Edgar Filing: Andalay Solar, Inc.

form_10-q.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-33695

Andalay Solar, Inc.

(Exact name of registrant as specified in its charter)

Delaware	90-0181035
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2721 Shattuck Avenue, #305, Berkeley, CA	94705
(Address of principal executive offices)	(Zip Code)

(408) 402-9400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 13, 2015, 534,984,001 shares of the issuer’s common stock, par value $0.001 per share, were outstanding (including non-vested restricted shares).

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets		1

Condensed Consolidated Statements of Operations		2

Condensed Consolidated Statements of Changes in Stockholders’ Deficit		3

Condensed Consolidated Statements of Cash Flows		4

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	26

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	41

Item 4. Controls and Procedures.	41

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.	42

Item 1A. Risk Factors.	42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	52

Item 3. Defaults upon Senior Securities.	52

Item 4. Mine Safety Disclosure.	52

Item 5. Other Information.	52

Item 6. Exhibits.	53

SIGNATURES	54

Exhibit Index	55

EX-31 Section 302 Certification of CEO and CFO

EX-32 Section 906 Certification of CEO and CFO

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Andalay Solar, Inc.

Condensed Consolidated Balance Sheets

	September 30, 2015 (unaudited)			December 31, 2014 (1)
Assets
Current assets:
Cash	$	42,491		$	61,542
Accounts receivable, net		70,388			118,456
Other receivables		69,185			—
Inventory		184,225			728,372
Prepaid expenses and other current assets		80,061			280,066
Total current assets		446,350			1,188,436
Property and equipment, net		—			699
Patents, net		380,000			1,131,327
Other assets, net		—			240,478
Total assets	$	826,350		$	2,560,940

Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	1,945,863		$	3,345,361
Accrued liabilities		135,231			104,229
Accrued warranty		854,080			938,466
Deferred revenue		—			15,450
Derivative liability – embedded conversion feature		—			129,598
Credit facility		—			500,000
Note payable – short-term		225,000			109,164
Convertible notes and beneficial conversion feature – short-term		158,379			30,000
Total current liabilities		3,318,553			5,172,268

Convertible notes, less current portion (net of discount)		—			343,499
Total liabilities		3,318,553			5,515,767

Commitments and contingencies (Note 17)

Stockholders’ deficit:
Common stock, $0.001 par value; 1,250,000,000 shares authorized; 474,649,087 and 279,475,332 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively		474,649			279,475
Additional paid-in capital		84,366,950			82,026,952
Accumulated deficit		(87,333,802	)		(85,261,254	)
Total stockholders’ deficit		(2,492,203	)		(2,954,827	)
Total liabilities and stockholders’ deficit	$	826,350		$	2,560,940

(1) The condensed consolidated balance sheet as of December 31, 2014 has been derived from the audited consolidated financial statements as of that date.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Andalay Solar, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Net revenue	$	190,516		$	605,943		$	807,139		$	1,055,344
Cost of goods sold		34,251			550,630			1,118,733			982,658
Gross profit (loss)		156,265			55,313			(311,594	)		72,686
Operating expenses
Sales and marketing		23,740			93,861			173,656			232,577
General and administrative		408,490			481,398			1,769,557			1,622,944
Total operating expenses		432,230			575,259			1,943,213			1,855,521
Loss from continuing operations		(275,965	)		(519,946	)		(2,254,807	)		(1,782,835	)
Other income (expense)
Interest expense, net		(174,437	)		(99,212	)		(321,616	)		(290,171	)
Asset impairment, patents		(277,061	)		—			(277,061	)		—
Adjustment to the fair value of embedded derivatives		—			48,607			41,265			31,924
Gain on settlement of prior debt owed		7,110			—			739,671			769,148
Total other income (expense), net		(444,388	)		(50,605	)		182,259			510,901
Loss before provision for income taxes		(720,353	)		(570,551	)		(2,072,548	)		(1,271,934	)
Provision for income taxes		—			—			—			—
Net loss		(720,353	)		(570,551	)		(2,072,548	)		(1,271,934	)
Preferred stock dividend		—			(83	)		—			(18,927	)
Net loss attributable to common stockholders	$	(720,353	)	$	(570,634	)	$	(2,072,548	)	$	(1,290,861	)

Net loss attributable to common stockholders per common share (basic and diluted)	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

Weighted-average shares used in computing loss per common share:		416,495,549			240,341,308			383,034,236			188,131,135

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Andalay Solar, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(Unaudited)

	Common Stock
	Number of Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Stockholders' Deficit
Balance as of January 1, 2015		279,475,332	$	279,475	$	82,026,952	$	(85,261,254	)	$	(2,954,827	)
Issuance of common stock pursuant to equity purchase agreement		140,608,178		140,608		1,169,122		—			1,309,730
Beneficial conversion feature on issuance of convertible note		—		—		500,000		—			500,000
Issuance of common stock upon conversion of notes payable		54,565,577		54,566		523,828		—			578,394
Stock-based compensation		—		—		147,048		—			147,048
Net loss		—		—		—		(2,072,548	)		(2,072,548	)
Balance as of September 30, 2015		474,649,087	$	474,649	$	84,366,950	$	(87,333,802	)	$	(2,492,203	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Andalay Solar, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities
Net loss	$	(2,072,548	)	$	(1,271,934	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation		699			11,291
Amortization		88,142			85,039
Impairment of intangible assets		277,061			—
Bad debt expense (benefit)		(4,672	)		4,492
Write down of inventory		369,586			—
Unrealized (gain) loss on fair value of embedded derivatives		(41,265	)		(31,924	)
Accretion of interest on convertible note		—			129,414
Accretion of interest on debt discount		258,379			—
Non-cash stock-based compensation expense		147,048			161,232
Non-cash settlement of prior debt owed		(732,561	)		(769,148	)
Accrued interest payable		20,075			66,498
Changes in assets and liabilities:
Accounts receivable		54,440			422,733
Other receivables		—			21,096
Inventory		174,559			161,766
Prepaid expenses and other current assets		200,005			149,234
Other assets		135,773			14,132
Accounts payable		91,266			111,418
Accrued liabilities and accrued warranty		(65,491	)		(44,935	)
Deferred revenue		(15,450	)		20,000
Net cash used in operating activities		(1,114,954	)		(759,596	)
Cash flows from investing activities
Acquisition of patents		(42,373	)		—
Net cash used in investing activities		(42,373	)		—
Cash flows from financing activities
Borrowing on convertible notes payable		—			600,000
Repayment of notes payable		(109,164	)		(130,480	)
Proceeds from issuance of common stock		1,247,440			625,000
Repayments on capital lease obligations		—			(299	)
Payment of placement agent and registration fees and other direct costs		—			(36,618	)
Employee taxes paid for vesting of restricted stock		—			(8,692	)
Net cash provided by financing activities		1,138,276			1,048,911
Net increase (decrease) in cash		(19,051	)		289,315
Cash
Beginning of period		61,542			150,081
End of period	$	42,491		$	439,396

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Supplemental cash flows disclosures:
Cash paid during the period for interest		$	2,991			$	51,667

Supplemental disclosure of non-cash financing activity:
Embedded derivative on convertible note issued	$	176,771	$	122,630
Embedded derivative converted to equity	$	88,333	$	102,731
Beneficial conversion feature on note refinance	$	500,000	$	—
Grant of warrants on issue of convertible note	$	—	$	170,767
Refinance of line of credit to convertible note payable	$	500,000	$	—
Preferred stock dividend, paid in common stock	$	—	$	18,927
Common stock issued for equity purchase agreement fees	$	12,107	$	—
Conversion of preferred stock to common stock	$	—	$	1,168,787
Conversion of convertible note to common stock	$	670,531	$	392,612
Common stock issued to settle claim	$	—	$	250,000
Accounts payable converted to note payable	$	225,000	$	—
Convertible note issued to financial advisor in exchange for accounts payable	$	—	$	160,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Andalay Solar, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015

(Unaudited)

1. Basis of Presentation and Description of Business

Basis of Presentation — Interim Financial Information

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. They should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements of Andalay Solar, Inc. and its subsidiaries (“Andalay Solar”, “we”, “us”, “our” or the “Company”), formerly Westinghouse Solar, Inc. and Akeena Solar, Inc., for the years ended December 31, 2014 and 2013 appearing in our Form 10-K. The September 30, 2015 unaudited interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements filed with our Annual Report on Form 10-K have been condensed or omitted as permitted by those rules and regulations. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

Description of Business

Andalay Solar is a designer of integrated solar mounting hardware which are integrated with compatible solar panels with 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. During the fourth quarter 2014, we re-entered the solar power installation business. In August, 2015, we revamped our business and implemented our new strategy of licensing our patented products to large module manufacturers and until recently have been focusing our direct efforts on partnering with large national installers. As part of this effort to re-focus our business, we have terminated our solar power installation business, substantially reduced our headcount and have placed most of our existing mounting hardware parts inventory on consignment at reduced prices at three regional companies to serve as the direct sales and support for customers who would like to purchase our products, and are also de-emphasizing our direct efforts. Our main focus is now to rely upon our distribution partners to host customer visits and conduct product demonstrations with support from our personnel. We believe that this new strategy is less capital intensive and will enable us to better focus on our strategic future.

We were incorporated in February 2001 as Akeena Solar, Inc. in the State of California and elected at that time to be taxed as an S corporation. During June 2006, we reincorporated in the State of Delaware and became a C corporation. On August 11, 2006, we entered into a reverse merger transaction with Fairview Energy Corporation, Inc. (“Fairview”). Pursuant to the merger, our stockholders received one share of Fairview common stock for each issued and outstanding share of our common stock. Our common shares were also adjusted from $0.01 par value to $0.001 par value at the time of the Merger. On May 17, 2010, we entered into an exclusive worldwide license agreement with Westinghouse, Inc, which permitted us to manufacture, distribute and market solar panels under the Westinghouse name and in connection therewith, on April 6, 2011, we changed our name to Westinghouse Solar, Inc. On April 13, 2011, we effected a reverse split of our common stock at a ratio of 1 – for – 4. On August 23, 2013, the license agreement with Westinghouse, Inc. was terminated and on September 19, 2013, we changed our name to our current name, Andalay Solar, Inc. and increased our number of authorized shares of common stock to 500,000,000. On June 9, 2015, we increased the number of authorized shares of common stock to 1,250,000,000.

Our Corporate headquarters is located at 2721 Shattuck Avenue, #305, Berkeley, CA 94705 as of September 2015. Our telephone number is (408) 402-9400. Additional information about Andalay Solar is available on our website at http://www.andalaysolar.com/. The information on our web site is not incorporated herein by reference.

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2. Significant Accounting Policies

Liquidity and Financial Position

We currently face challenges meeting the working capital needs of our business. Our primary requirements for working capital are to fund paying for costs associated with product management and licensing, sales efforts with certain prospective installers and distributors, ongoing operating expenses including our payroll, historical debt and accounts payable and purchases for solar mounting hardware equipment. As part of our new strategy to focus on licensing and distribution partnerships rather than directly operating a distribution business, we anticipate having less need to fund the purchase of panels and microinverters that had previously constituted a high percentage of our working capital needs. We have incurred net losses and negative cash flows from operations for the nine months ended September 30, 2015 and for each of the years ended December 31, 2014 and 2013. During 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 well as office lease expense. As of September 30, 2015, we had approximately $42,000 in cash on hand. We intend to address ongoing working capital needs through revenue derived from operations and sales of remaining inventory, along with raising additional debt and equity financing. Our revenue levels remain difficult to predict, and as we anticipate we will continue to sustain losses in the near term, we cannot assure investors that we will be successful in reaching break-even.

In September 2013, we entered into a supply agreement for assembly of our proprietary modules with Tianwei New Energy Co, Ltd., 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 Auxin. In June 2015, we entered into a license agreement with Hyundai Heavy Industries Co., Ltd. whereby we granted Hyundai the right to produce Andalay compatible modules. Hyundai began shipping Andalay compatible modules as of May 2015. We do not have any commitment from Hyundai to produce Andalay compatible modules and Hyundai could terminate its relationship with us at any time. 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 from first tier bankable suppliers such as Hyundai, our inventory and revenue could diminish significantly, causing disruption to our operations.

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. Our significant operating losses, negative cash flow from operations, and challenges in rapidly securing alternative sources of supply for solar panels, raise substantial uncertainty about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty, and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. There can be no assurance that we will be able to raise additional funds on commercially reasonable terms, if at all. There is uncertainty to our anticipated revenue levels and to the timing of cash receipts, which are needed to support our operations. As part of the shift to focus purely on our new strategy, ongoing revenues are expected to be minimal unless and until we can start to ramp up the licensing related sales. We expect this ramp up to occur no earlier than the Spring or Summer 2016 due to the long evaluation process that these installers customarily engage in as well as the seasonality of the solar industry with relatively lower sales in the Winter months. This delay is expected to make it more difficult for us to obtain equity and debt financing. We currently anticipate that we will retain all of our earnings, if any, for development of our business and repayment of historical debt and accounts payable, and do not anticipate paying any cash dividends on common stock in the foreseeable future.

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Securities Purchase Agreement

Because of certain down-round protection in the conversion rate of certain outstanding 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 non-cash benefit for the nine months ended September 30, 2015 of approximately $41,000 on a total of three convertible notes.

