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WEST > SEC Filings for WEST > Form 10-K on 10-Mar-2014All Recent SEC Filings

Show all filings for ANDALAY SOLAR, INC.

Form 10-K for ANDALAY SOLAR, INC.


10-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 Annual Report. This discussion contains "forward-looking statements," which can be identified by the use of words such as "expects," "plans," "will," "may," "anticipates," "believes," "should," "intends," "estimates" and other words of similar meaning. These forward-looking statements are subject to risks and uncertainties that may cause 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 on page 1 of this Annual Report, and the risks described in Item 1A above.

Company Overview

We are a designer and manufacturer of integrated 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 and do-it-yourself customers in the United States, Canada, the Caribbean and South America 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.

In September 2007, we introduced our "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) 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 five U.S. patents (Patent No. 7,406,800, Patent No. 7,832,157, Patent No. 7,866,098, Patent No. 7,987,614 and Patent No. 8,505,248) 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 7 foreign patents. Currently, we have 12 issued patents and 15 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 and do-it-yourself customers.

As a result of our announced exit from the solar panel installation business, our installation business has been reclassified in our financial statements as discontinued operations. The exit from the installation business was essentially completed by the end of the fourth quarter of 2010.

Concentration of Risk

Financial instruments that potentially subject us to credit risk are comprised of cash and cash equivalents, which are maintained at high quality financial institutions. At December 31, 2013 and 2012, we had no deposits in excess of the Federal Deposit Insurance Corporation limit of $250,000.

Concentration of Risk in Customer Relationships

Supplier Relationships

Historically, we obtained virtually all of our solar panels from Suntech and Lightway. During 2012, because of our cash position and liquidity constraints, we were late in making payments to both of these 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 filed a complaint for breach of contract, goods sold and delivered, account stated and open account against us in the Superior Court of the State of California, County of San Francisco. Suntech alleged that it delivered products and did not receive full payment from us. On July 31, 2012, we and Suntech entered into a settlement of this dispute. Because of our inability to make scheduled settlement payments, on March 15, 2013, Suntech entered a judgment against us in the amount of $946,438. As of December 31, 2013, Suntech has not sought to enforce its judgment. As of December 31, 2013, we have included in accounts payable in our Consolidated Balance Sheets a balance due to Suntech America of $946,438. We currently have no unshipped orders from Suntech or Lightway.

In May 2013, we entered into a new supply agreement for assembly of our proprietary modules with Environmental Engineering Group Pty Ltd ("EEG"), an assembler of polycrystalline modules located in Australia. In August 2013, we began receiving product from EEG and began shipping product to customers during the third calendar quarter of 2013. In September 2013, we entered into a second supply agreement for assembly of our proprietary modules with Tianwei New Energy Co, Ltd. (Tianwei), a panel supplier located in China. We began receiving product from Tianwei in February 2014. Although we believe we can find alternative suppliers for solar panels manufactured to our specifications, our operations would be disrupted unless we are able to rapidly secure alternative sources of supply, our inventory and revenue could diminish significantly, causing disruption to our operations. Based on the outcome of the most recent investigations by the Commerce Department launched on December 31, 2013, tariffs could be imposed on the solar panels that we import pursuant to our supply agreement with Tianwei. Any such tariff could cause the prices for solar power systems in the United States to increase and result in reduced market demand for solar power systems, which would negatively impact our revenue.


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Customer Relationships

The relative magnitude and the mix of revenue from our largest customers have varied significantly quarter to quarter. During the twelve months ended December 31, 2013 and 2012, four customers have accounted for significant revenues, varying by period, to our company: Sustainable Environmental Enterprises (SEE), a leading provider of renewable energy and development projects located in New Orleans, Louisiana, Lennox International Inc. (Lennox), a global leader in the heating and air conditioning markets, Lowe's Companies, Inc. (Lowe's), a nationwide home improvement retail chain, and Lennar Corporation (Lennar), a leading national homebuilder. For the twelve months ended December 31, 2013 and 2012, the percentages of sales to SEE, Lennar, Lennox and Lowe's are as follows:

                                          Twelve Months Ended
                                              December 31,
                                           2013           2012

Sustainable Environmental Enterprises         52.8 %         7.5 %
Lennox International Inc.                      2.5 %        30.1 %
Lowe's Companies, Inc.                         6.9 %         7.7 %
Lennar Corporation                             0.0 %         8.8 %

