AI
Friday, February 05, 2016 11:51:04 AM
Form 10-K/A for ANDALAY SOLAR, INC.
5-Feb-2016
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, but decided to exit that business. Recently we have re-entered 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 seven U.S. patents (Patent No. 7,406,800, Patent No. 7,832,157, Patent No. 7,866,098, Patent No. 7,987,641, Patent No. 8,505,248, Patent No. 8,813,460, and Patent No. 8,938,919) that cover key aspects of our Andalay solar panel technology, as well as U.S. Trademark No. 3485653 for registration of the mark "Andalay Solar." In addition to these U.S. patents, we have eight foreign patents. Currently, we have 15 issued patents and nine 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 began our 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 December 31, 2014 and 2013, we had no deposits in excess of the Federal Deposit Insurance Corporation limit of $250,000.
Concentration of Risk in Customer Relationships
Supplier Relationships
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 and stopped as of June 2014. In July 2014, we entered into a supply agreement for assembly of our proprietary modules with Auxin Solar, Inc., a panel supplier located in the United States. In December 2014, we began distributing panels from our new supplier. 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.
Table of Contents
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, 2014, Suntech has not sought to enforce its judgment. As of December 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.
Customer Relationships
The relative magnitude and the mix of revenue from our largest customers have varied significantly quarter to quarter. During the year ended December 31, 2014, five customers have accounted for significant revenues, varying by period, to our company: Smart Energy Today ("Smart Energy"), which specializes in helping home owners and business owners become more energy efficient, WDC Solar, Inc. ("WDC"), a leading construction, integration and installation of commercial, residential and utility scale solar installations in the Washington D.C. area, JCF Wholesale ("JCF") a provider of residential and commercial electrical services in Southern California, Lowe's Companies, Inc. (Lowe's), a nationwide home improvement retail chain, and Sustainable Environmental Enterprises ("SEE"), a leading provider of renewable energy and development projects located in New Orleans, Louisiana. For the year ended December 31, 2014 and 2013, the percentages of sales of our top five customers are as follows:
Years Ended
December 31,
2014 2013
Smart Energy Today 13.3 % 13.5 %
WDC Solar, Inc. 12.0 % 14.7 %
JCF Wholesale 8.7 % 10.6 %
Lowe's 5.9 % 6.9 %
Sustainable Environmental Enterprises 1.3 % 52.8 %
The percentage of our gross accounts receivable for our top customers as of December 31, 2014 and 2013, are as follows:
December 31,
2014 2013
WDC Solar, Inc. 40.1 % -
Lowe's 16.8 % -
Sustainable Environmental Enterprises - 86.7 %
Smart Energy Today 6.5 % -
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 39% and 25% of purchases as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, accounts payable included amounts owed to these top three suppliers of approximately $0 and $1.0 million, respectively.