In addition, 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 derivative liability and warrant issuance of $109,000 is being accreted to interest using the effective interest method. The relative fair value of the warrants issued in the February 2014 convertible note issuance of $200,000, were allocated to additional paid-in capital. Such value was determined assuming volatility of 169.1, a risk free interest rate of 0.7% and an expected term of 4.1 years. The resulting debt discount from the derivative liability and warrant issuance of $101,000 is being accreted to interest using the effective interest method. The relative fair value of the warrants issued in the March 2014 convertible note issuance of $300,000, were allocated to additional paid-in capital. Such value was determined assuming volatility of 168.8%, a risk free interest rate of 0.8% and an expected term of 4.1 years. The resulting debt discount from the derivative liability and warrant issuance of $154,000 is being accreted to interest using the effective interest method.

On November 1 and December 1, 2013, and on January 1, February 1 and March 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $30,000 each for a total of $150,000, which matured on October 31, November 30 and December 31, 2014, and on January 31 and February 28, 2015, respectively. On April 1, May 1 and June 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $20,000 each, for a total of $60,000, which matured on March 31, April 30 and May 31, 2015, respectively. On July 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $10,000, which matured on June 30, 2015. 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. 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.

Equity Purchase Agreement

On January 23, 2014, we entered into an Equity Purchase Agreement with Southridge Partners II, LP (“Southridge”), that superseded our prior Equity Purchase Agreement with Southridge that was entered into on November 25, 2013 (the “Prior Equity Purchase Agreement”). The terms of the January 2014 Purchase Agreement are identical to those of the Prior Equity Purchase Agreement other than that the New Equity Purchase Agreement provides that the Agreement may not be amended by either party. Pursuant to the Equity Purchase Agreement and as provided in the Prior Equity Purchase Agreement, Southridge has committed to purchase up to $5,000,000 worth of our common stock, over a period of time terminating on the earlier of: (i) 18 months from the effective date of the registration statement to be filed by us for the Purchase Agreement; or (ii) the date on which Southridge has purchased an aggregate maximum purchase price of $5,000,000 pursuant to the Equity Purchase Agreement; Southridge’s commitment to purchase our common stock was subject to various conditions, including, but not limited to, limitations based on the trading volume of our common stock. 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 SEC 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 Purchase Agreement of which partial proceeds of $100,000 was received on March 31, 2014 and $200,000 on April 16, 2014. On June 4, 2014, June 18, 2014 and July 8, 2014, we submitted additional take-down requests for $100,000, $100,000 and $125,000, respectively, pursuant to the terms of the Purchase Agreement.

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On December 10, 2014, we entered into the December Equity Purchase Agreement with Southridge that superseded the Equity Purchase Agreement. The terms of the December Equity Purchase Agreement are substantially similar to those of the Prior Equity Purchase Agreement. Pursuant to the December Equity Purchase Agreement and as provided in the Prior Equity Purchase Agreement, Southridge committed to purchase up to $5,000,000 worth of our common stock, over a period of time terminating on the earlier of: (i) 18 months from the effective date of the registration statement to be filed by us for the Equity Purchase Agreement; or (ii) the date on which Southridge has purchased an aggregate maximum purchase price of $5,000,000 pursuant to the December Equity Purchase Agreement; Southridge’s commitment to purchase our common stock is subject to various conditions, including, but not limited to, limitations based on the trading volume of our common stock. We submitted various take-down requests during the first quarter of 2015 pursuant to the terms of the December Equity Purchase Agreement. As of November 12, 2015, 84,113,042 shares had been sold under the registration statement declared effective on August 12, 2015, at an average price of $0.0131 per share, resulting in total proceeds of approximately $1.1 million.

On July 31, 2015, we filed a Registration Statement on Form S-1/A to register 150 million shares of common stock related to our December Equity Purchase Agreement with Southridge and on August 12, 2015, the SEC declared the Registration Statement effective. On August 27, 2015, we submitted an initial take-down request of $100,000 to Southridge pursuant to the terms of the December Equity Purchase Agreement and subsequent take-down requests of $100,000 as of October 13, 2015 and $100,000 as of November 2, 2015. As of November 12, 2015, 56,860,050 shares had been sold at an average price of $0.00361 per share, resulting in total proceeds of approximately $205,000.

Pursuant to the terms of the December Equity Purchase Agreement we agreed to pay Southridge a commitment fee of 1,000,000 shares of our common stock, of which 500,000 shares of our common stock were due to Southridge on January 16, 2015, the date that the registration statement was declared effective and the remaining 500,000 shares of common stock were due on January 20, 2015, the date that we delivered our first Draw Down Notice to Southridge. We valued the issuance of these shares based on the closing price of the stock as of January 16, 2015, $0.0169 for 500,000, and as of January 20, 2015, $0.0161 for 500,000, and we recorded $16,500 as a reduction in “Additional Paid-In Capital” on our condensed consolidated balance sheets.

On December 10, 2014, we also entered into a Registration Rights Agreement with Southridge pursuant to which we agreed to register shares of the common stock to be issued to Southridge in connection with the December Equity Purchase Agreement.

Settlement of Potential Claims Agreement

On January 22, 2014, we entered into a Settlement of Potential Claims Agreement with ASC Recap LLC (“ASCR”). Pursuant to the 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 our common stock in a §3(a)(10) 1933 Act proceeding. The shares of our 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 the claim in the amount of $1,027,705 that ASCR acquired from one Creditor (the value of the stock that we have 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), resulting in a gain on settlement of $769,148, net of expenses. 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.

During June 2015, we settled a prior debt of approximately $957,000 owed to DLA Piper LLP (US) for $225,000 payable if Andalay achieves certain business milestones but in no event later than July 1, 2016. As part of this agreement, during the nine months ended September 30, 2015, we recorded a gain in other income of $733,000 as a result of this favorable settlement.

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenue from sales of products is recognized when: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sale price is fixed or determinable, and (4) collection of the related receivable is reasonably assured. We recognize revenue when the solar power systems are shipped to the customer. Revenue from installation of a system is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable, and (4) collection of the related receivable is reasonably assured. In general, we recognize revenue upon completion of a system installation for residential installations and we recognize revenue under the percentage-of-completion method for commercial installations. Revenue recognition methods for revenue streams that fall under other categories are determined based on facts and circumstances.

Cash and Cash Equivalents

We consider all highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. We maintain cash and cash equivalents which consist principally of demand deposits with high credit quality financial institutions. At certain times, such amounts exceed FDIC insurance limits. We have not experienced any losses on these investments and, as of September 30, 2015 and December 31, 2014, we had no cash equivalents.

Accounts Receivable

Accounts receivable consist of trade receivables. We regularly evaluate the collectibility of our accounts receivable. An allowance for doubtful accounts is maintained for estimated credit losses, and such losses have historically been minimal and within our expectations. We consider a number of factors when estimating credit losses, including the aging of a customer’s account, creditworthiness of specific customers, historical trends and other information.

Manufacturer and Installation Warranties

The manufacturer directly warrants the solar panels and inverters for a range from 15 to 25 years. We warrant the balance of system components of our products against defects in material and workmanship for five years. We assist our customers in the event of a claim under the manufacturer warranty to replace a defective solar panel or inverter. The warranty liability for the material and the workmanship of the balance of system components of approximately $854,000 as of September 30, 2015 and $938,000 as of December 31, 2014, is included within “Accrued warranty” in the accompanying consolidated balance sheets. During the three and nine months ended September 30, 2015, we recorded an $81,000 favorable adjustment to accrued warranty as a reduction in warranty expense.

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The liability for our warranty consists of the following:

	September 30, 2015			December 31, 2014
Beginning accrued warranty balance	$	938,466		$	1,312,918
Reduction for labor payments and claims made under the warranty		(107,669	)		(75,966	)
Adjustment to warranty liability for discontinued operations		—			(324,349	)
Accruals related to warranties issued during the period		23,283			25,863
Ending accrued warranty balance	$	854,080		$	938,466

Patent Costs

We capitalize external legal costs and filing fees associated with obtaining or defending our patents. Upon issuance of new patents or successful defense of existing patents, we amortize these costs using the straight line method over the shorter of the legal life of the patent or its economic life. We believe the remaining useful life we assign to these patents, approximately 9.25 years as of September 30, 2015, are reasonable. We periodically review our patents to determine whether any such cost have been impaired and are no longer being used. To the extent we are no longer using certain patents, the associated costs will be written off at that time. During the nine months ended September 30, 2015, we recorded an impairment of approximately $277,000 to the carrying value of our patents.

Significant Accounting Policies and Estimates

There have been no material developments or changes to the significant accounting policies discussed in our 2014 Annual Report on Form 10-K or accounting pronouncements issued or adopted, except as described below.

Segment Reporting

During the quarter we were engaged in two business segments, (i) we marketed, sold, designed and installed systems for residential and commercial customers and (ii) we sold our AC solar panels to solar installers, trade workers and do-it-yourself customers through distribution partnerships, our dealer network and retail outlets. As of August 2015, we are engaged in one business segment, which is the sale of our proprietary mounting hardware principally through distribution partnerships who will then sell to dealers and retail outlets. Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by management in deciding how to allocate resources and in assessing performance.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued, Accounting Standards Update (“ASU”) ASU 2015-03 Interests — Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. Recognition and measurement guidance are not impacted by the ASU. The guidance is effective for fiscal years beginning after December 15, 2015, with retrospective disclosure upon transition, for all periods presented. We do not expect there to be any impact on our condensed consolidated financial statements as a result of this guidance.

In February 2015, the FASB issued ASU 2015-02 Consolidation (Topic 810) Amendments to the Consolidation Analysis. Effective for fiscal years beginning after December 15, 2015, the update effects the consolidation criteria around limited partnerships and similar legal entities; evaluation of fees paid to a decision maker or a service provider as a variable interest; the determination of primary beneficiary of a variable interest entity (VIE) when fee arrangements exist, the treatment of related parties in the VIE consolidation model and the consolidation of certain investment funds. We do not expect there to be any impact on our condensed consolidated financial statements as a result of this guidance.

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In January 2015, ASU 2015-01 Income Statement — Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, was issued by the FASB. The ASU eliminates the concept of extraordinary items. Presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be expanded to include items that are both unusual in nature and infrequent in occurrence. The guidance is effective for years beginning after December 15, 2015 and will be adopted in the first quarter of 2016. We do not expect there to be any impact on our condensed consolidated financial statements as a result of this guidance.

In May 2014 the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers” (ASU 2014-09) which requires companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service and requires expanded disclosures. ASU 2014-09 was originally effective for annual reporting periods beginning on or after December 15, 2016 and interim periods therein. In August 2015 the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 one year making it effective for annual reporting periods beginning on or after December 15, 2017 while also providing for early adoption but not before the original effective date. We are currently assessing the impact the adoption of ASU 2014-09 will have on our condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"), to provide guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Since ASU 2014-15 only impacts financial statement disclosure requirements regarding whether there is substantial doubt about an entity's ability to continue as a going concern, we do not expect its adoption to have an impact on our condensed consolidated financial statements.

In November 2014, the FASB issued ASU No. 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity. The amendments in this ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The ASU applies to all entities that are issuers of, or investors in, hybrid financial instruments that are issued in the form of a share and is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We do not expect there to be any impact on our condensed consolidated financial statements as a result of this guidance.

In June 2015 the FASB issued ASU 2015-10, Technical Corrections and Improvements. This update contains amendments that will affect a wide variety of topics in the codification. The amendments in this update will apply to all reporting entities within the scope of the affected accounting guidance. This Accounting Standard Update is effective for fiscal years beginning after December 15, 2015 for public companies. We have not assessed the impact of this guidance on our condensed consolidated financial statements.

In July 2015 the FASB issued ASU 2015-11, Inventory: Simplifying the Measurement of Inventory. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We have not assessed the impact of this guidance on our condensed consolidated financial statements.

In August 2015 the FASB has issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This ASU adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015, Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires the presentation of debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We have not assessed the impact of this guidance on our condensed consolidated financial statements.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.

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3. Segment Reporting

During the quarter ended September 30, 2015, we were engaged in two business segments, (i) the marketing, sale, design and installation of systems for residential and commercial customers and (ii) sale of our AC solar panels to solar installers, trade workers and do-it-yourself customers through distribution partnerships, our dealer network and retail outlets. Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by management in deciding how to allocate resources and in assessing performance.

An analysis of our revenue, operating profit and total assets are as follows (unaudited):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenue
Distribution	$	168,351	$	605,943	$	630,974	$	1,055,344
Installation		22,165		—		176,165		—
	$	190,516	$	605,943	$	807,139	$	1,055,344

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015			2014
Gross profit (loss)	$	148,146	$	55,313	$	(252,219	)	$	72,686
Distribution		8,120		—		(59,375	)		—
Installation	$	156,265	$	55,313	$	(311,594	)	$	72,686

Assets	September 30, 2015		December 31, 2014
Distribution	$	826,087	$	2,560,940
Installation		263		—
	$	826,350	$	2,560,940

We do not allocate operating expenses or other income (expense) to any of these segments for internal reporting purposes, as we do not believe that allocating these expenses is beneficial in evaluating segment performance. Installation assets include only accounts receivable assets. Other than accounts receivable, we do not allocate assets to segments for internal reporting purposes as we do not manage our segments by such metrics.

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4. Other Assets

We entered into a Supply and Warranty Agreement and Master Assignment Agreement with Real Goods Solar, Inc. (“Real Goods”), pursuant to which Real Goods has agreed to perform certain warranty work. The terms of the agreement provide that an escrow account be established as a source of funds from which to satisfy our obligation to pay Real Goods for its fees and reimburse it for its expenses for this warranty work. In March 2011, we entered into an Escrow Agreement with Real Goods and deposited $200,000 into an escrow account. In accordance to the Escrow Agreement, the escrow deposit will be released to us in the amount of $40,000, or one-fifth of the remaining escrow funds, per year after each of the fifth through the ninth anniversary of the escrow agreement, although we believe that the amount may be redeemed earlier. Real Goods returned $110,000 of the escrow amount in December 2014 and in June 2015, Real Goods returned the remaining $90,000 of the escrow amount as part of an agreement whereby Real Goods will no longer have any warranty or other obligations for the Andalay installations but our obligations will remain instead directly with SunRun.

