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WEST > SEC Filings for WEST > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for WESTINGHOUSE SOLAR, INC.


14-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All references to the "Company," "we," "our," and "us" refer to Westinghouse Solar, Inc. and its subsidiaries ("Westinghouse Solar").

The following discussion highlights what we believe are the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report and in our Annual Report on Form 10-K. This discussion contains "forward-looking statements," including but not limited to expectations regarding revenue growth, net sales, gross profit, operating expenses and performance objectives, and statements using the terms "believes," "expects," "will," "could," "plans," "anticipates," "estimates," "predicts," "intends," "potential," "continue," "should," "may," or the negative of these terms or similar expressions. These forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such risks and uncertainties include, without limitation, the risks described below in Item 1A. of Part II of this Quarterly Report. Further information on potential risk factors that could affect our future business and financial results and financial condition can be found in our periodic filings with the Securities and Exchange Commission (the "SEC"). We undertake no obligation to update any of these forward-looking statements.

Company Overview

We are a designer and manufacturer of solar power systems and solar panels with integrated microinverters (which we call AC solar panels). We design, market and sell these solar power systems to solar installers, trade workers and do-it-yourself customers in the United States and Canada through distribution partnerships, our dealer network and retail outlets. Our products are designed for use in solar power systems for residential and commercial rooftop customers. Prior to September 2010, we were also in the solar power installation business.

On May 9, 2012, we announced the execution of an agreement and plan of merger with CBD Energy Limited, a diversified renewable energy company based in Sydney, Australia (CBD), which contemplates a merger in which CBD would become our parent company, subject to shareholder approvals and other customary closing conditions. While the merger has been repeatedly delayed, the companies continue working towards completing the merger in 2013. In the meantime, our supply relationships have been disrupted, our revenue has declined significantly and we have had to implement significant cost reductions and lay off employees.

In September 2007, we introduced our new "plug and play" solar panel technology (under the brand name "Andalay"), which we believe significantly reduces the installation time and costs, and provides superior reliability and aesthetics, when compared to other solar panel mounting products and technology. Our panel technology offers the following features: (i) mounts closer to the roof with less space in between panels; (ii) all black appearance with no unsightly racks underneath or beside panels; (iii) built-in wiring connections; (iv) approximately 70% fewer roof-assembled parts and approximately 50% less roof-top labor required; (v) approximately 25% fewer roof attachment points; (vi) complete compliance with the National Electric Code and UL wiring and grounding requirements. We have three U.S. patents (Patent No. 7,406,800, Patent No. 7,832,157 and Patent No. 7,866,098) that cover key aspects of our Andalay solar panel technology, as well as U.S. Trademark No. 3481373 for registration of the mark "Andalay." In addition to these U.S. patents, we have 6 foreign patents. Currently, Westinghouse Solar has nine issued patents and 23 other pending U.S. and foreign patent applications that cover the Andalay technology working their way through the USPTO and foreign patent offices.

In February 2009, we announced a strategic relationship with Enphase, a leading manufacturer of microinverters, to develop and market solar panel systems with ordinary AC house current output instead of high voltage DC output. We introduced Andalay AC panel products and began offering them to our customers in the second quarter of 2009. Andalay AC panels cost less to install, are safer, and generally provide higher energy output than ordinary DC panels. Andalay AC panels deliver 5-25% more energy compared to ordinary panels, produce safe household AC power, and have built-in panel level monitoring, racking, wiring, grounding and microinverters. With 80% fewer parts and 5 - 25% better performance than ordinary DC panels, we believe Andalay AC panels are an ideal solution for solar installers, trade workers and do-it-yourself customers.