Table of Contents
Results of Operations
The following table sets forth, for the years ended December 31st, certain information related to our operations as a percentage of our net revenue:
2014 % 2013 %
Net revenue $ 1,288,985 100.0 $ 1,124,836 100.0
Cost of goods sold 1,191,390 92.4 1,121,612 99.7
Gross profit 97,595 7.6 3,224 0.3
Operating Expenses
Sales and marketing 366,543 28.4 887,305 78.9
General and administrative 2,263,086 175.6 2,377,703 211.4
Total operating expenses 2,629,629 204.0 3,265,008 290.3
Loss from operations (2,532,034 ) (196.4 (3,261,784 ) (290.0
Other Income (Expense)
Interest income (expense), net (362,955 ) (28.2 (65,031 ) (5.8
Adjustment to the fair value of embedded
derivatives (50,809 ) (3.9 65,962 5.9
Adjustment to the fair value of common
stock warrants - 0.0 9 0.0
Settlement of prior debt owed 769,148 59.7 420,000 37.3
Total other income, net 355,384 27.6 420,940 37.4
Loss before provision for income taxes (2,176,650 ) (168.9 (2,840,844 ) (252.6
Provision for income taxes - -
Net loss from continuing operations (2,176,650 ) (168.9 (2,840,844 ) (252.6
Gain from discontinued operations 324,349 25.2 10,797 1.0
Net loss (1,852,301 ) (143.7 (2,830,047 ) (251.6
Preferred stock dividend (18,927 ) (1.5 (153,305 ) (13.6
Preferred deemed dividend - 0.0 (875,304 ) (77.8
Net loss attributable to common
stockholders $ (1,871,228 ) (145.2 $ (3,858,656 ) (343.0
Net loss per common and common
equivalent share (basic and diluted)
attributable to common shareholders $ (0.01 ) $ (0.06 )
Weighted average shares used in
computing loss per common share: (basic
and diluted) 203,814,897 69,170,957
Year Ended December 31, 2014 as compared to Year Ended December 31, 2013
Net revenue
We generate revenue from the sale and installation of solar power systems. For the year ended December 31, 2014, we generated $1.3 million of revenue, an increase of $164,000, or 14.6%, compared to $1.1 million of revenue for the year ended December 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.
Cost of goods sold
Cost of goods sold as a percent of revenue for the year ended December 31, 2014, was 92.4% of net revenue, compared to 99.7% for the year ended December 31, 2013. Gross profit for the year ended December 31, 2014 was $98,000, or 7.6% of revenue, compared to gross profit of $3,000 or 0.3% of revenue for the same period in 2013. The increase in gross profit in the year ended December 31, 2014 compared to the year ended December 31, 2013, was due to lower solar module costs and lower inventory overhead allocations due to increase in revenue.
Table of Contents
Sales and marketing expenses
Sales and marketing expenses for the year ended December 31, 2014 were $367,000, or 28.4% of net revenue as compared to $887,000, or 78.9% of net revenue for the prior year. The $521,000 decrease in sales and marketing expenses for the year ended December 31, 2014 compared to the same period in 2013 was primarily due to decreases in licensing fees owed to Westinghouse Electric Corporation of $638,000, partially offset by an increase of $78,000 in payroll and commission expense. The decrease in licensing fees was due to the termination of the licensing agreement with Westinghouse Electric. The increase in payroll costs was due to higher headcount.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2014 were $2.3 million, or 175.6% of net revenue, as compared to $2.4 million, or 211.4% of net revenue during the same period of the prior year. The decrease in general and administrative expense for the year ended December 31, 2014 of $115,000, or 4.8% of net revenue, compared to the same period in 2013, was due primarily to an decrease in rent expense of $112,000, bad debt expense of $55,000, insurance of $66,000, research and development expense of $65,000 and patent filing fees of $14,000, partially offset by an increase in payroll and benefits of $208,000, professional fees of $142,000 and stock compensation expense of $88,000. The decrease in stock compensation expense was due to the timing of restricted stock and stock option grants. The decrease in rent and insurance was due to the consolidation of our administrative offices with our warehouse. The increase in professional fees was primarily due legal and accounting consulting services. The decrease in patent filing fees was due to the filing of patents in the prior year. The increase in payroll and benefits expense was due to higher headcount.
Other Income, net
During the year ended December 31, 2014, other income was $355,000 compared to $421,000 for the year ended December 31, 2013. During the year ended December 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. 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, 2014, net interest expense was approximately $363,000 compared with net interest expense of $65,000 for the same period in 2013. The increase in interest expense was associated with the increase in notes payable and convertible debt.
Adjustment to the fair value of embedded derivatives
During the year ended December 31, 2014, we recorded mark-to-market adjustments to reflect the fair value of embedded derivatives, resulting in a loss of approximately $51,000 in our consolidated statements of operations.
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.
Income taxes
During the year ended December 31, 2014 and 2013, 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 assets.