5. Accounts Receivable

Accounts receivable consists of the following:

	September 30, 2015			December 31, 2014
Trade accounts	$	90,603		$	154,172
Less: Allowance for bad debts		(20,215	)		(24,882	)
Less: Allowance for returns		—			(10,834	)
	$	70,388		$	118,456

The following table summarizes the allowance for doubtful accounts as of September 30, 2015 and December 31, 2014:

	Balance as of Beginning of Period		Provisions, net			Write-Off/ Recovery			Balance as of End of Period
Nine months ended September 30, 2015	$	24,882	$	(4,672	)	$	5		$	20,215
Year ended December 31, 2014	$	2,899	$	36,763		$	(14,780	)	$	24,882

6. Inventory

Inventory consists of the following:

	September 30, 2015		December 31, 2014
Finished goods	$	183,175	$	669,706
Work in process		1,050		58,666
	$	184,225	$	728,372

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Inventory is stated at the lower of cost (on an average basis) or market value. We determine cost based on our weighted-average purchase price and include both the costs of acquisition and the shipping costs in our inventory. We regularly review the cost of inventory against its estimated market value and record a lower of cost or market write-down to cost of goods sold, if any inventory has a cost in excess of estimated market value. During the nine months ended September 30, 2015, we recorded a $140,000 non-cash inventory write-down and a $214,000 non-cash inventory write-off, representing 103.5% of revenue in total. The $140,000 write-down was an adjustment to the carrying value of our roof mounting inventory to reflect the decline in market prices compared to our original cost and the $214,000 was an inventory write-off of obsolete inventory.

7. Property and Equipment, Net

Property and equipment, net consist of the following:

	September 30, 2015			December 31, 2014
Office equipment	$	13,500		$	436,051
Leasehold improvements		—			123,278
Vehicles		17,993			17,992
		31,493			577,321
Less: Accumulated depreciation and amortization		(31,493	)		(576,622	)
	$	—		$	699

Depreciation expense for the three months ended September 30, 2015 and 2014 was $0 and $3,000, respectively, and depreciation expense for the nine months ended September 30, 2015 and 2014 was $699 and $29,000, respectively.

8. Accrued Liabilities

Accrued liabilities consist of the following:

	September 30, 2015		December 31, 2014
Accrued salaries, wages, benefits and bonus	$	45,886	$	45,586
Sales tax payable		5,277		662
Accrued accounting and legal fees		18,050		—
Customer deposit payable		1,434		41,265
Accrued interest		44,214		5,683
Other accrued liabilities		20,370		11,033
	$	135,231	$	104,229

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9. Convertible Notes Payable and Credit Facility

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 on 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 Alpha Capital relating to the sale and issuance of a (i) convertible note in the principal amount of $200,000 that matures February 25, 2016 and (ii) five-year warrant (with a cashless exercise feature under certain circumstances) to purchase 5,000,000 shares of our common stock at an exercise price of $0.02 per share, subject to adjustment under certain circumstances. On March 18, 2014, we issued under the Securities Purchase Agreement we entered into with Alpha Capital on February 25, 2014 a (i) convertible note in the principal amount of $300,000 that matures March 18, 2016 and (ii) five–year warrant (with a cashless exercise feature under certain circumstances) to purchase 7,500,000 shares of our common stock at an exercise price of $0.02 per share, subject to adjustment under certain circumstances. 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. During the nine months ended September 30, 2015, the remaining outstanding convertible notes in the principal amount of approximately $520,000, along with accrued interest of $50,531, net of unamortized discount at date of conversion, were converted into 34,565,577 shares of our common stock.

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 non-cash benefit for the nine months ended September 30, 2015 of approximately $41,000 on a total of three convertible notes.

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Line of Credit

On September 30, 2013, we entered into a loan and security agreement (the “Loan Agreement”) with Alpha Capital Anstalt (“Alpha Capital”) and Collateral Services, LLC to provide financing, on a discretionary basis, for one year, against our accounts receivable and inventory. The maximum amount that could be borrowed under the Loan Agreement was $500,000. We had the right to borrow up to 80% of our eligible accounts receivable, not in excess of $200,000, 50% of the value of our raw materials in inventory, 65% of our finished goods inventory and 95% of cash, but not in the aggregate amount in excess of $300,000. The advances were secured by a lien on all of our assets. All advances under the Loan Agreement bear interest at a per annum rate of 12% and monthly interest shall be a minimum of $500. At the time of initial funding we paid a loan fee of 50 shares of our Series D Preferred Shares to the lender, in addition to other payments for legal fees. In addition, we paid the collateral agent an initial fee of $5,000 and have agreed to pay an administrative fee to the collateral agent of 0.5% per month of the daily balance during the preceding month or $500 whichever is less. In the event that of a prepayment, we are obligated to pay a prepayment fee in an amount equal to one-half of one percent (0.5%) of $500,000. On September 30, 2013, we requested and received an initial borrowing under the Loan Agreement totaling $350,000. Subsequently, on October 21, 2013, we requested and received an additional $100,000 and on November 20, 2013, we requested and received an additional $50,000. As of December 31, 2014, the balance outstanding under our line of credit was $500,000. On February 27, 2015, we agreed to extend the term of the Loan Agreement for one year, and to exchange the $500,000 plus interest owing under the Loan Agreement for a one year, 8%, convertible note. As of September 30, 2015, a $400,000 convertible note, along with approximately $21,000 in accrued interest, was outstanding. We are no longer able to make borrowings under the Loan Agreement.

The convertible note had been convertible at $0.01 per share of common stock but as part of obtaining Alpha’s consent in order to enable Southridge to sell our shares at a price below $0.01 per share of common stock under the December Equity Purchase Agreement, (i) in September 2015 we agreed to reduce the convertible price to $0.005 per share of its common stock and (ii) in October 2015 Andalay agreed to reduce the convertible price to $0.005 per share of its common stock. On the date we issued the convertible note to Alpha Capital, our stock price was $0.0155 per share of common stock. As a result of the difference between the stock price at the time of issuance and the conversion price, we recorded a beneficial conversion feature in the amount of $275,000 as a reduction to the Convertible Note and an increase in additional paid-in capital on our condensed consolidated balance sheets. The beneficial conversion feature is being amortized over the 12 month term of the Note. We recorded additional interest expense of approximately $183,000 during the nine months ended September 30, 2015 for accretion of interest on the debt discount related to the beneficial conversion feature.

10. Stockholders’ Deficit

We have 1,251,000,000 shares of capital stock authorized under our certificate of incorporation, consisting of 1,250,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of September 30, 2014, we had authorized (i) 2,000 shares of Series A Convertible Preferred Stock, par value $0.001, (ii) 4,000 shares of Series B 4% Convertible Preferred Stock, par value $0.001, (iii) 1,175 shares of our Series C 8% Convertible Preferred Stock, par value $0.001, and (iv) 1,180 shares of our Series D 8% Convertible Preferred Stock, par value $0.001. All preferred stock has been converted or cancelled and none remain outstanding

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 SEC 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 $200,000 on April 16, 2014. On April 17, 2014, we issued 8,079,800 shares of our common stock in a Section 3(a) (10) proceeding that generated proceeds in the amount of $250,000 in full settlement of a claim (see Note 17. Commitments and Contingencies). On June 4, 2014, June 18, 2014 and July 8, 2014, we submitted additional take-down requests for $100,000, $100,000 and $125,000, respectively, pursuant to the terms of the Equity Purchase Agreement. We issued a total of 31,760,578 shares of our common stock at an average price of $0.02 per share pursuant to the terms of the Equity Purchase Agreement. We have approximately 3.2 million shares remaining under our effective Form S-1 and available pursuant to the terms of our Equity Purchase Agreement following our take-downs through August 11, 2014.

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On January 23, 2014, we entered into an Equity Purchase Agreement with Southridge Partners II, LP (“Southridge”). Pursuant to the Equity Purchase Agreement, Southridge committed to purchase up to $5,000,000 worth of our common stock, over a period of time terminating on the earlier of: (i) 18 months from the effective date of the registration statement to be filed by us for the Equity Purchase Agreement; or (ii) the date on which Southridge has purchased an aggregate maximum purchase price of $5,000,000 pursuant to the New Equity Purchase Agreement; Southridge’s commitment to purchase our common stock was subject to various conditions, including, but not limited to, limitations based on the trading volume of our common stock. 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 $200,000 on April 16, 2014. On June 4, 2014, June 18, 2014 and July 8, 2014, we submitted additional take-down requests for $100,000, $100,000 and $125,000, respectively, pursuant to the terms of the Equity Purchase Agreement.

Pursuant to the terms of our Equity Purchase Agreement, a placement fee of one million shares of unregistered common stock was due to Southridge pursuant to the terms of the Equity Purchase Agreement. As of March 31, 2014, we issued 500,000 shares of unregistered common stock due upon the declaration of effectiveness of our Form S-1/A by the SEC of our Form S-1/A. In April 2014, we issued the remaining 500,000 shares of unregistered common stock to Southridge upon the completion of our initial take-down request under the Equity Purchase Agreement.

On December 10, 2014, we entered into the December Equity Purchase Agreement with Southridge, that superseded our Prior Equity Purchase Agreement with Southridge that was entered into on January 23, 2014. The terms of the December Equity Purchase Agreement are substantially similar to those of the Prior Equity Purchase Agreement. Pursuant to the December Equity Purchase Agreement and as provided in the Prior Equity Purchase Agreement, Southridge committed to purchase up to $5,000,000 worth of our common stock, over a period of time terminating on the earlier of: (i) 18 months from the effective date of the registration statement to be filed by us for the Equity Purchase Agreement; or (ii) the date on which Southridge has purchased an aggregate maximum purchase price of $5,000,000 pursuant to the December Equity Purchase Agreement; Southridge’s commitment to purchase our common stock is subject to various conditions, including, but not limited to, limitations based on the trading volume of our common stock. We submitted various take-down requests during the first quarter of 2015 pursuant to the terms of the December Equity Purchase Agreement. As of November 12, 2015, 84,113,042 shares had been sold at an average price of $0.0131 per share, resulting in total proceeds of approximately $1.1 million.

Pursuant to the terms of the December Equity Purchase Agreement we agreed to pay Southridge a commitment fee of 1,000,000 shares of our common stock, of which 500,000 shares of our common stock were paid to Southridge on January 16, 2015, the date that the registration statement was declared effective and the remaining 500,000 shares of common stock were paid on January 20, 2015, the date that we delivered our first Draw Down Notice to Southridge. We valued the issuance of these shares based on the closing price of the stock as of January 16, 2015, $0.0169 for 500,000, and as of January 20, 2015, $0.0161 for 500,000, and we recorded $16,500 as a reduction in “Additional Paid-In Capital” on our condensed consolidated balance sheets.

On July 31, 2015, we filed a Registration Statement on Form S-1/A to register 150 million shares of common stock related to our December Equity Purchase Agreement with Southridge and on August 12, 2015, the SEC declared the Registration Statement effective. On August 27, 2015, we submitted an initial take-down request of $100,000 to Southridge pursuant to the terms of the December Equity Purchase Agreement and subsequent take-down requests of $100,000 as of October 13, 2015 and $100,000 as of November 2, 2015. As of November 12, 2015, 56,860,050 shares had been sold under the registration statement that was declared effective on August 12, 2015, at an average price of $0.00361 per share, resulting in total proceeds of approximately $205,000.

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11. Stock Option Plan and Stock Incentive Plan

On August 8, 2006, we adopted the Akeena Solar, Inc. 2006 Stock Incentive Plan (the “Stock Plan”) pursuant to which shares of common stock are available for issuance to employees, directors and consultants under the Stock Plan as restricted stock and/or options to purchase common stock. The Stock Plan allows for issuance of up to 125,000,000 shares and there were 120,586,033 shares available for issuance under the Stock Plan as of September 30, 2015.

Restricted stock and options to purchase common stock may be issued under the Stock Plan. The restriction period on restricted stock grants generally expires at a rate of 25% per year over four years, unless decided otherwise by our Compensation Committee. Options to purchase common stock generally vest and become exercisable as to one-third of the total amount of shares subject to the option on each of the first, second and third anniversaries from the date of grant. Options to purchase common stock generally have a 5-year term.

We use the Black-Scholes-Merton Options Pricing Model (“Black-Scholes”) to estimate fair value of our employee and our non-employee director stock-based awards. Black-Scholes requires various judgmental assumptions, including estimating stock price volatility, expected option life and forfeiture rates. If we had made different assumptions, the amount of our deferred stock-based compensation, stock-based compensation expense, gross margin, net loss and net loss per share amounts could have been significantly different. We believe that we have used reasonable methodologies, approaches and assumptions to determine the fair value of our common stock, and that our deferred stock-based compensation and related amortization were recorded properly for accounting purposes. If any of the assumptions we used change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

We measure compensation expense for non-employee stock-based compensation under Accounting Standards Codification 505-50, “Equity-Based Payments to Non-Employees.” The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The estimated fair value is measured utilizing Black-Scholes using the value of our common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete (generally the vesting date). The fair value of the equity instrument is charged directly to expense and additional paid-in capital.

