,000 shares of the Company’s common stock pursuant
to awards of options and/or restricted stock. The 2007 Plan is administered by
the Company’s Board of Directors or a committee appointed by the Board. On
July 28, 2008, the Board adopted our 2008 Equity Incentive Plan and on
March 17, 2009 it adopted our 2009 Equity Incentive Plan.  At March
31, 2009, the Company had outstanding options granted under the 2007, 2008 and
2009 Plans to purchase an aggregate of 5,900,000 shares of the Company’s common
stock. On May 1, 2008 the Company adopted the Clear Skies Solar, Inc. 2008
Non-Employee Director Compensation Plan, which it amended on November 12, 2008
and, pursuant to that Plan as amended, each of the non-employee directors were
granted options expiring in ten years to purchase 90,000 shares, 90,000 shares
and 220,000 shares at $1.30, $.2725 and $.12 per share, respectively. The
Company did not issue any stock options to employees in 2007. A summary of the
Company’s stock option activity in the first three months of 2009 for employees
and three non-employees is as follows:





WeightedWeighted
                            
                            AverageAverage
                            
                            RemainingNumber
                            
                            Exercise
                            
                            Contractualof
                            
                            Price per
                            
                            TermOptions
                            
                            Option
                            
                            (Years)Employees:Outstanding,
      January 1, 2009
                            
                            3,030,000
                            
                            $
                            0.99
                            
                            7.40Granted
      — March 17, 2009
                            
                            2,555,000
                            
                            $
                            0.12
                            
                            9.02Cancelled/forfeited
                            
                            -35,000
                            
                            $
                            0.49Outstanding,
      March 31, 2009
                            
                            5,550,000Non-employees:Granted
      — March 17, 2009
                            
                            350,000
                            
                            $
                            0.12
                            
                            10.00Outstanding,
      March 31, 2009
                            
                            5,900,000




The
following table summarizes additional information about the assumptions used to
determine the fair value of stock options granted during the three months ended
March 31, 2009:




Risk
      free rate
                
                
                2.00
      - 2.64
                %Stock
      price volatility
                
                
                121
                %Dividend
      yield
                
                
                0Term
                
                4.5
      - 6 years





The
estimated stock price volatility was derived based on the average volatility of
34 companies that the Company considered reasonably similar to it. The risk free
rate of return was based on the yield of US Treasury debt of comparable
maturities on the date of issuance of the Options.





During
the three month periods ended March 31, 2009 and March 31, 2008, the Company
recorded approximately $228,000 and $83,000, respectively, of stock-based
compensation for issuances under this Plan. The amount of compensation expense
not yet recognized is $1,992,729 which will be recognized over the next three
years.





On
July 28, 2008 and March 17, 2009, the Company’s Board of Directors adopted
the Clear Skies Solar, Inc. 2008 and 2009 Equity Incentive Plans, respectively,
each of which permits the granting of up to 2,500,000 shares of the Company’s
common stock pursuant to awards of incentive and non-qualified stock options
and/or restricted stock. The Company plans to seek shareholder approval of the
2008 Plan, and, in order for any awards there under to qualify as incentive
stock options, the Company must obtain such approval by July 27, 2009, and
to seek approval of the 2009 Plan by March 16, 2010. Options granted under each
of the 2008 and 2009 Plans must have a duration of not more than ten years and,
if an incentive stock option, then it must have an exercise price of not less
than the Fair Market Value (as defined in each Plan) on the date of
grant.  Options granted under these Plans are included in the table
above.





As of
March 31, 2009, the Company’s outstanding options granted prior to March 17,
2009 had no intrinsic value due to the stock price on that date. The options
granted on March 17, 2009 have an intrinsic value of $300,000.





As of
March 31, 2009, options granted to non-employees may be exercised to
purchase a total of 350,000 shares and options granted to employees may be
exercised to purchase a total of 393,333 shares.




13




Table of Contents




9. Contracts


The
Company generates billings based on the fulfillment of milestones, which are set
forth in the signed contract for each project. Milestones may include, but are
not limited to, initial permits being obtained, delivery of materials, and when
installation is subsequently complete.