SEE accounted for approximately $499,000 or 86.7% of our gross accounts receivable as of December 31, 2013. As of the date hereof, the $499,000 receivable from SEE is past due. SEE has indicated that the past-due payment is late due to a processing delay of a rebate owed to it from the State of Louisiana and expects that full payment will be made in a few weeks upon its receipt of the rebate. Notwithstanding, no assurance can be given by us as to when a rebate will be issued to SEE by the State of Louisiana or as to when or to what extent payment will be received by us if it isn't issued timely. We had no receivable balance from Lennox, Lowe's or Lennar as of December 2013. Lennox and Lowe's accounted for 5.9% and 4.0%, respectively, of our gross accounts receivable as of December 31, 2012. We had no receivable balance for SEE or Lennar as of December 31, 2012.

We maintain reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded management's estimates. Our top three vendors accounted for approximately 25% and 36% of accounts payable as of and December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, accounts payable included amounts owed to our top three vendors of approximately $1.1 million and $960,000, respectively.


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Results of Operations

The following table sets forth, for the periods indicated, certain information related to our operations as a percentage of our net revenue:

                                               2013             %             2012             %

Net revenue                                $  1,124,836         100.0     $  5,222,248         100.0
Cost of goods sold                            1,121,612          99.7        5,249,121         100.5
Gross profit (loss)                               3,224           0.3          (26,873 )        (0.5 )
Operating Expenses
Sales and marketing                             887,305          78.9        2,078,830          39.8
General and administrative                    2,377,703         211.4        6,012,542         115.1
Total operating expenses                      3,265,008         290.3        8,091,372         154.9
Loss from operations                         (3,261,784 )      (290.0 )     (8,118,245 )      (155.5 )
Other income (expense)
Interest income (expense), net                  (65,031 )        (5.8 )       (103,429 )        (2.0 )
Other income                                    420,000          37.3                -
Adjustment to the fair value of embedded
derivatives                                      65,962           5.9                -
Adjustment to the fair value of common
stock warrants                                        9           0.0         (416,526 )        (8.0 )
Total other income (expense)                    420,940          37.4         (519,955 )       (10.0 )
Loss before provision for income taxes       (2,840,844 )      (252.6 )     (8,638,200 )      (165.4 )
Provision for income taxes                            -                              -
Net loss from continuing operations          (2,840,844 )      (252.6 )     (8,638,200 )      (165.4 )
Gain from operations of discontinued
component                                        10,797           1.0           15,807           0.3
Net loss                                     (2,830,047 )      (251.6 )     (8,622,393 )      (165.1 )
Preferred stock dividend                       (153,305 )       (13.6 )       (174,342 )        (3.3 )
Preferred deemed dividend                      (875,304 )       (77.8 )       (362,903 )        (6.9 )
Net loss attributable to common
stockholders                               $ (3,858,656 )      (343.0 )   $ (9,159,638 )      (175.4 )

Net loss per common and common
equivalent share (basic and diluted)
attributable to common shareholders        $      (0.06 )                 $      (0.46 )

Weighted average shares used in
computing loss per common share: (basic
and diluted)                                 69,170,957                     19,400,724

Year Ended December 31, 2012 as compared to Year Ended December 31, 2011

Net revenue

We generate revenue from the sale of solar power systems. For the year ended December 31, 2013, we generated $1.1 million of revenue, a decrease of $4.1 million, or 78.5%, compared to $5.2 million of revenue for the year ended December 31, 2012. The decrease in revenue was due to limited inventory levels during the first nine months of 2013 due to supplier relationship issues. In May 2013, we entered into a new supply agreement for assembly of our proprietary modules with Environmental Engineering Group Pty Ltd (EEG), an assembler of polycrystalline modules located in Australia. In August 2013, we began receiving product from EEG and began shipping product to customers during the third calendar quarter of 2013. In September 2013, we entered into a second supply agreement for assembly of our proprietary modules with Tianwei New Energy Co, Ltd. (Tianwei), a panel supplier located in China. We began receiving product Tianwei beginning in February 2014.