We recognized stock-based compensation expense of approximately $38,000 and $50,000 during the three months ended September 30, 2015 and 2014, respectively, and approximately $147,000 and $321,000 during the nine months ended September 30, 2015 and 2014, respectively, relating to compensation expense calculated based on the fair value at the time of grant for restricted stock and based on Black-Scholes for stock options granted under the Stock Plan. Stock-based compensation expense for the nine months ended September 30, 2014, included $160,000, related to the issuance of convertible notes for our financial advisor.

The following table sets forth a summary of restricted stock activity for the nine months ended September 30, 2015:

	Number of Restricted Shares			Weighted-Average Grant Date Fair Value
Outstanding and not vested beginning balance as of January 1, 2015		7,186		$	2.16
Granted		—		$	—
Forfeited/cancelled		—		$	—
Released/vested		(7,186	)	$	2.16
Outstanding and not vested as of September 30, 2015		—		$	—

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Restricted stock is valued at the grant date fair value of the common stock and expensed over the requisite service period or vesting period. We estimate forfeitures when recognizing stock-based compensation expense for restricted stock, and the estimate of forfeitures is adjusted over the requisite service period should actual forfeitures differ from such estimates. As of September 30, 2015, there was no remaining unrecognized stock-based compensation expense associated with the granting of unvested restricted stock. As of December 31, 2014, there was approximately $7,000 of unrecognized stock-based compensation expense associated with unvested restricted stock. The total fair value of shares vested during the nine months ended September 30, 2015 and 2014, was approximately $7,000 and $31,000, respectively. Tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows on our consolidated statements of cash flows. During the three and nine months ended September 30, 2015 and 2014, there were no excess tax benefits relating to restricted stock and therefore there is no impact on the accompanying condensed consolidated statements of cash flows.

The following table sets forth a summary of stock option activity for the nine months ended September 30, 2015:

	Number of Shares Subject to Option		Weighted-Average Exercise Price
Outstanding as of January 1, 2015		37,034,483	$	0.03
Granted		—	$	—
Forfeited/cancelled/expired		37,034,483	$	0.03
Exercised		—	$	—
Outstanding as of September 30, 2015		—	$	—
Exercisable as of September 30, 2015		—	$	—

Stock options are valued at the estimated fair value grant date or the measurement date and expensed over the requisite service period or vesting period. The weighted-average volatility was based upon the historical volatility of our common stock price. There were no stock options granted during the three and nine months ended September 30, 2015 and 2014.

On September 30, 2015, the Board of Directors cancelled all outstanding stock options. The 37,034,483 cancelled stock options include 15 million options issued to Steven Chan, our Chief Executive Officer. We have no plans to reissue stock options for at least the next six months to any of our officers, directors, employees or contractors. We are attempting to reduce cash compensation expenses with our officers, employees and contractors and are discussing both flexible and reduced workloads as well as offers to exchange restricted stock of Andalay Solar for reduced cash compensation.

The weighted-average remaining contractual term for the stock options outstanding (vested and expected to vest) and exercisable as December 31, 2014, was 4.4 years. The total estimated fair value of stock options vested during the nine months ended September 30, 2014 was approximately $29,000. The aggregate intrinsic value of stock options outstanding as of September 30, 2015 was zero.

We estimate forfeitures when recognizing stock-based compensation expense for stock options and the estimate of forfeitures is adjusted over the requisite service period should actual forfeitures differ from such estimates. As of December 31, 2014, there was approximately $514,000 of unrecognized stock-based compensation expense associated with stock options granted. Stock-based compensation expense relating to these stock options is being recognized over a weighted-average period of 3.1 years. Tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) is classified as financing cash flows on our consolidated statements of cash flows. During the three and nine ended September 30, 2015, there were no excess tax benefits relating to stock options and therefore there is no impact on the accompanying consolidated statements of cash flows.

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12. Stock Warrants and Warrant Liability

On December 19, 2013 and February 25, 2014, we entered into securities purchase agreements with certain institutional accredited investors relating to the sale and issuance of (i) convertible notes in the principal amount of $250,000, $200,000 and $300,000 that mature on December 19, 2015, February 25, 2016 and March 19, 2016, respectively and (ii) five- year warrants (with a cashless exercise feature under certain circumstances) to purchase 6,250,000, 5,000,000 and 7,500,000 shares, respectively, of our common stock at an exercise price of $0.02 per share, subject to adjustment under certain circumstances. See Note 9 for further discussion of the issuance of the convertible notes.

The following table summarizes the Warrant activity for the nine months ended September 30, 2015:

	Warrants for Number of Shares		Weighted-Average Exercise Price
Outstanding as of January 1, 2015		22,148,045	$	0.23
Issued		—		—
Exercised		—		—
Cancelled/expired		—		—
Outstanding as of September 30, 2015		22,148,045	$	0.23

The majority of our warrants outstanding are not exercisable for nine months from the date of issuance and are exercisable for either 4.5 years or 5 years thereafter. Our outstanding warrants expire on various dates between December 2015 and March 2019.

13. Earnings Per Share

On January 1, 2009, we adopted Accounting Standards Codification 260 (formerly Financial Accounting Standards Board Staff Position (“FSP”) Emerging Issues Task Force (“EITF 03-6-1”) (“ASC 260”), Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (the “Staff Position”), which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are considered participating securities and shall be included in the computation of net income (loss) per share pursuant to the two-class method described in ASC 260 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 128), Earnings Per Share.

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In accordance with the ASC 260, basic net income (loss) per share is computed by dividing net income (loss), excluding net income (loss) attributable to participating securities, by the weighted average number of shares outstanding less the weighted average unvested restricted shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss), excluding net income (loss) attributable to participating securities, by the denominator for basic net income (loss) per share and any dilutive effects of stock options, restricted stock, convertible notes and warrants.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Basic:
Numerator:
Net loss	$	(720,353	)	$	(570,551	)	$	(2,072,548	)	$	(1,271,934	)
Preferred deemed dividend and preferred stock dividend		—			(83	)		—			(18,927	)
Less: Net loss allocated to participating securities		—			598			6			5,973
	$	(720,353	)	$	(570,036	)	$	(2,072,554	)	$	(714,959	)
Denominator:
Weighted-average shares outstanding		416,495,549			240,593,277			383,035,331			189,005,946
Weighted-average unvested restricted shares outstanding		—			(251,969	)		(1,095	)		(874,811	)
Denominator for basic net loss per share		416,495,549			240,341,308			383,034,236			188,131,135

Basic net loss per share attributable to common stockholders	$	(0.00	)	$	(0.00	)	$	(0.01	)	$	(0.01	)

The following table sets forth potential shares of common stock at the end of each period presented that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive:

	September 30, 2015		December 31, 2014
Stock options outstanding		—		37,034,483
Unvested restricted stock		—		7,186
Warrants to purchase common stock		22,148,045		22,148,045

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14. Concentration of Risk

Supplier Relationships

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. We began receiving product from Auxin in December 2014. In June 2015, we entered into a license agreement with Hyundai whereby we granted Hyundai the right to produce Andalay compatible modules. Hyundai began shipping Andalay compatible modules as of May 2015. We do not have any commitment from Hyundai to produce Andalay compatible modules and Hyundai could terminate its relationship with us at any time. Although we believe we can find alternative suppliers for solar panels manufactured to our specifications, our operations would be disrupted and our inventory and revenue could diminish significantly unless we are able to rapidly secure alternative sources of supply from first tier bankable suppliers such as Hyundai.

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 September 30, 2015, Suntech has not sought to enforce its judgment. As of September 30, 2015, 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 nine months ended September 30, 2015, two 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 and Rectify LLC, a residential solar installer in Indiana. For the nine months ended September 30, 2015 and 2014, the percentages of sales of our top two customers are as follows:

	Nine Months Ended September 30,
	2015			2014
Smart Energy Today		30.4	%		13.5	%
Rectify LLC		10.8	%		—
Saddleback Cellars		—			—
WDC Solar, Inc.		—			14.7	%
JCF Wholesale		—			10.6	%

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The percentage of our gross accounts receivable for our top customers as of September 30, 2015 and December 31, 2014, are as follows:

	September 30, 2015			December 31, 2014
WDC Solar, Inc.		54.6	%		40.1	%
Lowe’s Retail		11.4	%		16.8	%
Hyundai Heavy Industries, Co., Ltd		10.7	%		—

We maintain reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded management’s estimates. Our top three suppliers accounted for approximately 24% and 39% of purchases as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015 and December 31, 2014, accounts payable included amounts owed to our top three suppliers of approximately $29,000 and $0, respectively.

15. Fair Value Measurement

We use a fair-value approach to value certain assets and liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. We use a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

•	Level one — Quoted market prices in active markets for identical assets or liabilities;

•	Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

•	Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter. Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

Liabilities	Level 1		Level 2		Level 3		December 31, 2014
Fair value of derivative liability – embedded conversion feature	$	—	$	—	$	129,598	$	129,598
Total	$	—	$	—	$	129,598	$	129,598

On August 30, 2013, November 25, 2013 and December 19, 2013, we entered into securities purchase agreements relating to the sale and issuance of convertible notes in the principal amounts of $200,000, $200,000 and $250,000. Each of 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, 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. The terms of the convertible notes meet the criteria for the bifurcation of an embedded derivative. Therefore, we recorded the fair value of the embedded derivative liability as of the issuance date for each of the convertible notes for an aggregate fair value of $243,889.

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We use a model based on Monte Carlo simulation to value the embedded conversion feature of our notes payable that are subject to fair value liability accounting. The determination of the fair value as of the reporting date is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the security and risk-free interest rate. In addition, the model uses multiple Monte Carlo simulations requiring the input of an expected life for the securities for which we have estimated and expectations of the timing and amount of future financing we may require. The fair value of the embedded conversion feature liability is revalued each balance sheet date utilizing our Monte Carlo simulation-based model computations with the decrease or increase in fair value being reported in the statement of Operations as other income or expense, respectively. The primary factors affecting the fair value of the embedded conversion feature liability are our stock price and volatility. In addition, the use of a Monte Carlo simulation-based model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

During the nine months ended September 30, 2015, the Monte Carlo simulation-based model was used to calculate the fair value of the embedded conversion feature based on a stock price of between $0.011 and $0.036 and a volatility of between 94.4% and 99.7%.

The following table shows the changes in Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2015:

	Derivative Liability – Embedded Conversion Feature			Total Level 3
Beginning balance – January 1, 2015	$	129,598		$	129,598
Issuances		—			—
Conversions		(88,333	)		(88,333	)
Total realized and unrealized gains or losses		(41,265	)		(41,265	)
Ending balance – September 30, 2015	$	—		$	—

16. Income Taxes

Deferred income taxes arise from timing differences resulting from income and expense items reported for financial account and tax purposes in different periods. A deferred tax asset valuation allowance is recorded when it is more likely than not that deferred tax assets will not be realized. During the three and nine months ended September 30, 2015, there was no income tax expense or benefit for federal and state income taxes in the accompanying condensed consolidated statements of operations due to our net loss and a valuation allowance on the resulting deferred tax asset. Our deferred tax asset has a 100% valuation allowance.

17. Commitments and Contingencies

Litigation

We are involved in litigation from time to time in the ordinary course of business. In the opinion of management, the outcome of such proceedings will not materially affect our financial position, results of operations or cash flows.

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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 of integrated solar mounting hardware which are integrated with compatible solar panels and 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. During the fourth quarter 2014, we re-entered the solar power installation business which we again exited in August 2015.

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. 348565 3 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.

During the quarter ended September 30, 2015, we were engaged in two business segments, (i) marketing, sale, design and installation of systems for residential and commercial customers and (ii) sale of our AC solar panels to solar installers, trade workers and do-it-yourself customers through distribution partnerships, our dealer network and retail outlets. As of August 2015, we are engaged in one business segment, which is the sale of our proprietary mounting hardware principally through distribution partnerships who then sell to dealers and retail outlets. Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by management in deciding how to allocate resources and in assessing performance.

To date, we have not generated sufficient revenue from operations to achieve our business goals and achieve profitability and there can be no assurance that we will do so in the future or that funding will be available to allow us to do so or to operate at our current level for the next twelve months. Our efforts to make sales our proprietary mounting hardware principally through distribution partnerships have been intended to both reduce our near term operating expenses as well as result in a future material increase in order volume for our mounting hardware parts. While the goal is to sell many more watts worth of our mounting hardware parts, this new focus will have less revenue per watt as the mounting hardware portion is a small percentage (under 15%) of the total AC solar panel kit revenue that we previously focused on. The ability to win meaningful business with large national installers is challenging as the evaluation and approval process within most large national installers can be lengthy and complicated as there are often multiple internal decision makers and evaluation criteria as well as third party lease fund approvals that will need to be achieved in order for us to be successful to sell our product.

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Concentration of Risk

Supplier Relationships

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. We began receiving product from Auxin in December 2014. In June 2015, we entered into a license agreement with Hyundai whereby we granted Hyundai the right to produce Andalay compatible modules. Hyundai began shipping Andalay compatible modules as of May 2015. We do not have any commitment from Hyundai to produce Andalay compatible modules and Hyundai could terminate its relationship with us at any time as well as discontinue future production of Andalay compatible modules. Although we believe we can find alternative suppliers for solar panels manufactured to our specifications, our operations would be disrupted and our inventory and revenue could diminish significantly unless we are able to rapidly secure alternative sources of supply from first tier bankable suppliers such as Hyundai.