As of March 31, 2009 and December 31, 2008
                                              
                                              2009
                                              
                                              
                                              2008Costs
      incurred on contracts
                                              
                                              $
                                              2,441,162
                                              
                                              
                                              $
                                              2,381,574Estimated
      earnings, less foreseeable losses
                                              
                                              
                                              423,899
                                              
                                              
                                              
                                              483,488B
                                              
                                              
                                              2,865,061
                                              
                                              
                                              
                                              2,865,062Billings
      to date
                                              
                                              
                                              (2,907,614
                                              )
                                              
                                              
                                              (2,905,394
                                              )Net
      costs and estimated earnings/losses in excess of billings
                                              
                                              $
                                              (42,553)
                                              
                                              
                                              $
                                              (40,332
                                              )These
      amounts are included in the accompanying March 31, 2009 and
      December 31, 2008 balance sheets under the following
      captions:Costs
      and estimated earnings in excess of billings
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —Billings
      in excess of costs and estimated earnings
                                              
                                              
                                              (42,553
                                              )
                                              
                                              
                                              (40,332
                                              )$
                                              (42,553)
                                              
                                              
                                              $
                                              (40,332
                                              )


10. Commitments and
Contingencies





Litigation





From time
to time, the Company is a party to various legal matters in the normal course of
business, the outcome of which, in the opinion of management, will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.





Lease
commitments





The
Company occupies premises, since June 25, 2008, consisting of 3,356 square
feet in a modern office building pursuant to a seven year lease. Annual fixed
rent under this lease is $93,968 in the first year escalating to $115,510 in the
seventh year. Additional payments are due for electricity and tax escalation in
amounts to be determined in each future year. The Company has provided a letter
of credit as security under this lease in the initial amount of $113,634 which
reduces to $56,817 after two years and to $28,408 after four years.





Employment
agreements





The
Company has entered into three year employment agreements with several employees
providing for severance arrangements. The severance arrangements become Company
obligations if the Company terminates such contract without “cause” or if the
covered employee terminates his contract with “good reason” (as such terms are
defined in the relevant agreement) and vary in amount (based on the salary in
effect on such termination date) and duration from three months to the remainder
of the contract term.


14


Table of Contents




Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.





This discussion should be read in
conjunction with our unaudited condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q and the notes thereto, as well as
the other sections of this Quarterly Report and our Annual Report for the year
ended December 31, 2008 on Form 10-K, including the “Certain Risks and
Uncertainties” and “Description of Business” sections thereof. This discussion
contains a number of forward-looking statements, all of which are based on our
current expectations and could be affected by the uncertainties and risk factors
described throughout this Quarterly Report and our Annual Report for the year
ended December 31, 2008 on Form 10-K. Our actual results may differ
materially.





Forward Looking
Statements




Certain statements in this Quarterly Report on Form
10-Q constitute "forward-looking statements". The words or phrases "can be,"
may," "could," "would," "expects,""believes," "seeks," "estimates," "projects"
and similar words and phrases are intended to identify such forward-looking
statements. Such forward-looking statements are subject to various risks and
uncertainties, including those described in the section "Risk Factors" included
in our form 10-K for the year ended December 31, 2008, and we caution you that
any forward-looking information provided by or on behalf of us is not a
guarantee of future performance. Our actual results could differ materially from
those anticipated by such forward-looking statements due to a number of factors,
some of which are beyond our control. All such forward-looking statements are
current only as of the date on which such statements were made. We do not
undertake any obligation to publicly update any forward-looking statement to
reflect events or circumstances after the date on which any such statement
is made or to reflect the occurence of unanticipated events.




Overview





We
deliver turnkey solar electricity installations and renewable energy technology
solutions to commercial, industrial and residential developer customers. Our
primary business is the design and installation of photovoltaic (sometimes
called “solar electric” or “PV” for short) solar power systems for the
commercial, industrial and residential developer markets. We have developed
certain proprietary photovoltaic panel mounting systems and trade secrets that
we believe reduce the required man-hours for system installations. We have also
developed XTRAX®, our
patented remote monitoring solution for measuring the production of renewable
energy systems, among other things. We have served customers in California, New
York and New Jersey. We also plan to expand to other locations where the amount
of sunshine, the cost of electricity and/or the availability of governmental
rebates make prospects of solar energy system sales appear
attractive.