Concentration of Risk in Customer and Supplier Relationships

Disruption of Supplier Relationships

Historically, we obtained virtually all of our solar panels from Suntech. On March 25, 2011, we entered into a volume supply agreement for a new generation of our solar panel products with Lightway, and in August 2011, we began purchasing solar panels from Lightway. Both Suntech and Lightway manufacture panels for us that are built to our unique specifications. We had a limited amount of remaining inventory on hand as of March 31, 2013, and although we are actively working with a CBD preferred supplier facility in Australia to produce Westinghouse Solar modules, the disruption and loss of our historical primary component supply relationships is severely disruptive to our operations. In recent periods, because of our cash position and liquidity constraints, we have been late in making payments to both of our panel suppliers. On March 30, 2012, pursuant to our Supply Agreement with Lightway, we issued 1,900,000 shares of our common stock to Lightway in partial payment of our past due account payable to them. At the time of issuance, the shares were valued at $1,045,000. On May 1, 2012, Suntech America filed a lawsuit against us for breach of contract, alleging that it delivered products to us and has not received full payment, and seeking payment of approximately $990,000. On July 31, 2012, we and Suntech entered into a settlement of this dispute, which allows and requires us make payment of the account balance over time, with the unpaid balance accruing interest at 10% per annum. As of March 31, 2013, we have included in our Condensed Consolidated Balance Sheets, under accounts payable, a balance due to Suntech America of $870,000, plus accrued interest of $76,438, which is included in accrued liabilities in our Condensed Consolidated Balance Sheets. We do not anticipate that our prior supplier will make any further shipments to us, which is resulting in decreased sales and revenue for us, and adversely affecting our customer relationships. We currently do not have any unshipped orders for solar panel product pending with Suntech or Lightway and we have not received any shipments of panels since April 2012.


Concentration of Risk in Customer Relationships

The relative magnitude and the mix of revenue from our largest customers have varied significantly quarter to quarter. During the quarter ended March 31, 2013 and 2012, three customers have accounted for significant revenues, varying by period, to our company: Lennar Corporation (Lennar), a leading national homebuilder, Lennox International Inc. (Lennox), a global leader in the heating and air conditioning markets, and Lowe's Companies, Inc. (Lowe's), a nationwide home improvement retail chain. For the three months ended March 31, 2013 and 2012, the percentages of sales to Lennar, Lennox and Lowe's are as follows:

                                Three Months Ended March 31,
                                 2013                   2012
Lennox International Inc.             30.4 %                 45.8 %
Lowe's Companies, Inc.                 2.3 %                  5.1 %
Lennar Corporation                     0.0 %                 18.9 %

We had no receivable balance from Lennar as of March 31, 2013 or December 31, 2012. Lennox accounted for 4.5% and 5.9% of our gross accounts receivable as of March 31, 2013 and December 31, 2012, respectively. Lowe's accounted for 1.2% and 4.0% of our gross accounts receivable as of March 31, 2013 and December 31, 2012.

We maintain reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded management's estimates. At March 31, 2013 and December 31, 2012, accounts payable included amounts owed to our top three vendors of approximately $886,000 and $960,000, respectively.

Three Months Ended March 31, 2013 as Compared to Three Months Ended March 31, 2012

Results of Operations

The following table sets forth, for the periods indicated, certain information
related to our operations, expressed in dollars and as a percentage of net
sales:

                                                          Three Months Ended March 31,
                                                      2013                             2012
Net revenue                                $     81,194          100.0 %    $  2,422,340         100.0 %
Cost of goods sold                               87,742          108.1 %       2,179,969          90.0 %
    Gross profit                                 (6,548 )         (8.1 )%        242,371          10.0 %
Operating expenses
Sales and marketing                             300,395          370.0 %         623,180          25.7 %
General and administrative                      711,424          876.2 %       2,063,409          85.2 %
Total operating expenses                      1,011,819        1,246.2 %       2,686,589         110.9 %
Loss from continuing operations              (1,018,367 )     (1,254.3 )%     (2,444,218 )      (100.9 )%
Other income (expense)
Interest income (expense), net                   (5,299 )         (6.5 )%          4,220           0.2 %
Adjustment to the fair value of common
stock warrants                                        7            0.0 %        (436,943 )       (18.0 )%
Total other income (expense)                     (5,292 )         (6.5 )%       (432,723 )       (17.9 )%
Loss before provision for income taxes
and discontinued operations                  (1,023,659 )     (1,260.8 )%     (2,876,941 )      (118.8 )%
Provision for income taxes                            -            0.0 %               -           0.0 %
Net loss from continuing operations
(Note 3)                                     (1,023,659 )     (1,260.8 )%     (2,876,941 )      (118.8 )%
Gain (loss) from discontinued
operations, net of tax                            2,925            3.6 %          25,853           1.1 %
Net loss                                     (1,020,734 )     (1,257.2 )%     (2,851,088 )      (117.7 )%
Preferred stock dividend                        (53,220 )        (65.5 )%        (21,259 )        (0.9 )%
Preferred deemed dividend                      (270,000 )       (332.5 )%              -           0.0 %
Net loss attributable to common
stockholders                               $ (1,343,954 )     (1,655.2 )%   $ (2,872,347 )      (118.6 )%