Customer Relationships

	Nine Months Ended September 30,
	2015			2014
Smart Energy Today		30.4	%		13.5	%
Rectify LLC		10.8	%		—
Saddleback Cellars		—			—
WDC Solar, Inc.		—			14.7	%
JCF Wholesale		—			10.6	%

The percentage of our gross accounts receivable for our top customers as of September 30, 2015 and December 31, 2014, are as follows:

	September 30, 2015			December 31, 2014
WDC Solar, Inc.		54.6	%		40.1	%
Lowe’s Retail		11.4	%		16.8	%
Hyundai Heavy Industries, Co., Ltd		10.7	%		—

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Three Months Ended September 30, 2015 as Compared to Three Months Ended September 30, 2014

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 September 30, 2015,
	2015					2014
Net revenue	$	190,516		100.0	%	$	605,943		100.0	%
Cost of goods sold		34,251		18.0	%		550,630		90.9	%
Gross profit (loss)		156,265		82.0	%		55,313		9.1	%
Operating expenses
Sales and marketing		23,740		12.5	%		93,861		15.5	%
General and administrative		408,490		214.4	%		481,398		79.4	%
Total operating expenses		432,230		226.9	%		575,259		94.9	%
Loss from continuing operations		(275,965	)	(144.9	)%		(519,946	)	(85.8	)%
Other income (expense)
Interest expense, net		(174,437	)	(91.6	)%		(99,212	)	(16.4	)%
Asset impairment - patents		(277,061	)	(145.4	)%
Adjustment to the fair value of embedded derivatives		—		0.0	%		48,607		8.0	%
Gain on settlement of prior debt owed		7,110		3.7	%		—		0.0	%
Total other income (expense), net		(444,388	)	(233.3	)%		(50,605	)	(8.4	)%
Loss before provision for income taxes		(720,353	)	(378.1	)%		(570,551	)	(94.2	)%
Provision for income taxes		—		0.0	%		—		0.0	%
Net loss		(720,353	)	(378.1	)%		(570,551	)	(94.2	)%
Preferred stock dividend		—		(0.0	)%		(83	)	(0.0	)%
Net loss attributable to common stockholders	$	(720,353	)	(378.1	)%	$	(570,634	)	(94.2	)%

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

Weighted-average shares used in computing loss per common share:		416,495,549					240,341,308

Net Revenue

We generate revenue from the sale and installation of solar power systems. For the three months ended September 30, 2015, we generated $191,000 of revenue, a decrease of approximately $415,000, or 68.6%, compared to approximately $606,000 of revenue for the three months ended September 30, 2014. The decrease in revenue was due to a decrease in watts sold and 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 September 30, 2015, was 18.0% of net revenue, compared to 90.9% for the three months ended September 30, 2014. Gross profit for the three months ended September 30, 2015, was approximately $156,000, or 82.0% of revenue, compared to gross profit of approximately $55,000 or 9.1% of revenue for the same period in 2014. During the three months ended September 30, 2015, we recorded a favorable adjustment to warranty expense of approximately $81,000. Excluding the favorable adjustment to warranty expense, gross profit was approximately $76,000, or 39.7% of revenue. Excluding the favorable adjustment to warranty expense, the increase in gross margin in the three months ended September 30, 2015, compared to the three months ended September 30, 2014, was due to a decrease in the cost of solar panels and installation parts and lower inventory overhead allocations.

Sales and Marketing Expenses

Sales and marketing expenses for the three months ended September 30, 2015, were approximately $24,000, or 12.5% of net revenue as compared to approximately $94,000, or 15.5% of net revenue during the same period of the prior year. The approximately $70,000 decrease in sales and marketing expenses for the three months ended September 30, 2015, compared to the same period in 2014 was primarily due to a decrease of approximately $47,000 in payroll and commission expense, approximately $19,000 in travel and entertainment and approximately $10,000 in stock-based compensation expense. The decrease in payroll costs and stock-based compensation expense was due to lower headcount. The decrease in travel and entertainment was due to a decrease in travel related costs.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2015, were approximately $408,000, or 214.4% of net revenue as compared to approximately $481,000, or 79.4% of net revenue during the same period of the prior year. The increase in general and administrative expense for the three months ended September 30, 2015, compared to the same period in 2014, was due primarily to a decrease in investor relations fees of approximately $36,000, professional fees of approximately $21,000, payroll and benefits of approximately $17,000, accounting and legal fees of approximately $17,000, research and development costs of approximately $15,000 and stock-based compensation expense of approximately $10,000. The decrease in professional fees was due to lower consulting fees. The decrease in payroll and benefits was due to lower headcount. The decrease in legal and accounting fees was due lower utilization of legal and accounting services. The decrease in stock compensation expense was due to the timing of restricted stock and stock option grants.

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Interest Expense, Net

During the three months ended September 30, 2015, net interest expense was approximately $174,000 compared with net interest expense of approximately $99,000 for the same period in 2014. The increase in interest expense was associated with related to interest expense recorded as a result of the beneficial conversion feature on our outstanding convertible notes.

Asset impairment

During the three months ended September 30, 2015, we recorded an asset impairment of approximately $277,000 on the write-down in the value of our patents.

Settlement of prior debt owed

During the three months ended September 30, 2015, we recorded a settlement expense of approximately $7,000.

Income Taxes

During the three months ended September 30, 2015 and 2014, there was no income tax expense or benefit for federal and state income taxes reflected in our condensed consolidated statements of operations due to our net loss and a valuation allowance on the resulting deferred tax asset.

Net Loss

Net loss for the three months ended September 30, 2015, was approximately $720,000, compared to a net loss of approximately $571,000 for the three months ended September 30, 2014.

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Nine Months Ended September 30, 2015 as Compared to Nine Months Ended September 30, 2014

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:

	Nine Months Ended September 30, 2015,
	2015					2014
Net revenue	$	807,139		100.0	%	$	1,055,344		100.0	%
Cost of goods sold		1,118,733		138.6	%		982,658		93.1	%
Gross profit (loss)		(311,594	)	(38.6	)%		72,686		6.9	%
Operating expenses
Sales and marketing		173,656		21.5	%		232,577		22.0	%
General and administrative		1,769,557		219.2	%		1,622,944		153.8	%
Total operating expenses		1,943,213		240.8	%		1,855,521		175.8	%
Loss from continuing operations		(2,254,807	)	(279.4	)%		(1,782,835	)	(168.9	)%
Other income (expense)
Interest expense, net		(321,616	)	(39.9	)%		(290,171	)	(27.5	)%
Asset impairment - patents		(277,061	)	(34.3	)%		—
Adjustment to the fair value of embedded derivatives		41,265		5.1	%		31,924		3.0	%
Gain on settlement of prior debt owed		739,671		91.6	%		769,148		72.9	%
Total other income (expense), net		182,259		22.6	%		510,901		48.4	%
Loss before provision for income taxes		(2,072,548	)	(256.8	)%		(1,271,934	)	(120.5	)%
Provision for income taxes		—		0.0	%		—		0.0	%
Net loss		(2,072,548	)	(256.8	)%		(1,271,934	)	(120.5	)%
Preferred stock dividend		—		(0.0	)%		(18,927	)	(1.8	)%
Net loss attributable to common stockholders	$	(2,072,548	)	(256.8	)%	$	(1,290,861	)	(122.3	)%

Net loss attributable to common stockholders per common share (basic and diluted)	$	(0.01	)			$	(0.01	)

Weighted-average shares used in computing loss per common share:		383,034,236					188,131,135

Net Revenue

We generate revenue from the sale and installation of solar power systems. For the nine months ended September 30, 2015, we generated approximately $807,000 of revenue, a decrease of approximately $248,000, or 23.5%, compared to approximately $1.1 million of revenue for the nine months ended September 30, 2014. The decrease in revenue was due to a decrease in watts sold and 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 nine months ended September 30, 2015, was 138.6% of net revenue, compared to 93.1% for the nine months ended September 30, 2014. Gross loss for the nine months ended September 30, 2015, was approximately $312,000, or 38.6% of revenue, compared to gross profit of approximately $73,000 or 6.9% of revenue for the same period in 2014. During the nine months ended September 30, 2015, we recorded a favorable adjustment to warranty expense of approximately $81,000. Also during the nine months ended September 30, 2015, we recorded a $140,000 non-cash inventory write-down and a $214,000 non-cash inventory write-off, representing 43.9% of revenue in total. The $140,000 write-down was an adjustment to the carrying value of our roof mounting inventory to reflect the decline in market prices compared to our original cost and the $214,000 was an inventory write-off of obsolete inventory. Excluding the favorable adjustment to warranty expense and the write-down and write-off of inventory, gross loss for the nine months ended September 30, 2015, was approximately $38,000, or 4.7% of revenue.

Sales and Marketing Expenses

Sales and marketing expenses for the nine months ended September 30, 2015, were approximately $173,000, or 21.5% of net revenue as compared to approximately $233,000, or 22.0% of net revenue during the same period of the prior year. The approximately $59,000 decrease in sales and marketing expenses for the nine months ended September 30, 2015, compared to the same period in 2014 was primarily due to a decrease of approximately $28,000 in travel and entertainment, approximately $13,000 in payroll and commission expense, and approximately $4,000 in advertising expense. The decrease in travel and entertainment was due to a decrease in travel related costs. The decrease in payroll and commissions was due to lower headcount. The decrease in advertising expense was due to lower advertising.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2015, were approximately $1.8 million or 219.2% of net revenue as compared to approximately $1.6 million, or 153.8% of net revenue during the same period of the prior year. The increase in general and administrative expense for the nine months ended September 30, 2015, compared to the same period in 2014, was due primarily to an increase in professional fees of approximately $202,000, payroll and benefits of approximately $100,000 and settlement expense of approximately $20,000. The increase in professional fees was due to higher consulting fees. The increase in payroll and benefits was due to higher headcount. The increase in settlement expense was to settle a claim with a former supplier.

Interest Expense, Net

During the nine months ended September 30, 2015, net interest expense was approximately $322,000 compared with net interest expense of approximately $290,000 for the same period in 2014. The increase in interest expense was associated with an increase in interest expense related to interest expense recorded as a result of the beneficial conversion feature on our outstanding convertible notes, partially offset by a decrease in convertible notes outstanding.

Asset impairment

During the nine months ended September 30, 2015, we recorded an asset impairment of approximately $277,000 on the write-down in the value of our patents.

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Gain on adjustment to the Fair Value of Embedded Derivatives

During the nine months ended September 30, 2015, we recorded mark-to-market gain on adjustments to reflect the fair value of embedded derivatives related to the issuance of our convertible notes, resulting in an unrealized gain of approximately $41,000 in our condensed consolidated statements of operations compared with approximately $32,000 for the same period in 2014.

Gain on settlement of prior debt owed

During June 2015, we settled a prior debt of approximately $957,000 owed to DLA Piper LLP (US) for approximately $225,000 payable if Andalay achieves certain business and milestones but in no event later than July 1, 2016. During the nine months ended September 30, 2014, we recorded a gain on settlement in other income of approximately $769,000 as a result of a favorable settlement on a prior debt owed to a creditor.

Income Taxes

During the nine months ended September 30, 2015 and 2014, there was no income tax expense or benefit for federal and state income taxes reflected in our condensed consolidated statements of operations due to our net loss and a valuation allowance on the resulting deferred tax asset.

Net Loss

Net loss for the nine months ended September 30, 2015, was approximately $2.1 million, compared to a net loss of approximately $1.3 million for the nine months ended September 30, 2014.

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 nine months ended September 30, 2015 and for each of the two years in the period ended 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 September 30, 2015, we had approximately $42,000 of cash on hand. We intend to address ongoing working capital needs through sales of products, along with raising additional debt and equity financing. 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 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 condensed 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.

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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 $0.02 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. During the nine months ended September 30, 2015, the remaining outstanding convertible notes in the principal amount of approximately $520,000, along with accrued interest of $50,531, net of unamortized discount at date of conversion, were converted into 34,565,577 shares of our common stock.

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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 benefit for the nine months ended September 30, 2015 of $41,000 on the fair value of derivatives.

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 derivative liability and warrant issuance of $109,000 is being accreted to interest using the effective interest method. The relative fair value of the warrants issued in the February 2014 convertible note issuance of $200,000, were allocated to additional paid-in capital. Such value was determined assuming volatility of 169.1, a risk free interest rate of 0.7% and an expected term of 4.1 years. The resulting debt discount from the derivative liability and warrant issuance of $101,000 is being accreted to interest using the effective interest method. The relative fair value of the warrants issued in the March 2014 convertible note issuance of $300,000, were allocated to additional paid-in capital. Such value was determined assuming volatility of 168.8%, a risk free interest rate of 0.8% and an expected term of 4.1 years. The resulting debt discount from the derivative liability and warrant issuance of $154,000 is being accreted to interest using the effective interest method.

On November 1 and December 1, 2013, and on January 1, February 1 and March 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $30,000 each for a total of $150,000, which mature on October 31, November 30 and December 31, 2014, and on January 31 and February 28, 2015, respectively. On April 1, May 1 and June 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $20,000 each, for a total of $60,000, which mature on March 31, April 30 and May 31, 2015, respectively. On July 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $10,000, which matures on June 30, 2015. 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. 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.