Clear
Skies Group, Inc. was incorporated in New York in 2003 and began operations in
August 2005. As a result of the reverse merger transaction that we
consummated on December 20, 2007, our historical financial statements for
periods prior to the reverse merger are those of Clear Skies Group,
Inc.





Since we
began operations we have incurred annual net losses. As of March 31, 2009,
we had an accumulated deficit of $12,643,927 and we expect to incur
additional losses in the foreseeable future. Our revenues during the three month
periods ended March 31, 2009 and 2008 ware $11,113 and $153,224, respectively.
We recognized net losses of $1,155,579 (or a basic and diluted loss of $.04 per
common share) for the three months ended March 31, 2009 and a net loss of
$1,652,237 (or a basic and diluted loss of $.05 per common share) for the
comparable period in 2008.





Since our
inception, we have financed our operations primarily through sales of equity and
debt securities. From inception through March 31, 2009, we received net offering
proceeds from private sales of equity and debt securities (after deducting
placement agents’ discounts, commissions and expenses, and our offering
expenses) of approximately $6,800,000 in the aggregate.





Based on
our current plans and assumptions, which include our expectations relating to
the future sale of our equity and debt securities and entering into contracts
for the financing and installation of solar energy systems and the resulting
cash flows and revenues, we believe that we will have adequate resources to fund
our operations in 2009.  However, there can be no assurances that we
will be successful in entering into such contracts or arranging financing on
terms satisfactory to us, in which case there would be significant doubt as to
our ability to continue as a going concern.   As of May 8, 2009,
our available cash balance was under $20,000. Notwithstanding our recent sale of
convertible notes for gross proceeds of $400,000 and borrowings of $248,464 from
an unrelated third party, we will need to raise additional funds to pay
outstanding vendor invoices.





Depending
upon the needs of our customers, we may have to increase our installation staff
significantly in 2009 to ensure that installations can be completed while
applicable rebates remain in effect. We expect that our selling and general and
administrative expenses will increase in future periods, as we expand our
administrative, sales and installation workforce.




We
outgrew our original offices and in June 2008 leased new office space in
Mineola, New York as our headquarters which can accommodate our expected needs
for the next three years. See Lease Commitments in Note 10 above. In addition,
we anticipate establishing regional field offices for our sales teams.
Accordingly, we expect the rental expense component of our general and
administrative expenses to increase in future periods.





We expect
our immediate capital expenditures, which we do not expect to exceed
approximately $400,000, will be related to completing the Beta tests and initial
launch of XTRAX®. Subject
to industry and governmental approvals, and availability of funds, we expect to
be able to have a commercial XTRAX® product
during 2009; however, no assurance can be given that our expectations will be
met. Cranes and other solar energy system installation equipment are generally
available for rental on reasonable terms, and we do not have plans to acquire
any.





Generally,
we anticipate that our operating costs and expenses will increase in the future
to support a higher level of revenues. Increased costs will be attributable to
increased personnel, principally sales and installation personnel and support
staff for a multi-office infrastructure and increased marketing expenditures to
promote our services.


15




Table of Contents




Results of Operations: Comparison of
Three Month Periods Ended March 31, 2009 and 2008





Revenues
in the first quarter of 2009 were $11,113, a decrease of $142,111 from the
$153,224 of revenue for the three months ended March 31, 2008. In the 2009
period, revenue decreased as we had completed all work on our jobs in 2008 and
sold excess solar panel inventory, while in the 2008 quarter we only billed
relatively small contract and sub-contract work. Cost of revenue in the first
quarter of 2009 was $27,946, down $165,402 from the cost of revenue of $193,348
in the three months ended March 31, 2008. The gross margin loss in the 2009
quarter was $16,833, a decrease of $23,291 from the gross margin loss of $40,124
in the first quarter of 2008.





