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WEST > SEC Filings for WEST > Form 10-Q on 14-May-2014All Recent SEC Filings

Show all filings for ANDALAY SOLAR, INC.

Form 10-Q for ANDALAY SOLAR, INC.


14-May-2014

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 Andalay Solar, Inc. and its subsidiaries ("Andalay 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 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. As of March 31, 2014 and December 31, 2013, we had no deposits in excess of the Federal Deposit Insurance Corporation limit of $250,000.

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 March 31, 2014, Suntech has not sought to enforce its judgment. As of March 31, 2014, we have included in accounts payable in our Condensed Consolidated Balance Sheets a balance due to Suntech America of $946,438. We currently have no unshipped orders from Suntech or Lightway.


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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.
Customer Relationships

The relative magnitude and the mix of revenue from our largest customers have varied significantly quarter to quarter. During the three months ended March 31, 2014, 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, Helco Electrics ("Helco") a full-service provider of electrical services in southern Oregon and Shoreline Electric ("Shoreline") a provider of residential and commercial electrical services in Southern California. For the three months ended March 31, 2014, the percentages of sales to SEE, Lennox, Lowe's, Helco and Shoreline are as follows:

                                            Three Months Ended March 31,
                                             2014                   2013

Sustainable Environmental Enterprises             11.7 %                    -
Lennox International Inc.                          0.4 %                 30.4 %
Lowe's Companies, Inc.                             6.7 %                  2.3 %
Helco Electrics                                   22.9 %                    -
Shoreline Electric                                31.9 %                    -

SEE accounted for approximately $517,000 or 96.3% of our gross accounts receivable as of March 31, 2014. As of the date hereof, the $517,000 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. Lowe's accounted for approximately 0.4% of gross accounts receivable balance. We had no receivable balance from Lennox, Helco or Shoreline as of March 31, 2014 and we had no receivable balance from Lennox, Lowe's, Helco or Shoreline as of December 31, 2013.
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 28% and 25% of accounts payable as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014 and December 31, 2013, accounts payable included amounts owed to our top three vendors of approximately $976,000 and $1.1 million, respectively.


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Three Months Ended March 31, 2014 as Compared to Three Months Ended March 31, 2013

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
revenue:

                                                           Three Months Ended March 31,
                                                       2014                             2013
Net revenue                                $     142,482          100.0 %    $     81,194          100.0 %
Cost of goods sold                               135,388           95.0 %          87,742          108.1 %
    Gross profit (loss)                            7,094            5.0 %          (6,548 )         (8.1 )%
Operating expenses
Sales and marketing                               63,384           44.5 %         300,395          370.0 %
General and administrative                       604,164          424.0 %         711,424          876.2 %
Total operating expenses                         667,548          468.5 %       1,011,819        1,246.2 %
Loss from continuing operations                 (660,454 )       (463.5 )%     (1,018,367 )     (1,254.3 )%
Other income (expense)
Interest (expense), net                          (77,085 )        (54.1 )%         (5,299 )         (6.5 )%
Adjustment to the fair value of embedded
derivatives                                     (101,551 )        (71.3 )%              -            0.0 %
Adjustment to the fair value of common
stock warrants                                         -            0.0 %               7            0.0 %
Settlement of prior debt owed                    769,148          539.8 %               -            0.0 %
Total other expense, net                         590,512          414.4 %          (5,292 )         (6.5 )%
Loss before provision for income taxes
and discontinued operations                      (69,942 )        (49.1 )%     (1,023,659 )     (1,260.8 )%
Provision for income taxes                             -            0.0 %               -            0.0 %
Net loss from continuing operations
(Note 3)                                         (69,942 )        (49.1 )%     (1,023,659 )     (1,260.8 )%
Net income (loss) from discontinued
operations, net of tax                                 -            0.0 %           2,925            3.6 %
Net loss                                         (69,942 )        (49.1 )%     (1,020,734 )     (1,257.2 )%
Preferred stock dividend                         (14,454 )            ( )%        (53,220 )        (35.7 )%
Preferred deemed dividend                              -         (506.2 )%       (270,000 )       (617.4 )%
Net loss attributable to common
stockholders                               $     (84,396 )     (1,039.5 )%   $ (1,343,954 )     (1,910.3 )%

Net loss attributable to common
stockholders per common share (basic and
diluted)                                   $       (0.00 )                   $      (0.04 )

Weighted average shares used in
computing loss per common share (basic
and diluted)                                 131,428,001                       33,051,363

Net revenue

We generate revenue from the sale of solar power systems. For the three months ended March 31, 2014, we generated $142,000 of revenue, an increase of $61,000, or 75.5%, compared to $81,000 of revenue for the three months ended March 31, 2013. The increase in revenue was due to an increase in watts sold, partially offset by a decrease in our average selling price per watt.