Line of credit

On September 30, 2013, we entered into a loan and security agreement (the “Loan Agreement”) with Alpha Capital Anstalt (“Alpha Capital”) and Collateral Services, LLC to provide financing, on a discretionary basis, for one year, against our accounts receivable and inventory. The maximum amount that could be borrowed under the Loan Agreement was $500,000. We had the right to borrow up to 80% of our eligible accounts receivable, not in excess of $200,000, 50% of the value of our raw materials in inventory, 65% of our finished goods inventory and 95% of cash, but not in the aggregate amount in excess of $300,000. The advances were secured by a lien on all of our assets. All advances under the Loan Agreement bear interest at a per annum rate of 12% and monthly interest shall be a minimum of $500. At the time of initial funding we paid a loan fee of 50 shares of our Series D Preferred Shares to the lender, in addition to other payments for legal fees. In addition, we paid the collateral agent an initial fee of $5,000 and have agreed to pay an administrative fee to the collateral agent of 0.5% per month of the daily balance during the preceding month or $500 whichever is less. In the event that of a prepayment, we are obligated to pay a prepayment fee in an amount equal to one-half of one percent (0.5%) of $500,000. On September 30, 2013, we requested and received an initial borrowing under the Loan Agreement totaling $350,000. Subsequently, on October 21, 2013, we requested and received an additional $100,000 and on November 20, 2013, we requested and received an additional $50,000. As of December 31, 2014, the balance outstanding under our line of credit was $500,000. On February 27, 2015, we agreed to extend the term of the Loan Agreement for one year, and to exchange the $500,000 plus interest owing under the Loan Agreement for a one year, 8%, convertible note. As of September 30, 2015, a $158,000 convertible note, along with $22,000 in accrued interest, was outstanding. We are no longer able to make borrowings under the Loan Agreement.

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The convertible note is convertible at $0.01 per share of common stock. On the date we issued the convertible note to Alpha Capital, our stock price was $0.0155 per share of common stock. As a result of the difference between the stock price at the time of issuance and the conversion price, we recorded a beneficial conversion feature in the amount of $275,000 as a reduction to the Convertible Note and an increase in additional paid in capital on our condensed consolidated balance sheets. The beneficial conversion feature is being amortized over the 12 month term of the Note. We recorded additional interest expense of approximately $183,000 during the nine months ended September 30, 2015 for accretion of interest on debt discount related to the beneficial conversion feature.

Equity Purchase Agreement

On December 10, 2014, we entered into an Equity Purchase Agreement (the “December Equity Purchase Agreement”) with Southridge Partners II, LP (“Southridge”), that superseded our prior Equity Purchase Agreement with Southridge that was entered into on January 23, 2014 (the “Prior Equity Purchase Agreement”). The terms of the December Equity Purchase Agreement are substantially similar to those of the Prior Equity Purchase Agreement.

Pursuant to the December Equity Purchase Agreement and as provided in the Prior Equity Purchase Agreement, Southridge committed to purchase up to $5,000,000 worth of our common stock, over a period of time terminating on the earlier of: (i) 18 months from the effective date of the registration statement to be filed by us for the December Equity Purchase Agreement; or (ii) the date on which Southridge has purchased an aggregate maximum purchase price of $5,000,000 pursuant to the December Equity Purchase Agreement; Southridge’s commitment to purchase our common stock is subject to various conditions, including, but not limited to, limitations based on the trading volume of our common stock.

We intend to draw on the facility from time to time, as and when we determine appropriate in accordance with the terms and conditions of the December Equity Purchase Agreement. The purchase price for our shares to be paid by Southridge will be 90% of the volume weighted average price (total dollar value traded for all transactions (share price multiplied by number of shares traded) divided by the total quantity of shares traded for the day) on the principal market for each of the trading days of our common stock during the ten (10) trading days immediately following the clearing date. On the date the Draw Down Notice is delivered to Southridge, we are required to deliver an estimated amount of shares to Southridge’s brokerage account equal to 125% of the Draw Down Amount indicated in the Draw Down Notice divided by the closing bid price of the trading day immediately prior to the date of the Draw Down Notice (“Estimated Shares”). The Valuation Period begins the first trading day after the Estimated Shares have been delivered to Southridge’s brokerage account and have been cleared for trading and terminates on the tenth day thereafter. At the end of the Valuation Period, if the number of Estimated Shares delivered to Southridge is greater than the shares issuable pursuant to a Draw Down, then Southridge is required to return to us the difference between the Estimated Shares and the actual number of shares issuable pursuant to the Draw Down. If the number of Estimated Shares is less the shares issuable under the Draw Down, then we are required to issue additional shares to Southridge equal to the difference; provided that the number of shares to be purchased by Southridge may not exceed the number of shares that, when added to the number of shares of our common stock then beneficially owned by Southridge, would exceed 9.99% of our shares of common stock outstanding. As a result, our existing shareholders experienced immediate dilution upon the purchase of any of the shares by Southridge. If we fail to satisfy the applicable closing conditions, we will not be able to sell the put shares to Southridge.

The December Equity Purchase Agreement further provides that Southridge is entitled to customary indemnification from us for any losses or liabilities it suffers as a result of any material misrepresentation, breach of warranty or nonfulfillment of or a failure to perform any material covenant or agreement contained in the December Equity Purchase Agreement.

Pursuant to the terms of the December Equity Purchase Agreement we agreed to pay Southridge a commitment fee of 1,000,000 shares of our common stock, of which 500,000 shares of our common stock were paid to Southridge on January 16, 2015, the date that the registration statement was declared effective and the remaining 500,000 shares of common stock were paid on January 20, 2015, the date that we delivered our first Draw Down Notice to Southridge. We valued the issuance of these shares based on the closing price of the stock as of January 16, 2015, $0.0169 for 500,000, and as of January 20, 2015, $0.0161 for 500,000, and we recorded $16,500 as a reduction in “Additional Paid In Capital” on our condensed consolidated balance sheets.

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We submitted various take-down requests during 2015 pursuant to the terms of the December Equity Purchase Agreement. As of November 12, 2015, 84,113,042 shares had been sold at an average price of $0.0131 per share, resulting in total proceeds of approximately $1.1 million.

Cash Flow Analysis

Our primary capital requirement is to fund purchases of solar panels and inverters. Significant sources of liquidity are cash on hand, cash flows from operating activities, working capital and proceeds from equity financings. As of September 30, 2015, we had approximately $42,000 in cash on hand.

Cash used in operating activities was approximately $1.1 million for the nine months ended September 30, 2015. Cash used in operating activities was primarily due to our net loss adjusted for non-cash items of $362,000, a $200,000 decrease in prepaid expenses and other current assets, a $175,000 decrease in inventory, a $136,000 decrease in other assets and a $91,000 increase in accounts payable, partially offset by a $65,000 decrease in accrued liabilities and accrued warranty and a $15,000 decrease in deferred revenue. The increases and decreases in assets and liabilities were primarily due to the timing of payments and receipts.

Cash used in investing activities was approximately $42,000 for the nine months ended September 30, 2015. Cash used in investing activities was due to the acquisition of patents.

Cash provided by financing activities was approximately $1.1 million for the nine months ended September 30, 2015. During the nine months ended September 30, 2015, we received $1.2 million in proceeds from the Equity Purchase Agreement, partially offset by $109,000 from the repayment of notes payable.

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Application of Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reporting of assets, liabilities, sales and expenses, and the disclosure of contingent assets and liabilities. Note 2 to our consolidated financial statements for the years ended December 31, 2014 and 2013 as filed in our Annual Report on Form 10-K provides a summary of our significant accounting policies, which are all in accordance with generally accepted accounting policies in the United States. Certain of our accounting policies are critical to understanding our consolidated financial statements, because their application requires management to make assumptions about future results and depends to a large extent on management’s judgment, because past results have fluctuated and are expected to continue to do so in the future.

The application of the accounting policies described in the following paragraphs is highly dependent on critical estimates and assumptions that are inherently uncertain and highly susceptible to change. For all these policies, we caution that future events rarely develop exactly as estimated, and the best estimates routinely require adjustment. On an ongoing basis, we evaluate our estimates and assumptions, including those discussed below.

Revenue recognition. Revenue from sales of products is recognized when: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sale price is fixed or determinable, and (4) collection of the related receivable is reasonably assured. We recognize revenue when the solar power systems are shipped to the customer. Revenue from installation of a system is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable, and (4) collection of the related receivable is reasonably assured. In general, we recognize revenue upon completion of a system installation for residential installations and we recognize revenue under the percentage-of-completion method for commercial installations. Revenue recognition methods for revenue streams that fall under other categories are determined based on facts and circumstances.

Inventory. Inventory is stated at the lower of cost (on an average basis) or market value. We determine cost based on our weighted-average purchase price and include both the costs of acquisition and the shipping costs in our inventory. We regularly review the cost of inventory against its estimated market value and record a lower of cost or market write-down to cost of goods sold, if any inventory has a cost in excess of estimated market value. Our inventory generally has a long life cycle and obsolescence has not historically been a significant factor in its valuation.

Long-lived assets. We periodically review our property and equipment and identifiable intangible assets for possible impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Significant assumptions and estimates include the projected cash flows based upon estimated revenue and expense growth rates and the discount rate applied to expected cash flows. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.

Patent costs. We capitalize external legal costs and filing fees associated with obtaining or defending our patents. Upon issuance of new patents or successful defense of existing patents, we amortize these costs using the straight line method over the shorter of the legal life of the patent or its economic life. We believe the remaining useful life we assign to these patents, approximately 9.25 years as of September 30, 2015, are reasonable. We periodically review our patents to determine whether any such cost have been impaired and are no longer being used. To the extent we are no longer using certain patents, the associated costs will be written off at that time.

Stock-based compensation. We use the Black-Scholes-Merton Options Pricing Model (“Black-Scholes”) to estimate fair value of our employee and our non-employee director stock-based awards. Black-Scholes requires various judgmental assumptions, including estimating stock price volatility, expected option life and forfeiture rates. We measure compensation expense for non-employee stock-based compensation under Accounting Standards Codification (“ASC”) ASC 505-50, “Equity-Based Payments to Non-Employees.” The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The estimated fair value is measured utilizing Black-Scholes using the value of our common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.

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Warranty provision. The manufacturer directly warrants the solar panels and inverters for a range from 15 to 25 years. We warrant the balance of system components of our products against defects in material and workmanship for five years. We assist our customers in the event of a claim under the manufacturer warranty to replace a defective solar panel or inverter.

Common stock warrant liabilities. In March 2009 and February 2011, we issued warrants to purchase shares of our common stock in connection with certain capital financing transactions. The terms of the warrant agreements related to these two offerings contained a cash-out provision which may be triggered at the option of the warrant holders if we “go private,” if we are acquired for all cash or upon the occurrence of certain other fundamental transactions involving us. In addition, the terms of the warrant agreement related to the February 2011 offering contain a provision that may require us to reduce the exercise price of the warrants to purchase shares of our common stock upon the occurrence of certain lower-priced future offerings of our equity securities. Under ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), financial instruments that may require the issuer to settle the obligation by transferring assets or to reduce the exercise price of its warrants to purchase shares of its common stock are classified as a liability. Therefore, we have classified the warrants as liabilities and will record mark-to-market adjustments to reflect the fair value at each period end.

Significant Accounting Policies and Estimates

There have been no material changes or developments to the significant accounting policies discussed in our 2014 Annual Report on Form 10-K or accounting pronouncements issued or adopted, except as described below.

Recent Accounting Pronouncements

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Seasonality

Our quarterly operating results may vary significantly from quarter to quarter as a result of seasonal changes in weather as well as changes in state or federal subsidies.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows.

Interest Rate Risk

As of September 30, 2015, we had approximately $500,000 borrowed under convertible notes. Our convertible notes bear interest at a rate of 8% per year. The interest rate under these notes are fixed for the life of the agreements, therefore, any change in market interest rates will not have an impact on the amount of our interest expense.

Foreign Currency Exchange Risk

We do not have any foreign currency exchange risk as purchases of our solar panels from manufacturers outside the United States and sales of our solar panels to Canada are denominated in U.S. currency.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer who is also our Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on this evaluation, management concluded as of September 30, 2015 that our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness in our internal control over financial reporting, which is described below. In connection with the preparation of our financial statements for the three months ended September 30, 2015, we concluded there is a material weakness in the design and operating effectiveness of our internal control over financial reporting as defined in SEC Regulation S-X. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

We have begun to take actions that we believe will substantially remediate the material weakness identified. In response to the identification of our material weakness, we: (i) increased the focus of our employees and contractors in our financial group, (ii) are in the process of establishing a review process for key aspects of our financial reporting process, and (iii) will seek to establish better operating controls, which will involve establishing formal procedures to communicate deficiencies in internal controls with our management on a timely basis. However, we cannot assure you that our internal control over financial reporting, as modified, will enable us to identify or avoid material weaknesses in the future.

Our management, including our Chief Executive Officer who is also our Interim Chief Financial Officer, does not expect that our disclosure controls and procedures and our internal control processes will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that the breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. However, these inherent limitations are known features of the financial reporting process.

Quarterly Evaluation of Changes in Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer who is also our Interim Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) to determine whether any change occurred during the second fiscal quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our management concluded that there was no such change during the fiscal quarter ended September 30, 2015.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

On February 9, 2015, the law firm of Snell & Wilmer LLP filed suit against us in California Superior Court, County of Orange. The complaint alleges that we have failed to pay Snell & Wilmer fees due to that firm in connection with prior patent prosecution litigation, in an amount of no less than $808,202, plus interest. During the three months ended June 2015, we settled this amount for $250,000 payable in installments on or prior to October 31, 2015. As of November 2015, Andalay has paid $75,000 to Snell & Wilmar under this settlement. In the event that Andalay has not paid the remaining $175,000, Andalay and Snell & Wilmar have agreed that Snell & Wilmar may file a stipulation for entry of judgment to court for $200,000 plus interest and fees.

We are also involved in other litigation from time to time in the ordinary course of business. In the opinion of management, the outcome of such proceedings will not materially affect our financial position, results of operations or cash flows.