Selling
expenses decreased by $142,704 from the $233,959 incurred in the first quarter
of 2008 to $91,255 in the comparable 2009 quarter. The decrease is largely
accounted for by decreases in salaries of $57,000, public relations of $37,000
and travel of $36,000.





General
and administrative expenses were $1,040,474 for the three months ended March 31,
2009 compared to $1,401,957 in the three months ended March 31, 2008, for a
decrease of $361,483. This decrease is largely accounted for by approximately
(a) a decrease in legal fees of $282,000, (b) investor relations
expenses decreasing by $265,000, and (c) a $105,000 decrease in cash salaries,
offset in part by an increase in non-cash stock compensation expense of
$288,000.





Interest
income for the three months ended March 31, 2008 resulted from the
investment of excess cash from the private placement described in Note 2 above
compared to $470 of interest income in the 2009 comparable period.




16




Table of Contents




Liquidity and Capital Resources -
Going Concern





At March
31, 2009, we had an accumulated deficit of $12,643,927 and we expect to incur
additional losses in the foreseeable future. While we have funded our operations
since inception through private placements of equity and bridge loans, there can
be no assurance that adequate financing will continue to be available to us and,
if available, on terms that are favorable to us.





At March
31, 2009 we had approximately $8,000 in cash and cash
equivalents.  Based on our current plans and assumptions, which
include our expectations relating to the future sale of our equity and debt
securities and entering into contracts for the financing and installation of
solar energy systems and the resulting cash flows and revenues, we believe that
we will have adequate resources to fund our operations in
2009.  However, there can be no assurances that we will be successful
in entering into such contracts or arranging financing on terms satisfactory to
us, in which case there would be significant doubt as to our ability to continue
as a going concern. Notwithstanding our recent sale of convertible notes for
gross proceeds of $400,000 and borrowings of $248,464 from an unrelated third
party, we will need to raise additional funds to pay outstanding vendor
invoices. For a full description of the recent sale of convertible notes see our
form 8-K filed on May 13, 2009.





Clear
Skies Group, Inc. began operations in August 2005, and raised $310,000 of
gross proceeds from a private placement offering of securities to Rudd-Klein
Alternative Energy, LLC (“Rudd-Klein”) that closed on September 30, 2005.
On April 18, 2006, Rudd-Klein funded the remaining $100,000 of the purchase
price in such private placement. On April 25, 2006, Clear Skies Group, Inc.
sold its common stock in an additional private placement transaction that raised
gross proceeds of $100,000. From April 26, 2007 through July 26, 2007,
Clear Skies Group, Inc. sold its common stock and warrants to two separate
purchasers in a series of private placement transactions that raised aggregate
gross proceeds of $95,000. In the quarter ended September 30, 2007, Clear
Skies Group, Inc. issued an aggregate of $745,000 principal amount of bridge
notes in a private placement transaction. The purchasers of such bridge notes
paid an aggregate gross purchase price of $745,000 for such Bridge Notes and
shares of common stock of Clear Skies Group, Inc. In accordance with the terms
of the Bridge Notes, the holders of all $745,000 of outstanding principal amount
of Bridge Notes invested in our private placement that closed in
December 2007 by exchanging the Bridge Notes for an aggregate of 1,490,000
shares of our common stock (i.e. the number of shares of our common stock
offered for sale in the Private Placement for an aggregate purchase price of
$745,000). The accrued interest on the Bridge Notes was paid out of the proceeds
of the December 2007 private placement. In the fourth quarter of 2007,
Clear Skies Group, Inc. borrowed an aggregate of $250,000 and issued 8%
promissory notes to evidence such borrowing, which notes were repaid upon
closing of the private placement in December 2007. In closings on
December 20, 2007 and December 24, 2007, we raised an aggregate of
approximately $5,931,000 in net proceeds (in addition to eliminating $745,000 of
indebtedness) from the private placement of 16,000,000 shares of our common
stock.