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Cost of goods sold

Cost of goods sold as a percent of revenue for the year ended December 31, 2013, was 99.7% of net revenue, compared to 100.5% for the year ended December 31, 2012. Gross income for the year ended December 31, 2013 was $3,000, or 0.3% of revenue, compared with a gross loss of $27,000, or 0.5% of revenue, for the year ended December 31, 2012. During the year ended December 31, 2012, we recorded a $206,000 non-cash inventory write-down, a $65,000 write-off of accumulated inventory overhead costs and a $112,000 non-cash inventory write-off, representing 7.3% of revenue in total. The $206,000 write-down was an adjustment to the carrying value of our older, smaller-format solar panels and older microinverter inventory to reflect the decline in market prices compared to our original cost and the $112,000 was an inventory write-off of obsolete inventory. The increase in gross margin for the year ended December 31, 2013 compared to the year ended December 31, 2012, was due to the non-cash inventory charges in the prior year and a decline in panel costs in the current year, partially offset by lower average selling prices in the current year.

Sales and marketing expenses

Sales and marketing expenses for the year ended December 31, 2013 were $887,000, or 78.9% of net revenue as compared to $2.1 million, or 39.8% of net revenue during the same period of the prior year. The $1.2 million decrease in sales and marketing expenses for the year ended December 31, 2013 compared to the same period in 2012 was primarily due to decreases in payroll and commission costs of $590,000, advertising costs and trade shows expense of $274,000, stock compensation costs of $181,000, licensing fees owed to Westinghouse Electric Corporation of $112,000 and $34,000 in travel costs. The overall decrease in sales and marketing expenses was due to lower headcount and lower revenue due to limited inventory levels during 2013. The decline in licensing fees was due to the termination of the license agreement with Westinghouse Electric in August of 2013.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2013 were $2.4 million, or 211.4% of net revenue as compared to $6.0 million, or 115.1% of net revenue during the same period of the prior year. The decrease in general and administrative expense for the year ended December 31, 2013 compared to the same period in 2012, was due primarily to lower legal and professional fees by $1.7 million, payroll costs of $720,000, bad debt expense of $393,000, research and development costs of $406,000, insurance expense of $152,000, stock compensation costs of $123,000 and travel costs of $50,000. The decrease in legal and professional fees related to the recently terminated 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 bad debt expense was driven by a $400,000 non-cash write-down of a receivable from a supplier in the prior year. The decrease in research and development costs was due to lower headcount and decreased expenditures for prototype parts and material and testing.

Other Income

During the year ended December 31, 2013, we recorded other income of $420,000, net of legal fees, relating to the favorable settlement of a legal dispute relating to a supply agreement with a former customer.

Interest, net

During the year ended December 31, 2013, net interest expense was approximately $65,000 compared with net interest expense of $103,000 for the same period in 2012. The decrease in interest expense for the year ended December 31, 2013 was due to lower interest expense incurred in the prior year related to amounts owed to Suntech, partially offset by an increase in interest expense on our credit facility and on our convertible notes.

Adjustment to the fair value of embedded derivatives

During the year ended December 31, 2013, we recorded a $66,000 favorable adjustment to the fair value to the embedded derivatives on our convertible note.

Adjustment to the fair value of common stock warrants

During the year ended December 31, 2013, the fair value of the warrants was reduced to zero as a result of the decrease in the price of our common stock. During the year ended December 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 $417,000 in our consolidated statements of operations.

Income taxes

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


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Net loss from continuing operations

Net loss from continuing operations for the year ended December 31, 2013 was $2.8 million, compared to a net loss from continuing operations of $8.6 million for the year ended December 31, 2012. For the year ended December 31, 2013, the net loss included a favorable non-cash adjustment to embedded derivatives of $66,000 and other income of $420,000, representing a favorable settlement of a legal dispute relating to a supply agreement with a former customer. For the year ended December 31, 2012, the net loss included an unfavorable non-cash adjustment to the fair value of common stock warrants of $417,000. Excluding the impact of the impact of non-cash adjustments in both years, net loss from continuing operations for the years ended December 31, 2013 and 2012 would have been $3.3 million and $8.2 million, respectively.

Gain from discontinued operations

As a result of the exit from the installation business on September 7, 2010, we recorded $11,000 in net income from the discontinuance of our installation business segment for the year ended December 31, 2013, compared with net income of $16,000 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.