Net loss per common and common
equivalent share (basic and diluted)       $      (0.04 )                   $      (0.17 )

Weighted average shares used in
computing loss per common share: (basic
and diluted)                                 33,051,363                       16,145,962


Net revenue

We generate revenue from the sale of solar power systems. For the three months ended March 31, 2013, we generated $81,000 of revenue, a decrease of $2.3 million, or 96.6%, compared to $2.4 million of revenue for the three months ended March 31, 2012. The decrease in revenue was due to a decrease in unit volume of product sales to our dealer network and strategic partners, lower average selling prices, limited inventory levels due to severe, ongoing supplier relationship issues, and the overall soft solar market conditions following punitive tariff announcements in the U.S. related to solar modules manufactured in China. In addition, as of March 31, 2013, we had no current or unshipped orders for solar panel product pending with Suntech. Our supply relationship with Lightway is stalled. We are actively working with a CBD preferred supplier facility in Australia to produce Westinghouse Solar modules. The processes to obtain necessary product certifications for both U.S. and Australian distribution are currently underway and are expected to be completed in the second quarter of this year. Once the certifications are received, we anticipate shipping product from the new production line to customers by early in the third quarter of this year. Unless we rapidly secure alternative, cost competitive source of supply, our inventory will be depleted and our revenue will further diminish, causing disruption to our operations.

Cost of goods sold

Cost of goods sold as a percent of revenue for the three months ended March 31, 2013, was 108.1% of net revenue, compared to 90.0% for the three months ended March 31, 2012. Gross loss for the three months ended March 31, 2013 was $7,000, or 8.1% of revenue, compared to gross profit of $242,000 or 10.0% of revenue for the same period in 2012. The decrease in gross margin for the year three months ended March 31, 2013 compared to the three months ended March 31, 2012, was due to higher inventory overhead allocations related to lower revenue volume and lower average selling prices.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2013 were $300,000, or 370.0% of net revenue as compared to $623,000, or 25.7% of net revenue during the same period of the prior year. The $323,000 decrease in sales and marketing expenses for the three months ended March 31, 2013 compared to the same period in 2012 was primarily due to decreases in payroll and commission costs of $195,000, advertising costs and trade shows expense of $90,000, stock compensation costs of $71,000 and travel of $28,000, partially offset by an increase in licensing fees we owe to Westinghouse Electric Corporation of $63,000. The decrease in payroll and stock compensation costs was due to lower headcount.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2013 were $711,000, or 876.2% of net revenue as compared to $2.1 million, or 85.2% of net revenue during the same period of the prior year. The decrease in general and administrative expense for the three months ended March 31, 2013 compared to the same period in 2012, was due primarily to lower legal fees of $495,000, payroll costs of $328,000, stock compensation costs of $223,000, research and development costs of $148,000, insurance expense of $31,000 and travel costs of $24,000. The decrease in legal and professional fees related to the pending CBD merger transaction and patent litigation costs in the prior year. The decrease in payroll and stock compensation costs was due to lower headcount. The decrease in research and development costs was due to lower prototype parts and material and lower headcount.

Interest, net

During the three months ended March 31, 2013, net interest expense was approximately $5,000 compared with net interest income of $4,000 for the same period in 2012.

Adjustment to the fair value of common stock warrants

During the three months ended March 31, 2012, we recorded mark-to-market adjustments to reflect the fair value of outstanding common stock warrants accounted for as a liability, resulting in an unrealized loss of $437,000 in our condensed consolidated statements of operations. The fair value of the warrants is lower primarily due to a decrease in the price of our common stock and a shorter life for the remainder of our outstanding warrants.

Income taxes

During the three months ended March 31, 2013 and 2012, there was no income tax expense or benefit for federal and state income taxes reflected in our condensed consolidated statements of operations due to our net loss and a valuation allowance on the resulting deferred tax asset.


Net loss from continuing operations

Net loss from continuing operations for the three months ended March 31, 2013 was $1.0 million, or $0.04 per share, compared to a net loss from continuing operations of $2.9 million, or $0.17 per share, for the three months ended March 31, 2012. For the quarter ended March 31, 2012, the net loss included an unfavorable non-cash adjustment to the fair value of common stock warrants of $437,000. Excluding the impact of the common stock warrant adjustment, net loss from continuing operations for the quarter ended March 31, 2012 was $2.4 million, or $0.15 per share.