Several
of our officers and directors, or their affiliates, have from time to time
extended loans to Clear Skies Group, Inc. or agreed to defer compensation
payable to them in order to fund our operating expenses. In this regard:
(i) Quixotic Systems, Inc. (“Quixotic”), an affiliate of Richard Klein, who
is a member of our board of directors, loaned $285,000 ($175,000 of which
constitute amounts Quixotic has paid in connection with a settlement agreement
among Quixotic, Alpha Energy and Clear Skies Group, Inc., dated as of
August 30, 2007), which loan had been repaid in full, together with 10%
interest compounded daily, by December 31, 2007; and (ii) Gelvin
Stevenson, our Secretary and Treasurer loaned $20,000, which had been repaid in
full as of December 31, 2007. Furthermore, Ezra Green, our Chairman and
Chief Executive Officer, agreed to the deferral of $73,259 of his compensation,
of which $69,366 remained unpaid as of December 31, 2007 (and was recorded
as a balance due to related party at December 31, 2007). As of
March 18, 2008, Mr. Green’s deferred compensation had been paid in
full. In addition, Mr. Green had advanced $30,275 to us in 2006 and an
additional $70,037 to us in 2007 (which has been recorded as a balance of
$100,312 due to related party at December 31, 2007). This related party
amount was also repaid in full by March 18, 2008. Such loans and other
arrangements were interest free (except for Quixotic) and had not been
memorialized by written promissory notes. In consideration for the extension and
maintenance of such credit and deferral of salary, on May 7, 2007, Clear
Skies Group, Inc. granted Mr. Green, Quixotic and Dr. Stevenson
securities that were exchanged for 610,452, 290,691 and 77,517 shares of our
common stock, respectively, in our reverse merger.




17




Table of Contents




We will
need to raise additional funds through either the licensing or sale of our
technologies, products and services or additional public or private offerings of
our securities. There can be no assurance that we will be able to obtain further
financing, do so on reasonable terms, or do so on terms that would not
substantially dilute our current stockholders’ equity interests in us. If we are
unable to raise additional funds on a timely basis, or at all, we probably
will not be able to continue as a going concern.





We expect
to put our present and anticipated capital resources to the following
uses:





•
            payment
      of operating expenses;




•
            towards
      our budget for the engagement of investor relations and public relations
      firms;




•
            possibly
      for strategic acquisitions, if and to the extent we determine
      appropriate;




•
            completion
      of beta testing and commercialization of XTRAX®;
      and




•
            for
      general working capital purposes.





Commitments and
Contingencies





We occupy
premises consisting of 3,356 square feet in a modern office building pursuant to
a seven year lease. Annual fixed rent under this lease is $93,968 in the first
year escalating to $115,510 in the seventh year. Additional payments are due for
electricity and real estate tax escalation in amounts to be determined in each
future year. We have provided a letter of credit as security under this lease in
the initial amount of $113,634 which reduces to $56,817 after two years and to
$28,408 after four years. Our obligations for each of the next five calendar
years are:




2009
                  
                  $
                  100,0532010
                  
                  $
                  103,3992011
                  
                  $
                  104,6432012
                  
                  $
                  106,0072013
                  
                  $
                  109,717





Certain Risks and
Uncertainties





Our
Annual Report on Form 10-K for the year ended December 31, 2008 includes a
detailed discussion of our risk factors under the heading “Certain Risks and
Uncertainties.” The information presented in this 10-Q should be read in
conjunction with the risk factors and information disclosed in such Form
10-K.





Off-Balance Sheet
Arrangements





We did
not engage in any off-balance sheet arrangements during the three month periods
ended March 31, 2009 and 2008.





Item 3. Quantitative and
Qualitative Disclosures About Market Risk.





Due to
our status as a smaller reporting company, this Item is not
applicable.




18




Table of Contents




Item 4T. Controls and
Procedures.





Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
of the period covered by this Quarterly Report on Form 10-Q. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based upon
our evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective, as of the
three months ended March 31. 2009, in ensuring that material information that we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and
forms.