Item 1A. Risk Factors

Our Quarterly Report on Form 10-Q, and information we provide in our press releases, telephonic reports and other investor communications, may contain forward-looking statements with respect to anticipated future events and our projected financial performance, operations and competitive position that are subject to risks and uncertainties that could cause our actual results to differ materially from those forward-looking statements and our expectations. Future economic and industry trends that could potentially affect revenue, profitability, and growth remain difficult to predict. The factors underlying our forecasts and forward-looking statements are dynamic and subject to change. As a result, any forecasts or forward-looking statements speak only as of the date they are given and do not necessarily reflect our outlook at any other point in time.

Risks Relating to Our Business

We will need additional capital in the near future to fund our business, and financing may not be available. If we can find financing our common stock may be greatly diluted. If we cannot find financing to fund the business, we may decide or may be forced to reorganize or to wind down operations.

We expect our currently available capital resources and cash flows from operations to be insufficient to meet our working capital and capital expenditure requirements. In addition, our new business model is unproven and may not generate revenue or profits. Our cash requirements will depend on numerous factors, including the amount of our sales, the timing and levels of products purchased, pricing, payment terms and credit limits from manufacturers, the availability and terms of asset-based credit facilities, the timing and level of our accounts receivable collections, and our ability to manage our business towards profitability.

We expect to need to raise additional funds through public or private debt or equity financings or enter into new asset-based or other credit facilities, but such financings will likely dilute our stockholders. The December Equity Purchase Agreement that we entered into with Southridge Partners II, LP (“Southridge”) on December 10, 2014 contains conditions that must be met prior to each funding event and therefore there can be no assurance that such conditions will be met when funding is needed. We cannot assure you that any additional financing that we may need will be available on terms favorable to us, or at all. Our loss of S-3 eligibility in September 2012 due to our Nasdaq delisting and limited availability of authorized and unissued common stock has made it more difficult to raise such funds. In addition, our new business model is unproven and may not generate revenue. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of business opportunities, develop new products or otherwise respond to competitive pressures. If we are not able to raise additional capital, and if we are not able to significantly increase our revenues from operations, we will not have enough funds to continue operations and we may either decide to or may be forced to reorganize or to wind down our operations. If such event were to occur, any equity holdings in the Company would likely be reduced to zero.

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We have disclosed a material weakness in our internal control over financial reporting relating to our accounting procedures which could adversely affect our ability to report our financial condition, results of operations or cash flows accurately and on a timely basis.

In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified a material weakness in our internal control over financial reporting relating to our accounting process and procedures for the year ended December 31, 2014. For a discussion of our internal control over financial reporting and a description of the identified material weakness, see our Annual Report on Form 10-K for the year ended December 31, 2014-"Management's Report on Internal Control over Financial Reporting" under Item 9A, "Controls and Procedures."

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. We have determined that further improvements are required in our accounting processes before we can consider the material weakness remediated. Management's procedures and testing identified errors that, although not material to the consolidated financial statements, led management to conclude that control deficiencies exist related to various financial disclosures, including derivative valuation and warranty reserves. As a result of these deficiencies, it is reasonably possible that internal controls over financial reporting may not have prevented or detected errors from occurring that could have been material, either individually or in the aggregate.

A material weakness in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. While we have taken actions to improve our internal controls in response to the identified material weakness related to certain aspects of our accounting process and procedures, additional work will be needed to address and remediate the identified material weakness. If we are unsuccessful in implementing or following our remediation plan, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or maintain effective internal controls over financial reporting. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, securities litigation, and/or lack of investor confidence, any one of which could adversely affect the valuation of our common stock and could adversely affect our business prospects.

Our loan and security agreement was exchanged for a convertible note, but both the agreement and the convertible note contain many negative covenants and if we trigger those covenants under the agreement we could lose all of our assets.

Our loan and security agreement with Lender and Collateral Services, LLC is secured by all of our assets. The agreement and the convertible note which now evidences the loan contain both affirmative and negative covenants, including covenants regarding incurrence of indebtedness, liens, mergers and acquisitions, subject to materiality and other qualifications and exceptions customary for a credit facility of this size and type. Our obligations under the agreement may be accelerated upon the occurrence of an event of default in accordance with the terms of the Agreement, which includes customary events of default, including payment defaults, the inaccuracy of representations or warranties, cross-defaults related to material indebtedness, bankruptcy and insolvency related defaults, defaults relating to certain other matters, and loss of perfected lien status. If we fail to comply with these covenants or if we fail to make certain payments under the secured loans when due, the Lender could declare our loans in default. If we default on the loan, the Lender has the right to seize our assets that secure the loan, which may force us to suspend all operations. We currently do not have enough cash to repay amounts owed under the loan and security agreement.

We have a history of losses and there can be no assurance that we will generate or sustain positive earnings.

For the quarter ended September 30, 2015, and for the years ended December 31, 2014 and 2013, we have incurred net losses from operations. We cannot be certain that our business strategy will ever be successful. Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with any emerging business operations. If we fail to address any of these risks or difficulties adequately, our business will likely suffer. Future revenues and profits, if any, will depend upon various factors, including the success, if any, of our new business model, marketability of our instruments and services, our ability to maintain favorable relations with manufacturers and customers, and general economic conditions. There is no assurance that we can operate profitably or that we will successfully implement our plans. There can be no assurance that we will ever generate positive earnings.

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Our consolidated financial statements have been prepared assuming that 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 consolidated financial statements for the years ended December 31, 2014 and 2013 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. The report of our independent registered public accounting firm for the years ended December 31, 2014 and 2013 included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report included herein. If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our company. 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.

We are engaging in a new strategy of licensing our patented products to large manufacturers but have only executed one license agreement

We believe that licensing our products, instead of manufacturing ourselves or through contracted manufacturers, will enable us to operate the business in a less capital intensive manner. We have signed one license agreement and two memorandums of understanding in the first half of 2015 for the licensing of our products. This strategy will be dependent on us or our distributors also signing up at least one top national installer as a significant customer. To date, neither we nor any of our distributors have signed any agreements with any large national installers as it relates to the purchase of Andalay compatible modules or mounting hardware. If we are not able to accomplish our goal of signing large manufacturers as license partners and large national installers as significant customers, our business will be severely negatively impacted.

We are dependent upon our key suppliers for the components used in our systems and we must arrange for cost competitive manufacturing of our proprietary solar panels in order to grow our business.

Historically, we obtained virtually all of our components from suppliers in China. These components are specifically manufactured for our patented technology, and we are dependent on these suppliers to provide us with high quality low cost manufactured goods. If these suppliers stopped providing these materials to us, we may have a difficult time in sourcing high quality replacement vendors.

It is critical to the growth of our revenue that our products be high quality while offered at competitive pricing. We believe that we will need to reduce the unit production cost of our products over time to obtain and maintain our ability to offer competitively priced products. Our ability to achieve cost reductions will depend on our ability to maintain favorable supplier contracts and to increase sales volumes so we can achieve economies of scale. We cannot provide assurance that we will be able to achieve any such production cost reductions. If we fail to negotiate better terms and maintain our relationships with our current suppliers or develop new supplier relationships, we may not achieve production cost reductions necessary to competitively price our products, which could adversely affect or limit our sales and growth.

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We are currently dependent upon Hyundai to continue to produce and sell Andalay compatible modules upon attractive commercial terms as our proprietary mounting hardware requires Andalay compatible modules in order to be used.

In June 2015, we entered into a license agreement with Hyundai whereby we granted Hyundai the right to produce Andalay compatible modules. Hyundai began shipping Andalay compatible modules as of May 2015. We do not have any commitment from Hyundai to produce Andalay compatible modules and Hyundai could terminate its relationship with us and future production of Andalay compatible modules at any time. Although we believe we can find alternative suppliers for solar panels manufactured to our specifications, our operations would be disrupted and our inventory and revenue could diminish significantly unless we are able to rapidly secure alternative sources of supply from first tier bankable suppliers such as Hyundai.

We are currently subject to market prices for the components that we purchase, which are subject to fluctuation beyond our control. An increase in the price of components used in our systems could result in an increase in costs to our customers and could have a material adverse effect on our revenues and demand for our products.

Interruptions in our ability to procure needed components for our systems, whether due to discontinuance by our suppliers, delays or failures in delivery, shortages caused by inadequate production capacity or unavailability, financial failure, manufacturing quality, or for other reasons, would adversely affect or limit our sales and growth. There is no assurance that we will continue to find qualified manufacturers on acceptable terms and, if we do, there can be no assurance that product quality will continue to be acceptable, which could lead to a loss of sales and revenues.

The U.S. Government imposed tariffs on solar panels manufactured in China causing the prices for solar panels to increase. This could cause customer demand for our products to decrease.

In early 2012, a group of solar panel manufacturers with domestic U.S. production facilities requested the U.S. Government to impose tariffs on the import of solar panels manufactured in China, based on allegations of unfair competition and of subsidization of prices for Chinese-made solar panels by the Chinese Government.

On December 31, 2013, SolarWorld America Industries, Inc. requested the U.S. Government to impose tariffs on the import of solar panels manufactured in China with Taiwanese solar cells, based on allegations of unfair competition and of subsidization of prices by the Chinese Government. In December 2014, the U.S. International Trade Commission determined that imports of Chinese panels made with Taiwanese solar cells injure the domestic manufacturing industry. The Commerce Department has found for the complainant in all of the cases, imposing tariffs on Chinese manufacturers of solar panels and tariffs on solar panels made with Taiwanese solar cells.

We anticipate that at least some of our license partners may produce their solar modules in China. The imposition of tariffs on these modules may cause prices to rise, which would generally increase the price of solar power systems, and which may cause a reduction in demand.

We have experienced significant customer concentration in recent periods, and our revenue levels could be adversely affected if any significant customer fails to purchase products from us at anticipated levels.

The relative magnitude and the mix of revenue from our largest customers have varied significantly quarter to quarter. During the nine months ended September 30, 2015, two customer has 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. The loss of this customer would have a material adverse effect on our business.

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We are continuing to shift our business model, away from manufacturing and towards licensing. We had previously exited the installation business, and there is no guarantee that we will be successful in licensing our products.

Our shift to focus on a licensing business model will depend entirely on our distributors’ ability meaningfully increase volume or successfully obtain large installers as customers. Our current distributors are small and do not have extensive resources and their ability to achieve this will be challenging. To date, we have not generated sufficient revenue or profits from operations to achieve our business goals and achieve profitability and there can be no assurance that we will do so in the future. Our focus to use a distribution channel to sell our mounting hardware is intended to both reduce our near term operating expenses as well as result in a future material increase in order volume for our mounting hardware parts. While the goal is to sell many more watts worth of our mounting hardware parts, this new focus will have less revenue per watt as the mounting hardware portion is a small percentage (under 15%) of the total AC solar panel kit revenue that we previously focused on. The ability to win meaningful business with large national installers is challenging as the evaluation and approval process within most large national installers can be lengthy and complicated as there are often multiple internal decision makers and evaluation criteria as well as third party lease fund approvals that will need to be achieved in order for us to be successful to sell our product.

If we are not able to achieve the expansion of our licensing business and meet our revenue growth and cost reduction objectives within the anticipated time frame, or at all, the anticipated benefits and cost savings of our change in strategic focus and our restructuring may not be realized or may take longer to realize than expected, and the value of our common stock may be adversely affected.

Specifically, risks in the operations of our business in order to realize the anticipated benefits of the change to a design and installation business model include, among other things:

· failure to acquire cost competitive solar panels;

· failure to find and develop distribution relationships with new channel partners, particularly in California and the North America market;

· failure to successfully partner with other leading installers in California

· failure to effectively coordinate sales and marketing efforts to communicate the capabilities of our company;

· unpredictability and delays in the timing of projected distribution orders, and resulting accumulation of excess product inventory;

· failure to focus and develop our distribution product and service offerings quickly and effectively;

· failure to successfully develop new products and services on a timely basis that address the market opportunities; and

· unexpected revenue attrition or delays.

In addition, the shift(s) in our business model(s) may result in additional or unforeseen expenses, and the anticipated cost reduction benefits may not be realized.

Our technology may encounter unexpected problems or may not be protectable, which could adversely affect our business and results of operations.

The adoption of our technology is relatively limited and it has not been broadly tested in many installation settings for a sufficient period of time to prove its long-term effectiveness and benefits. Problems may occur with products or their underlying components that are unexpected and could have a material adverse effect on our business or results of operations. We have not had the resources to substantively enhance the product since it was developed. We have been issued several U.S. and foreign patents that cover our Andalay solar panel technology. We have several other pending patent applications covering Andalay technology. Ultimately, we may not be able to realize the benefits from any patent that is issued. We have recently discontinued support of our foreign patents and applications because we lack the resources to pursue market opportunities in those foreign markets.

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Because our industry is highly competitive and has low barriers to entry, we may lose market share to larger companies that are better equipped to weather a decline in market conditions due to increased competition.

Our industry is highly competitive and fragmented, is subject to rapid change and has low barriers to entry. Competition in the solar power services industry may increase in the future, partly due to low barriers to entry, as well as from other alternative energy sources now in existence or developed in the future. Increased competition could result in price reductions, reduced margins or loss of market share and greater competition for qualified technical personnel. In addition, many of our competitors have greater resources than we do, allowing them to devote greater resources to research and development of new and innovative products and marketing of their products. There can be no assurance that we will be able to compete successfully against current and future competitors. We have recently seen many more competitors with viable and new products that have a similar application and intended market opportunity as the Andalay mounting hardware which has eroded our opportunity and prospects. If we are unable to compete effectively, or if competition results in a deterioration of market conditions, our business and results of operations would be adversely affected.