Gain (loss) from discontinued operations

As a result of the exit from the installation business on September 7, 2010, we recorded a $3,000 net gain from the discontinuance of our installation business segment for the three months ended March 31, 2013, compared with a gain of $26,000 during the same period in 2012.

Preferred deemed dividend

On October 18, 2012, we entered into a securities purchase agreement relating to the sale and issuance of up to 1,245 shares of our Series C Preferred Stock, for aggregate proceeds of up to $1,245,000. At the initial closing, we sold and issued 750 shares of Series C Preferred, for initial aggregate proceeds of $750,000. On November 2, 2012, we sold an aggregate of 350 additional shares of our Series C Preferred to the purchasers for aggregate proceeds of $350,000. As a result of the contingent conversion feature on the Series C Preferred, which reduced the conversion price from $0.155 to $0.08 per share on the total 750 shares of Series C Preferred Stock issued and outstanding at November 2, 2012, and which resulted in an increase in the number of common shares issuable, we recognized a preferred deemed dividend of $363,000.

On January 24, 2013, we provided to the Purchasers of our Series C Preferred Stock a draw down notice under the purchase agreement. The purchasers agreed to accept the new draw down notice and thereby extend our right to exercise a "put" to sell additional Series C Preferred beyond the Securities Purchase Agreement's prior expiration date of December 31, 2012. As a result of the draw down, we sold an aggregate of 75 additional shares of Series C Preferred to the Purchasers for aggregate proceeds of $75,000. Based on the closing price of our common stock as reported on the OTCQB Marketplace on January 24, 2013 (which was $0.05 per share), the 75 shares of Series C Preferred to be issued pursuant to the draw down would be convertible into 1,500,000 shares of our common stock. As a result of the contingent conversion feature on the Series C Preferred, which reduced the conversion price from $0.08 to $0.05 per share on the total 720 shares of Series C Preferred Stock issued and outstanding at January 24, 2013, and which resulted in an increase in the number of common shares issuable, we recognized additional preferred deemed dividends of $270,000. The net loss attributable to common shareholders reflects both the net loss and the deemed dividend.

Liquidity and Capital Resources

The current economic downturn presents us with challenges in meeting the working capital needs of our business. Our primary requirements for working capital are to fund purchases for solar panels and microinverters, and to cover our payroll and lease expenses. For the quarter ended March 31, 2013 and for the year ended December 31, 2012, we have incurred net losses and negative cash flows from operations. We have undertaken several equity financing transactions to provide the capital needed to sustain our business and we have dramatically reduced our headcount and other variable expenses. In addition, we expect to incur a net loss from operations for the year ending December 31, 2013. Based on current cash projections for 2013, we intend to address ongoing working capital needs through cost reduction measures and liquidation of remaining inventory, along with raising additional equity. In January 2013, our board of directors approved actions to dramatically reduce our variable operating costs, including a 12 person employee headcount reduction effective January 15, 2013, for the period through the anticipated merger closing with CBD. No restructuring charges or severance payments were incurred. While the merger has been repeatedly delayed, the companies continue working towards completing the merger in 2013. In the event that revenue is lower or the merger is delayed further, additional staffing reductions and expense cuts could occur. Our revenue levels remain difficult to predict, and we anticipate that we will continue to sustain losses in the near term, and we cannot assure investors that we will be successful in reaching break-even.

As of March 31, 2013, we had approximately $21,000 in cash on hand. Our potentially available $750,000 credit facility is subject to limitations based on the level of our qualifying accounts receivable, and at March 31, 2013, we had no qualifying accounts receivable. In addition, due to Suntech entering judgment against us on March 15, 2013, our credit facility is currently unavailable. Under the Merger Agreement we entered into with CBD, we are required to raise sufficient equity capital, with the cooperation and support of CBD, to meet our own liquidity and working capital requirements. In addition, prior to closing of the merger, CBD may provide capital funding support to us if necessary, subject to conditions and limitations as provided in the Merger Agreement.