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Cost of goods sold

Cost of goods sold as a percent of revenue for the three months ended March 31, 2014, was 95.0% of net revenue, compared to 108.1% for the three months ended March 31, 2013. Gross profit for the three months ended March 31, 2014 was $7,000, or 5.0% of revenue, compared to gross loss of $7,000 or 8.1% of revenue for the same period in 2013. The increase in gross margin in the three months ended March 31, 2014 compared to the three months ended March 31, 2013, was due to lower solar module costs and lower inventory overhead allocations due to increase in revenue.

Sales and marketing expenses

Sales and marketing expenses for the three months ended March 31, 2014 were $63,000, or 44.5% of net revenue as compared to $300,000, or 370.0% of net revenue during the same period of the prior year. The $237,000 decrease in sales and marketing expenses for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to decreases in licensing fees owed to Westinghouse Electric Corporation of $250,000 and payroll and commission costs of $17,000, partially offset by an increase in stock compensation costs of $24,000. The decrease in licensing fees was due to the termination of the licensing agreement with Westinghouse Electric. The decrease in payroll costs was due to lower headcount.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2014 were $604,000, or 424.0% of net revenue as compared to $711,424, or 876.2% 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, 2014 compared to the same period in 2013, was due primarily to a decline in legal and professional fees of $84,000, insurance costs of $42,000, research and development costs of $37,000, bad debt expense of $28,000 and rent expense of $27,000, partially offset by an increase in stock compensation expense of $139,000. The decrease in legal and professional fees was primarily due to legal fees incurred in the prior year associated with the merger. The decrease in insurance cost was due to a reduction in premium. The decrease in rent was due to the consolidation of our administrative offices with our warehouse and the decrease in research and development costs was due to lower prototype parts and material.

Interest, net

During the three months ended March 31, 2014, net interest expense was approximately $77,000 compared with net interest expense of $5,000 for the same period in 2013. The increase in interest expense was due to an increase in notes payable and convertible debt.

Adjustment to the fair value of embedded derivatives

During the three months ended March 31, 2014, we recorded mark-to-market adjustments to reflect the fair value of embedded derivatives, resulting in an unrealized loss of $102,000 in our condensed consolidated statements of operations.

Adjustment to the fair value of common stock warrants

During the three months ended March 31, 2013, 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 gain of $7 in our condensed consolidated statements of operations.

Settlement of prior debt owed

During the three months ended March 31, 2014, we recorded a gain in other income of $769,000 as a result of a favorable settlement on a prior debt owed to a creditor.

Income taxes

During the three months ended March 31, 2014 and 2013, 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.


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Net loss from continuing operations

Net loss from continuing operations for the three months ended March 31, 2014 was $70,000, compared to a net loss from continuing operations of $1.0 million for the three months ended March 31, 2013.

Net income (loss) from discontinued operations

As a result of the exit from the installation business on September 7, 2010, we recorded net income of $2,000 from the discontinuance of our installation business segment for the three months ended March 31, 2013.

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 the three months ended March 31, 2014 and for each of the two years in the period ended 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 March 31, 2014, we had approximately $259,000 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 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.

The accompanying condensed 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. 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.

Despite our recent financings, we have insufficient cash to operate our business at the current level for the next twelve months and insufficient cash to achieve our business goals. The success of our business plan is contingent upon us increasing sales and obtaining additional financing. We intend to fund operations through debt and/or equity financing arrangements such as the Equity Purchase Agreement with Southridge and the loan and security agreement discussed below; however there can be no assurance that we will continue to meet the conditions necessary to be able to use the Equity Line under the Equity Purchase Agreement (described below) or the loan and security agreement (described below). Other than the Equity Line and the loan and security agreement described below, we do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that any additional financing will be available to us on acceptable terms, or at all.