Net loss from continuing operations
Net loss from continuing operations for the year ended December 31, 2014 was $2.2 million, compared to a net loss from continuing operations of $2.8 million for the year ended December 31, 2013.
Gain from discontinued operations
During the year ended December 31, 2014, we recorded a $324,000 gain from discontinued operations compared to a gain of $11,000 in the prior year. During the year ended December 31, 2014, we re-evaluated our warranty liability related to our discontinued installation operations and in conjunction with re-entering the installation operations, we reduced the liability by approximately $324,000.
Table of Contents
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, 2014, 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, 2014, we had approximately $62,000 of 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.
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 consolidated 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 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 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 "ASC Agreement") with ASC Recap LLC ("ASC"), an entity affiliated with Southridge. Pursuant to the ASC Agreement, ASC 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 ASC certain shares of our common stock in a ?3(a)(10) 1933 Act proceeding. The shares of common stock that we have agreed to issue to ASC 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 ASC already purchased from one (1) Creditor, we entered into a Settlement Agreement and Stipulation 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 ASC Recap acquired from one Creditor (the value of the stock that we agreed to issue was two hundred and fifty percent (250%) of the discounted purchase price ASC paid to purchase the debt from the Creditor, and approximately 25% of the original amount we owed to the Creditor). The court subsequently approved the settlement and 8,079,800 shares were issued,
Convertible Notes payable
On August 30, 2013, we entered into a securities purchase agreement with Alpha Capital Anstalt ("Alpha Capital") 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 Alpha Capital relating to 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 Alpha Capital 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 Alpha Capital 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 Alpha Capital 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 per share. Each of the Convertible Notes bear interest at the rate of 8% per annum compounded annually, are payable at maturity and the principal and interest outstanding under the convertible notes are convertible into shares of our common stock, at any time after issuance, at the option of the purchaser, at a conversion price equal to $0.02 per share, subject to adjustment upon the happening of certain events, including stock dividends, stock splits and the issuance of common stock equivalents at a price below the conversion price. Subject to our fulfilling certain conditions, including beneficial ownership limits, the convertible notes are subject to a mandatory conversion if the closing price of our common stock for any 20 consecutive days commencing six months after the issue date of the convertible notes equal or exceeds $0.04 per share. Unless waived in writing by the purchaser, no conversion of the convertible notes can be effected to the extent that as a result of such conversion the purchaser would beneficially own more than 9.99% in the aggregate of our issued and outstanding common stock immediately after giving effect to the issuance of common stock upon conversion.
We have the option of repaying the outstanding principal amount of the convertible notes, in whole or in part, by paying the purchaser a sum of money equal to one hundred and twenty percent (120%) of the principal together with accrued but unpaid interest upon 30 days notice, subject to certain beneficial ownership limits. For so long as we have any obligation under the convertible notes, we have agreed to certain restrictions regarding, among other things, incurrence of additional debt, liens, amendments to charter documents, repurchase of stock, payment of cash dividends, affiliated transactions. We are also prohibited from entering into certain variable priced agreements until the convertible notes are repaid in full, except for the Equity Line we have with Southridge.
Because of certain down-round protection in the conversion rate of the convertible notes, we determined that the derivative liability related to the embedded conversion feature met the criteria for bifurcation. Accordingly, we recognized an aggregate liability of $123,000 on the three issuance dates during the year ended December 31, 2014. This was in addition to the carrying value of the derivative liability on three previously recorded derivatives of $178,000. The derivative liability is carried at fair value with changes in the fair value reflected in the "Adjustment to the fair value of embedded derivatives" line item of our condensed consolidated statements of operations. We recognized a loss for the year ended December 31, 2014 of $51,000 on our convertible notes.
Table of Contents
The relative fair value of the warrants issued in the December 2013 convertible note issuance of $250,000, were allocated to additional paid-in capital. Such value was determined assuming volatility of 149.1%, a risk free interest rate of 0.7% and an expected term of 4.1 years. The resulting debt discount from the . . .