As a result of the January 24, 2013 draw down notice, pursuant to the terms of the outstanding Series B Preferred Stock, the conversion price of the Series B Preferred was reduced from $0.08 per share of common stock to become equal to $0.05, and the conversion price of the Series C Preferred issued under the initial closing was reduced from $0.08 per share of common stock to become equal to $0.05. As a result of the May 13, 2013 draw down notice, the price of the Series B Preferred was further reduced from $0.05 per share of common stock to become equal to $0.03, and the conversion price of the Series C Preferred was also further reduced from $0.05 per share of common stock to $0.03. As of September 30, 2013, there were 823 shares of Series B Preferred that remain outstanding. With the May 13, 2013 draw down, and after recent conversions of our Series C Preferred, there are 97 shares of Series C Preferred that remain outstanding. As a result of our August 30, 2013 financing, the conversion prices of the Series B and Series C Preferred were further reduced from $0.03 per share of common stock to $0.02. After adjustment to the conversion prices as a result of the August 30, 2013 financing and for subsequent conversions of our preferred stock to common stock, the outstanding Series B Preferred and Series C Preferred would be convertible into 21,020,232 shares and 4,333,350 shares, respectively, of our common stock.

On February 15, 2013, we entered into a securities purchase agreement with an institutional accredited investor relating to the sale and issuance of up to 1,180 shares of our newly created Series D Preferred Stock at a price per share equal to the stated value, which is $1,000 per share, for aggregate proceeds of up to $1,000,000. At the initial closing, concurrent with entering the agreement, we issued 150 shares of Series D Preferred, for initial aggregate proceeds of $150,000. After the initial closing, the securities purchase agreement permits the purchaser to exercise a "call" right to purchase additional Series D Preferred in multiple draw downs from time to time until December 31, 2013, subject to certain limits, terms and conditions. In March 2013, the company and investors entered into a letter agreement to the securities purchase agreement dated as of February 15, 2013, modifying the number of shares of Series D Preferred Stock to be issued upon settlement of any purchaser draw downs made on or after March 18, 2013, equal to the purchaser investment amount divided by the stated value multiplied by a number agreed upon by the Company and the purchaser, which shall not be higher than 1.67.
Subsequently, on March 21, 2013, we issued 167 shares of Series D Preferred for aggregate proceeds of $100,000. On May 13, 2013, we entered into a letter agreement amendment to the securities purchase agreement dated as of February 15, 2013 with certain investors, modifying the number of shares of Series D Preferred Stock that may be issued upon draw downs made on or after May 13, 2013, equal to the purchaser investment amount divided by the stated value multiplied by a number agreed upon by us and the purchaser, which shall not be higher than 3.34. The corresponding conversion price into underlying shares of our common stock was $0.03 per share. On May 13, 2013, we issued 583 shares of Series D Preferred to an investor for aggregate proceeds of $175,000. As a result of the contingent conversion feature on the Series C Preferred, which reduced the conversion price from $0.05 to $0.03 per share on the total 260 shares of Series C Preferred Stock issued and outstanding at May 13, 2013, and which resulted in an increase in the number of common shares issuable, we recognized additional preferred deemed dividends of $104,000. On August 30, 2013, we entered into an agreement to sell $200,000 in convertible notes. As a result of the sale of these convertible notes and as a result of the contingent conversion feature on the Series C Preferred and Series D Preferred, which reduced the conversion price from $0.03 to $0.02 per share on the Series C and from $0.10 to $0.02 per share on the Series D on the total 147 shares and 930 shares, respectively, of Series C Preferred Stock and Series D Preferred Stock issued and outstanding at August 30, 2013, and which resulted in an increase in the number of common shares issuable, we recognized additional preferred deemed dividends of $36,000 on the Series C Preferred Stock and $465,000 on the Series D Preferred Stock. The net loss attributable to common shareholders reflects both the net loss and the deemed dividend.


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Liquidity and Capital Resources

We currently face challenges 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 each of the two years in the period ending December 31, 2013, we have incurred net losses and negative cash flows from operations. During the recent years, we have undertaken several equity and debt financing transactions to provide the capital needed to sustain our business. We have dramatically reduced our headcount and other variable expenses. As of December 31, 2013, we had approximately $150,000 in cash on hand. We intend to address ongoing working capital needs through sales of products, along with raising additional debt and equity financing. 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, which merger was terminated in July 2013. No restructuring charges or severance payments were incurred. 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.

During 2012, because of our cash position and liquidity constraints, we were late in making payments to both of our former panel suppliers, Suntech and Lightway. We currently have no unshipped orders from these suppliers. In May 2013, we entered into a new supply agreement for assembly of our proprietary . . .

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