In
connection with the preparation of our Annual Report on Form 10-KSB, as amended,
for the year ended December 31, 2007, management identified a material weakness,
due to insufficient resources in our accounting and finance department,
resulting in (i) an ineffective review, monitoring and analysis of
schedules, reconciliations and financial statement disclosures and (ii) the
misapplication of U.S. GAAP and SEC reporting requirements. Due to the effect of
the lack of resources, including a lack of resources that are appropriately
qualified in the areas of U.S. GAAP and SEC reporting, and the potential impact
on the financial statements and disclosures and the importance of the annual and
interim financial closing and reporting process, in the aggregate, there is more
than a remote likelihood that a material misstatement of the financial
statements would not have been prevented or detected for the year ended
December 31, 2007.





Remediation
Plans Implemented in 2008





Management
has remediated the above-mentioned weakness in our internal control over
financial reporting and has implemented the following steps:





•
            Hired
      additional accounting personnel (a full time CFO was hired in
      January 2008 and another full time senior level accountant was hired
      in February 2008 who was replaced by an experienced controller in
      June 2008);




•
            Purchased
      and installed new accounting
software;




•
            Established
      a detailed timeline for review and completion of financial reports to be
      included in our Forms 10-Q and
10-K;




•
            Engaged
      the use of a third party accounting service provider as needed to further
      support and supplement our internal staff in accounting and related areas
      when necessary; and




•
            Employed
      the use of appropriate supplemental SEC and U.S. GAAP checklists in
      connection with our closing process and the preparation of our Forms 10-Q
      and 10-K.





The
implementation of these remediation plans was initiated and continued during
2008. The material weakness was considered remediated and management has
concluded that the procedures are operating effectively.





If we are
not able to implement controls to avoid the occurrence of material weaknesses in
our internal control over financial reporting in the future, then we might
report results that are not consistent with our actual results and we may need
to restate results that will have been previously reported.





Changes in Internal Control over
Financial Reporting





There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2009.




19




Table of Contents




PART
II


OTHER INFORMATION


Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.





During
the three months ended March 31, 2009, we have issued unregistered securities to
the persons described below. These transactions did not involve any
underwriters, underwriting discounts or commissions, or any public offering.
Each sale of these securities was deemed to be exempt from the registration
requirements of the Securities Act of 1933 by virtue of Section 4(2)
thereof, and/or Rule 506 of Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering.





On
January 6 and 13, 2009, we issued 25,000 shares and 200,000 shares,
respectively, of our common stock to an investor relations firm and to a law
firm, respectively, as compensation for services provided to us pursuant to
agreements dated October 7, 2007, and January 5, 2009.  Each
issuance was valued at the closing price of the Company’s common stock on the
last trading day preceding the date of issue. Each certificate carries a
restricted stock legend on its face.





Item 6. Exhibits.
..





The
following exhibits are filed as part of, or incorporated by reference into, this
Report:




Exhibit No.
                  
                  Description31.1*
                  
                  Section 302
      Certification of Principal Executive Officer31.2*
                  
                  Section 302
      Certification of Principal Financial Officer32.1*
                  
                  Section 906
      Certification of Principal Executive Officer and Principal Financial
      Officer





*
              Filed
      herewith






20




Table of Contents




SIGNATURES


Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





CLEAR
      SKIES SOLAR, INC.Date:
      May 15, 2009
                    By:
                    /s/
      Ezra J. GreenName:
                    Ezra
      J. GreenTitle:
                    Chairman
      & Chief Executive Officer(Principal Executive
      Officer)Date:
      May 15, 2009
                    By:
                    /s/
      Arthur L. GoldbergName:
                    Arthur
      L. GoldbergTitle:
                    Chief
      Financial Officer
                      (Principal
      Financial and Accounting
Officer)




21




Table of Contents




EXHIBIT
INDEX





Exhibit
      No.
                                      
                                      Description31.1*
                                      
                                      Section 302
      Certification of Principal Executive Officer31.2*
                                      
                                      Section 302
      Certification of Principal Financial Officer32.1*
                                      
                                      Section 906
      Certification of Principal Executive Officer and Principal Financial
      Officer




*
              Filed
      herewith






22