In recent months, because of our cash position and liquidity constraints, we have been late in making payments to both of our panel suppliers. We had a limited amount of remaining inventory on hand as of March 31, 2013. We do not have any unshipped orders for solar panel product pending with Suntech, and our supply relationship with Lightway is currently stalled. We are actively working with a CBD preferred supplier facility in Australia to produce Westinghouse Solar modules. The processes to obtain necessary product certifications for both U.S. and Australian distribution are currently underway and are expected to be completed in the second quarter of this year. Once the certifications are received, we anticipate shipping product from the new production line to customers by early in the third quarter of this year. Although we believe we can find alternative suppliers for solar panels manufactured to our specifications, unless we are able to rapidly secure alternative sources of supply, our inventory and revenue could diminish significantly, causing disruption to our operations in the next few quarters.


The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. Our significant operating losses, negative cash flow from operations, and challenges in rapidly securing alternative sources of supply for solar panels, raise substantial uncertainty about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty, and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. We believe our current cash balance, projected financial results from our operations, and the amounts that should be available to us through debt and equity financing provide sufficient resources and operating flexibility to fund our anticipated cash needs, through at least the next 12 months; however, there can be no assurance that we will be able to raise additional funds on commercially reasonable terms, if at all. The current economic downturn adds uncertainty to our anticipated revenue levels and to the timing of cash receipts, which are needed to support our operations. It also worsens the market conditions for seeking equity and debt financing. As a result of our delisting from the Nasdaq Capital Market in September 2012, we are no longer eligible to file new registration statements on Form S-3, which may make it more costly and more difficult for us to obtain additional equity financing. We currently anticipate that we will retain all of our earnings, if any, for development of our business and do not anticipate paying any cash dividends on common stock in the foreseeable future.

Our Line of Credit

On February 15, 2011, we entered into a Business Financing Agreement (the "2011 Credit Facility") with Bridge Bank, National Association ("Bridge Bank") to finance our accounts receivables. The 2011 Credit Facility provides for a credit limit of $750,000, representing the maximum amount of advances based on up to 50% of $1.5 million of gross eligible accounts receivables. The 2011 Credit Facility may be terminated at any time by either party and may be renewed under similar terms if acceptable and agreed to by both parties. If any advance is not repaid in full within 90 days from the earlier of (a) invoice date, or (b) the date on which such advance is made, we are obligated to immediately pay the outstanding amount to Bridge Bank. Outstanding loans under the 2011 Credit Facility will accrue interest at the Bridge Bank Prime rate plus 3.0% (annualized) of the daily gross financed amount outstanding. The 2011 Credit Facility is secured by substantially all of our assets. As of March 31, 2013, there were no borrowings under the 2011 Credit Facility. In addition, due to Suntech entering judgment against us, our credit facility is currently unavailable.

Equity Financing Activity

On March 30, 2012, we entered into an amendment with the outstanding Series K warrants (Series K Amendment) removing the provision for any future price adjustment to the exercise price. On March 30, 2012, the fair value of the warrants was estimated using Black-Scholes with the following weighted average assumptions: risk-free interest rate of 0.5%, an expected life of 3.0 years; an expected volatility factor of 109.3% and a dividend yield of 0.0%. The fair value of the warrants decreased to $481,000 as of March 30, 2012 and we recognized a $425,000 unfavorable non-cash adjustment from the change in fair value of these warrants during the three months ended March 31, 2012. As a result of the March 30, 2012 Series K Amendment the fair value of the warrants of $481,000 was reclassified from warrant liability to equity.

On March 30, 2012, pursuant to our supply agreement with Lightway, we issued 1,900,000 share of our common stock to them. The shares were issued at $0.55 per share based on the latest closing sale price on the date of issuance.

On August 14, 2012, we entered into a securities purchase agreement with an institutional accredited investor relating to the sale of 2,000,000 shares of our common stock at a price of $0.25 per share. The aggregate purchase price was $500,000.

On October 18, 2012, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale and issuance of up to 1,245 shares of our newly created Series C 8% Convertible Preferred Stock at a price of $1,000 per share, for aggregate proceeds of up to $1,245,000. At the initial closing, we sold and issued 750 shares of Series C Preferred, for initial aggregate proceeds of $750,000. Subsequently, on November 2, 2012, we sold and issued 350 shares of Series C Preferred for proceeds of $350,000. On January 24, 2013, we provided to the purchasers a draw down notice under the Purchase Agreement. The purchasers agreed to accept the new draw down notice and thereby extend our right to exercise a "put" to sell additional Series C . . .

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