On January 22, 2014, we entered into a Settlement of Potential Claims Agreement (the "ASCR Agreement") with ASC Recap LLC (ASCR), an entity affiliated with Southridge. Pursuant to the ASCR Agreement, ASCR has offered to purchase (and in one (1) case has already purchased) approximately $3.7 million of our prior debt owed to four creditors ("Creditors") for past due services at a substantial discount to face value to which we have agreed to issue to ASCR certain shares of its common stock in a 3(a)(10) 1933 Act proceeding. The shares of common stock that we have agreed to issue to ASCR in full payment for, and as a release of any debt it purchases from the Creditors, is anticipated to have, upon issuance, a market value equal to approximately 25% of the principal amount of our outstanding debt. In the case of the debt ASCR already purchased from one
(1) Creditor, we entered into a Settlement Agreement and Stipulation on February 26, 2014 that was filed with the Circuit Court of the Second Judicial Circuit, Leon County, Florida pursuant to which we agreed, subject to court approval, to issue shares of our common stock that generate proceeds in the amount of $250,000 in full settlement of a claim in the amount of $1,027,705 that ASCR acquired form one Creditor (the value of the stock that we agreed to issue was two hundred and fifty percent (250%) of the discounted purchase price ASCR paid to purchase the debt from the Creditor, and approximately 25% of the original amount we owed to the Creditor). On March 24, 2014, the Circuit Court of the Second Judicial Circuit, Leon County, Florida, approved the 3(a)(10) 1933 Act proceeding and Settlement Agreement and Stipulation and in April 2014, we issued 8,079,800 shares of common stock at an average price of $0.031 for the full settlement of the agreement with ASCR. The stock to be issued by us and the purchase of the debt by ASCR of the remaining three Creditors is subject to the acceptance of offers by the Creditors and court approval of the terms of the settlement.


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Registration statement

On March 11, 2014, we filed a Registration Statement on Form S-1/A to register 35 million shares of common stock related to our Equity Purchase Agreement with Southridge and on March 21, 2014, the Securities and Exchange Commission declared the Registration Statement effective. On March 26, 2014, we submitted an initial take-down request of $300,000 to Southridge pursuant to the terms of the Equity Purchase Agreement of which partial proceeds of $100,000 was received on March 31, 2014 and the remaining $200,000 on April 16, 2014. We issued a total of 15,000,000 shares of our common at an average price of $0.02 per share pursuant to the terms of the Equity Credit Agreement. We have 20 million shares remaining under our effective Form S-1 and available pursuant to the terms of our Equity Purchase Agreement following our initial take-down.

Convertible notes payable

On August 30, 2013, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale and issuance of a convertible note in the principal amount of $200,000 that matures August 29, 2015 (the "Convertible Note"). Subsequently, on November 25, 2013 and December 19, 2013, we entered into additional securities purchase agreements with the same institutional accredited investors relating the sale and issuance of convertible notes in the principal amount of $200,000 and $250,000, respectively, which mature on November 25, 2015 and December 19, 2015. On January 27, 2014, we issued a convertible note in the principal amount of $100,000 that matures January 27, 2016 under the Securities Purchase Agreement we entered into with an accredited investor on December 19, 2013. In connection with the issuance of the December 19, 2013 convertible note, we also issued 6,250,000 warrants to purchase shares of our common stock at a price of $0.02 per share. On February 25, 2014, we entered into a Securities Purchase Agreement with the same accredited investor related to the sale and issuance of a convertible note in the principal amount of $200,000 that matures February 25, 2016. In connection with the issuance of the February 25, 2014 convertible note, we issued 5,000,000 warrants to purchase shares of our common stock at a price of $0.02 per share. On March 18, 2014, we entered into a Securities Purchase Agreement we entered into with the same accredited investor related to the sale and issuance of a convertible note in the principal amount of $300,000 that matures March 18, 2016. In connection with the March 18, 2014 convertible note, we issued a five -year warrant to purchase 7,500,000 shares of our common stock at an exercise price of $.02. Each of the Convertible Notes bear interest at the . . .

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