5-Feb-2016
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, but decided to exit that business. Recently we have re-entered 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 seven U.S. patents (Patent No. 7,406,800, Patent No. 7,832,157, Patent No. 7,866,098, Patent No. 7,987,641, Patent No. 8,505,248, Patent No. 8,813,460, and Patent No. 8,938,919) that cover key aspects of our Andalay solar panel technology, as well as U.S. Trademark No. 3485653 for registration of the mark "Andalay Solar." In addition to these U.S. patents, we have eight foreign patents. Currently, we have 15 issued patents and nine 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 began our 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 December 31, 2014 and 2013, we had no deposits in excess of the Federal Deposit Insurance Corporation limit of $250,000.
Concentration of Risk in Customer Relationships
Supplier Relationships
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 and stopped as of June 2014. In July 2014, we entered into a supply agreement for assembly of our proprietary modules with Auxin Solar, Inc., a panel supplier located in the United States. In December 2014, we began distributing panels from our new supplier. 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.
Table of Contents
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, 2014, Suntech has not sought to enforce its judgment. As of December 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.
Customer Relationships
The relative magnitude and the mix of revenue from our largest customers have varied significantly quarter to quarter. During the year ended December 31, 2014, five customers have accounted for significant revenues, varying by period, to our company: Smart Energy Today ("Smart Energy"), which specializes in helping home owners and business owners become more energy efficient, WDC Solar, Inc. ("WDC"), a leading construction, integration and installation of commercial, residential and utility scale solar installations in the Washington D.C. area, JCF Wholesale ("JCF") a provider of residential and commercial electrical services in Southern California, Lowe's Companies, Inc. (Lowe's), a nationwide home improvement retail chain, and Sustainable Environmental Enterprises ("SEE"), a leading provider of renewable energy and development projects located in New Orleans, Louisiana. For the year ended December 31, 2014 and 2013, the percentages of sales of our top five customers are as follows:
Years Ended
December 31,
2014 2013
Smart Energy Today 13.3 % 13.5 %
WDC Solar, Inc. 12.0 % 14.7 %
JCF Wholesale 8.7 % 10.6 %
Lowe's 5.9 % 6.9 %
Sustainable Environmental Enterprises 1.3 % 52.8 %
The percentage of our gross accounts receivable for our top customers as of December 31, 2014 and 2013, are as follows:
December 31,
2014 2013
WDC Solar, Inc. 40.1 % -
Lowe's 16.8 % -
Sustainable Environmental Enterprises - 86.7 %
Smart Energy Today 6.5 % -
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 39% and 25% of purchases as of December 31, 2014 and 2013, respectively. As of December 31, 2014 and 2013, accounts payable included amounts owed to these top three suppliers of approximately $0 and $1.0 million, respectively.
Table of Contents
Results of Operations
The following table sets forth, for the years ended December 31st, certain information related to our operations as a percentage of our net revenue:
2014 % 2013 %
Net revenue $ 1,288,985 100.0 $ 1,124,836 100.0
Cost of goods sold 1,191,390 92.4 1,121,612 99.7
Gross profit 97,595 7.6 3,224 0.3
Operating Expenses
Sales and marketing 366,543 28.4 887,305 78.9
General and administrative 2,263,086 175.6 2,377,703 211.4
Total operating expenses 2,629,629 204.0 3,265,008 290.3
Loss from operations (2,532,034 ) (196.4 (3,261,784 ) (290.0
Other Income (Expense)
Interest income (expense), net (362,955 ) (28.2 (65,031 ) (5.8
Adjustment to the fair value of embedded
derivatives (50,809 ) (3.9 65,962 5.9
Adjustment to the fair value of common
stock warrants - 0.0 9 0.0
Settlement of prior debt owed 769,148 59.7 420,000 37.3
Total other income, net 355,384 27.6 420,940 37.4
Loss before provision for income taxes (2,176,650 ) (168.9 (2,840,844 ) (252.6
Provision for income taxes - -
Net loss from continuing operations (2,176,650 ) (168.9 (2,840,844 ) (252.6
Gain from discontinued operations 324,349 25.2 10,797 1.0
Net loss (1,852,301 ) (143.7 (2,830,047 ) (251.6
Preferred stock dividend (18,927 ) (1.5 (153,305 ) (13.6
Preferred deemed dividend - 0.0 (875,304 ) (77.8
Net loss attributable to common
stockholders $ (1,871,228 ) (145.2 $ (3,858,656 ) (343.0
Net loss per common and common
equivalent share (basic and diluted)
attributable to common shareholders $ (0.01 ) $ (0.06 )
Weighted average shares used in
computing loss per common share: (basic
and diluted) 203,814,897 69,170,957
Year Ended December 31, 2014 as compared to Year Ended December 31, 2013
Net revenue
We generate revenue from the sale and installation of solar power systems. For the year ended December 31, 2014, we generated $1.3 million of revenue, an increase of $164,000, or 14.6%, compared to $1.1 million of revenue for the year ended December 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.
Cost of goods sold
Cost of goods sold as a percent of revenue for the year ended December 31, 2014, was 92.4% of net revenue, compared to 99.7% for the year ended December 31, 2013. Gross profit for the year ended December 31, 2014 was $98,000, or 7.6% of revenue, compared to gross profit of $3,000 or 0.3% of revenue for the same period in 2013. The increase in gross profit in the year ended December 31, 2014 compared to the year ended December 31, 2013, was due to lower solar module costs and lower inventory overhead allocations due to increase in revenue.
Table of Contents
Sales and marketing expenses
Sales and marketing expenses for the year ended December 31, 2014 were $367,000, or 28.4% of net revenue as compared to $887,000, or 78.9% of net revenue for the prior year. The $521,000 decrease in sales and marketing expenses for the year ended December 31, 2014 compared to the same period in 2013 was primarily due to decreases in licensing fees owed to Westinghouse Electric Corporation of $638,000, partially offset by an increase of $78,000 in payroll and commission expense. The decrease in licensing fees was due to the termination of the licensing agreement with Westinghouse Electric. The increase in payroll costs was due to higher headcount.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2014 were $2.3 million, or 175.6% of net revenue, as compared to $2.4 million, or 211.4% of net revenue during the same period of the prior year. The decrease in general and administrative expense for the year ended December 31, 2014 of $115,000, or 4.8% of net revenue, compared to the same period in 2013, was due primarily to an decrease in rent expense of $112,000, bad debt expense of $55,000, insurance of $66,000, research and development expense of $65,000 and patent filing fees of $14,000, partially offset by an increase in payroll and benefits of $208,000, professional fees of $142,000 and stock compensation expense of $88,000. The decrease in stock compensation expense was due to the timing of restricted stock and stock option grants. The decrease in rent and insurance was due to the consolidation of our administrative offices with our warehouse. The increase in professional fees was primarily due legal and accounting consulting services. The decrease in patent filing fees was due to the filing of patents in the prior year. The increase in payroll and benefits expense was due to higher headcount.
Other Income, net
During the year ended December 31, 2014, other income was $355,000 compared to $421,000 for the year ended December 31, 2013. During the year ended December 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. 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, 2014, net interest expense was approximately $363,000 compared with net interest expense of $65,000 for the same period in 2013. The increase in interest expense was associated with the increase in notes payable and convertible debt.
Adjustment to the fair value of embedded derivatives
During the year ended December 31, 2014, we recorded mark-to-market adjustments to reflect the fair value of embedded derivatives, resulting in a loss of approximately $51,000 in our consolidated statements of operations.
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.
Income taxes
During the year ended December 31, 2014 and 2013, 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 assets.
Net loss from continuing operations
Net loss from continuing operations for the year ended December 31, 2014 was $2.2 million, compared to a net loss from continuing operations of $2.8 million for the year ended December 31, 2013.
Gain from discontinued operations
During the year ended December 31, 2014, we recorded a $324,000 gain from discontinued operations compared to a gain of $11,000 in the prior year. During the year ended December 31, 2014, we re-evaluated our warranty liability related to our discontinued installation operations and in conjunction with re-entering the installation operations, we reduced the liability by approximately $324,000.
Table of Contents
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, 2014, 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, 2014, we had approximately $62,000 of 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.
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 consolidated 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 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 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 "ASC Agreement") with ASC Recap LLC ("ASC"), an entity affiliated with Southridge. Pursuant to the ASC Agreement, ASC 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 ASC certain shares of our common stock in a ?3(a)(10) 1933 Act proceeding. The shares of common stock that we have agreed to issue to ASC 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 ASC already purchased from one (1) Creditor, we entered into a Settlement Agreement and Stipulation 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 ASC Recap acquired from one Creditor (the value of the stock that we agreed to issue was two hundred and fifty percent (250%) of the discounted purchase price ASC paid to purchase the debt from the Creditor, and approximately 25% of the original amount we owed to the Creditor). The court subsequently approved the settlement and 8,079,800 shares were issued,
Convertible Notes payable
On August 30, 2013, we entered into a securities purchase agreement with Alpha Capital Anstalt ("Alpha Capital") 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 Alpha Capital relating to 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 Alpha Capital 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 Alpha Capital 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 Alpha Capital 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 per share. Each of the Convertible Notes bear interest at the rate of 8% per annum compounded annually, are payable at maturity and the principal and interest outstanding under the convertible notes are convertible into shares of our common stock, at any time after issuance, at the option of the purchaser, at a conversion price equal to $0.02 per share, subject to adjustment upon the happening of certain events, including stock dividends, stock splits and the issuance of common stock equivalents at a price below the conversion price. Subject to our fulfilling certain conditions, including beneficial ownership limits, the convertible notes are subject to a mandatory conversion if the closing price of our common stock for any 20 consecutive days commencing six months after the issue date of the convertible notes equal or exceeds $0.04 per share. Unless waived in writing by the purchaser, no conversion of the convertible notes can be effected to the extent that as a result of such conversion the purchaser would beneficially own more than 9.99% in the aggregate of our issued and outstanding common stock immediately after giving effect to the issuance of common stock upon conversion.
We have the option of repaying the outstanding principal amount of the convertible notes, in whole or in part, by paying the purchaser a sum of money equal to one hundred and twenty percent (120%) of the principal together with accrued but unpaid interest upon 30 days notice, subject to certain beneficial ownership limits. For so long as we have any obligation under the convertible notes, we have agreed to certain restrictions regarding, among other things, incurrence of additional debt, liens, amendments to charter documents, repurchase of stock, payment of cash dividends, affiliated transactions. We are also prohibited from entering into certain variable priced agreements until the convertible notes are repaid in full, except for the Equity Line we have with Southridge.
Because of certain down-round protection in the conversion rate of the convertible notes, we determined that the derivative liability related to the embedded conversion feature met the criteria for bifurcation. Accordingly, we recognized an aggregate liability of $123,000 on the three issuance dates during the year ended December 31, 2014. This was in addition to the carrying value of the derivative liability on three previously recorded derivatives of $178,000. The derivative liability is carried at fair value with changes in the fair value reflected in the "Adjustment to the fair value of embedded derivatives" line item of our condensed consolidated statements of operations. We recognized a loss for the year ended December 31, 2014 of $51,000 on our convertible notes.
Table of Contents
The relative fair value of the warrants issued in the December 2013 convertible note issuance of $250,000, were allocated to additional paid-in capital. Such value was determined assuming volatility of 149.1%, a risk free interest rate of 0.7% and an expected term of 4.1 years. The resulting debt discount from the . . .
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