Our profitability depends, in part, on our success and brand recognition and we could lose our competitive advantage if we are not able to protect our trademarks and patents against infringement, and any related litigation could be time-consuming and costly.

We have registered the “Andalay Solar” trademark with the USPTO related to our panel technology. Use of our trademarks or similar trademarks by competitors in geographic areas in which we have not yet operated could adversely affect our ability to use or gain protection for our brand in those markets, which could weaken our brand and harm our business and competitive position. In addition, any litigation relating to protecting our trademarks and patents against infringement could be time consuming and costly.

We are exposed to risks associated with global economy, which increase the uncertainty of project financing for solar installations and the risk of non-payment from customers.

The continuing tight credit markets are contributing to a slower than anticipated growth in the solar industry, which may worsen if these economic conditions are prolonged or deteriorate further. The market for installation of solar power systems depends largely on commercial and consumer capital spending. Economic uncertainty exacerbates negative trends in these areas of spending, and may cause customers to push out, cancel, or refrain from placing orders, which may reduce our net sales. Difficulties in obtaining capital and adverse market conditions may also lead to the inability of some customers to obtain affordable financing, including traditional project financing and tax-incentive based financing and home equity based financing, resulting in lower sales to potential customers with liquidity issues, and may lead to an increase of incidents where our customers are unwilling or unable to pay for systems they purchase, and additional bad debt expense for us. Further, these conditions and uncertainty about future economic conditions make it challenging for us to obtain equity and debt financing to meet our working capital requirements to support our business, forecast our operating results, make business decisions, and identify the risks that may affect our business, financial condition and results of operations. If we are unable to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition or results of operations may be materially and adversely affected.

We may have warranty obligations to SunRun, Inc. that could adversely affect our results of operations.

In connection with our exit from the solar system installation business in California in 2010, Real Goods Solar, Inc. (“Real Goods”) agreed to undertake primary, “first responder” responsibility for future warranty service obligations relating to the approximately 800 installations for SunRun that we have previously completed (the “Andalay Installations”). We retained secondary warranty responsibility on the Andalay Installations, in the event that Real Goods fails to perform the warranty. We agreed to reimburse Real Goods for actual warranty service work completed by Real Goods related to these “first responder” installations. Other than solar panels and inverters that are covered under the manufacturer warranty, we provided our customers for Andalay Installations a 5-year or a 10-year warranty. We have accrued, and included within “Accrued Warranty” in our consolidated balance sheets as of December 31, 2014 and 2013, a liability of approximately $568,000 and $1,000,000, respectively, to cover these warranty obligations. That amount is intended to cover both the Andalay Installations and certain installation projects that were assigned to Real Goods. The terms of the Warranty Agreements provided that we establish an escrow account as a source of funds from which to satisfy our obligation to pay Real Goods for its fees and reimburse it for its expenses for warranty work performed by it pursuant to the Warranty Agreements which are not paid to Real Goods from the company directly. In March 2011, we entered into an Escrow Agreement with Real Goods and deposited $200,000 into an escrow fund. The amount is reflected in “Other assets, net” in our condensed consolidated balance sheets. In November 2014, Real Goods returned $110,000 of the escrow amount in December 2014 and in June 2015, Real Goods returned the remaining $90,000 of the escrow amount as part of an agreement whereby Real Goods will no longer have any warranty or other obligations for the Andalay Installations but our obligations will remain instead directly with SunRun. If the actual warranty expenses exceed the amounts we have accrued, we could incur significant unexpected additional expenses, which would adversely affect our results of operations.

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Our success depends on our key personnel, including our executive officers, and the loss of key personnel or the transition of key personnel, including our Chief Executive Officer, could disrupt our business.

Our success greatly depends on the continued contributions of our senior management and other key sales, marketing and operations personnel. These employees may voluntarily terminate their employment at any time. We may not be able to successfully retain existing personnel or identify, hire and integrate new personnel; and we do not have key person insurance policies in place for these employees. Starting on May 7, 2012, Margaret Randazzo, acted as our Chief Financial Officer, a director, and our Chief Executive Officer. On April 22, 2014, Steven Chan assumed the role as our Chief Executive Officer and interim Chief Financial Officer and President after Ms. Randazzo announced her resignation as our Chief Executive Officer and as Chief Financial Officer effective June 30, 2014. Wei-Tai Kwok resigned as our director in August 2015 and departed as our Chief Operating Officer in September 2015. On November 12, 2015, we were informed that Mr. Chan was resigning as our Chief Executive Officer, interim Chief Financial Officer and a director, effective November 20, 2015 and that Mr. Edward Bernstein was assuming those roles. While Mr. Chan has agreed to serve as an advisor to the Company, there can be no assurance that there will be a smooth transition. Changes in our key positions can be disruptive and could have a material adverse effect on our operations and business.

If we are unable to attract, train and retain highly qualified personnel, the quality of our services may decline and we may not successfully execute our internal growth strategies.

Our success depends in large part upon our ability to continue to attract, train, motivate and retain highly skilled and experienced employees, including technical personnel. Qualified technical employees periodically are in great demand and may be unavailable in the time frame required to satisfy our customers’ requirements. While we currently have available technical expertise sufficient for the requirements of our business, expansion of our business could require us to employ additional highly skilled technical personnel. We expect competition for such personnel to increase as the market for solar power systems expands.

There can be no assurance that we will be able to attract and retain sufficient numbers of highly skilled technical employees in the future including a successor CFO. The loss of personnel or our inability to hire or retain sufficient personnel at competitive rates of compensation could impair our ability to secure and complete customer engagements and could harm our business.

Unexpected warranty expenses or service claims could reduce our profits.

We maintain a warranty reserve on our balance sheet for potential warranty or service claims that could occur in the future. This reserve is adjusted based on our ongoing operating experience with equipment and installations. It is possible, perhaps due to bad supplier material or defective installations, that we would have actual expenses substantially in excess of the reserves we maintain. Our failure to accurately predict future warranty claims could result in unexpected profit volatility.

RISKS RELATING TO OUR INDUSTRY

We have experienced technological changes in our industry. New technologies may prove inappropriate and result in liability to us or may not gain market acceptance by our customers.

The solar power industry (and the alternative energy industry, in general) is subject to technological change. Our future success will depend on our ability to appropriately respond to changing technologies and changes in function of products and quality. If we adopt products and technologies that are not attractive to consumers, we may not be successful in capturing or retaining a significant share of our market. In addition, some new technologies are relatively untested and unperfected and may not perform as expected or as desired, in which event our adoption of such products or technologies may cause us to lose money.

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A drop in the retail price of conventional energy or non-solar alternative energy sources may negatively impact our profitability.

We believe that an end customer’s decision to purchase or install solar power capabilities is primarily driven by the cost and return on investment resulting from solar power systems. Fluctuations in economic and market conditions that affect the prices of conventional and non-solar alternative energy sources, such as decreases in the prices of oil and other fossil fuels, could cause the demand for solar power systems to decline, which would have a negative impact on our profitability. Changes in utility electric rates or net metering policies could also have a negative effect on our business.

Existing regulations, and changes to such regulations, may present technical, regulatory and economic barriers to the purchase and use of solar power products, which may significantly reduce demand for our products and services.

New government regulations or utility policies pertaining to solar power systems are unpredictable and may result in significant additional expenses or delays and, as a result, could cause a significant reduction in demand for solar energy systems and our services. For example, there currently exist metering caps in certain jurisdictions which effectively limit the aggregate amount of power that may be sold by solar power generators into the power grid.

Our business depends on the availability of rebates, tax credits and other financial incentives; reduction, elimination or uncertainty of which would reduce the demand for our products and services.

Many states offer incentives to offset the cost of solar power systems. These systems can take many forms, including direct rebates, state tax credits, system performance payments and Renewable Energy Credits (“RECs”). Moreover, the federal government currently offers a 30% tax credit for the installation of solar power systems. Businesses may also elect to accelerate the depreciation on their system over five years. Uncertainty about the introduction of, reduction in or elimination of such incentives or delays or interruptions in the implementation of favorable federal or state laws could substantially increase the cost of our systems to our customers, resulting in significant reductions in demand for our services, which would negatively impact our sales.

If solar power technology is not suitable for widespread adoption or sufficient demand for solar power products does not develop or takes longer to develop than we anticipate, our sales would decline and we would be unable to achieve or sustain profitability.

The market for solar power products is emerging and rapidly evolving, and its future success is uncertain. Many factors will influence the widespread adoption of solar power technology and demand for solar power products, including:

· cost effectiveness of solar power technologies as compared with conventional and non-solar alternative energy technologies;

· performance and reliability of solar power products as compared with conventional and non-solar alternative energy products;

· capital expenditures by customers that tend to decrease if the U.S. economy slows; and

· availability of government subsidies and incentives.

If solar power technology proves unsuitable for widespread commercial deployment or if demand for solar power products fails to develop sufficiently, we would be unable to generate enough revenue to achieve and sustain profitability. In addition, demand for solar power products in the markets and geographic regions we target may not develop or may develop more slowly than we anticipate.

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RISKS RELATING TO OUR COMMON STOCK

We were delisted from the Nasdaq Capital Market and there is a limited trading volume for our common stock on the OTCQB.

In September 2012, our common stock was delisted from the Nasdaq Capital Market. Our common stock, which currently trades on the OTCQB, does not have substantial trading volume. As a result, relatively small trades of our common stock may have a significant impact on the price of our common stock and, therefore, may contribute to the price volatility of our common stock. Because of the limited trading volume in our common stock and the price volatility of our common stock, you may be unable to sell your shares of common stock when you desire or at the price you desire. The inability to sell your shares in a declining market because of such illiquidity or at a price you desire may substantially increase your risk of loss.

In addition, the delisting of our common stock from the Nasdaq Capital Market has materially adversely affected our ability to raise capital on terms acceptable to us or at all and could adversely affect institutional investor interest and we anticipate that this situation will continue into the future.

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 $0.02 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. During the nine months ended September 30, 2015, the remaining outstanding convertible notes in the principal amount of approximately $520,000, along with accrued interest of $50,531, net of unamortized discount at date of conversion, were converted into 34,565,577 shares of our common stock.

On November 1 and December 1, 2013, and on January 1, February 1 and March 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $30,000 each for a total of $150,000, which mature on October 31, November 30 and December 31, 2014, and on January 31 and February 28, 2015, respectively. On April 1, May 1 and June 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $20,000 each, for a total of $60,000, which matured on March 31, April 30 and May 31, 2015, respectively. On July 1, 2014, we issued convertible notes to our financial advisory firm in the principal amount of $10,000, which matured on June 30, 2015. 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. 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. As of December 31, 2014, convertible notes in the principal amount of $940,000, along with accrued interest of $68,319, were converted into 50,439,751 shares of our common stock.

When the investors convert our convertible notes or exercise the warrant, our stockholders have to experienced dilution in the net tangible book value of their common stock. In addition, the sale or availability for sale of the underlying shares or shares sold pursuant to the December Equity Purchase Agreement in the marketplace could depress our stock price. As a result, the investors could resell the underlying shares immediately upon issuance, which may result in significant downward pressure on the market price of our stock.

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Future sales of common stock by our existing stockholders may cause our stock price to fall.

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As of November 12, 2015, we had 534,984,001 shares of common stock outstanding and we had warrants to purchase 22,148,045 shares of common stock.

All of the shares of common stock issuable upon exercise of our outstanding vested options will be freely tradable without restriction under the federal securities laws.

Our stock price may be volatile, which could result in substantial losses for investors.

The market price of our common stock is likely to be highly volatile and could fluctuate widely in response to various factors, some of which are beyond our control, including the following:

· decisions by us or our creditors to discontinue operation

· technological innovations or new products and services by us or our competitors;

· announcements or press releases relating to the energy sector or to our business or prospects;

· additions or departures of key personnel;

· regulatory, legislative or other developments affecting us or the solar power industry generally;

· our ability to execute our business plan;

· operating results that fall below expectations;

· volume and timing of customer orders;

· industry developments;

· economic and other external factors; and

· period-to-period fluctuations in our financial results.

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also significantly affect the market price of our common stock.

Our stock is a penny stock and therefore may be less attractive to investors.

Our stock is considered to be a penny stock. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with: (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

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RISKS RELATING TO OUR COMPANY

Our financial condition does not currently allow for the growth needed to maintain our strategy of licensing solar power systems and re-entering the residential solar installation business.

Our cash on hand and receivables due to us, along with our current expenses, do not permit capital expenditure into the strategic areas of growth in which we believe we need to invest in in order to increase revenue and target towards profitability. If we are not able to increase our revenue and eventually attain profitability, we will run short of funds and may decide to or may be forced to discontinue our operations. Our settlements obligations in connection with our litigation require that we pay large sums of cash at certain times, reducing cash available for operation.

We are continuing to evaluate our inventory levels and may be required to write down certain levels

If financial rules and regulations require, or if we believe it is appropriate under such financial rules and regulations, we may write down the value of certain inventory. If we do write down inventory levels, then our financials may be negatively affected and that may affect our stock price.

We are subject to the reporting requirements of the federal securities laws, which impose additional burdens on us.

We are a public reporting company and, accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002. As a public company, these rules and regulations result in increased compliance costs and make certain activities more time consuming and costly.

Our Certificate of Incorporation authorizes our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to issue preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of new series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our Board of Directors could authorize the issuance of new series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.

Our recent increase in our authorized shares of common stock and our issuances of convertible notes could result in future dilution of our common stock.

If we sell additional equity or convertible debt securities, those sales could result in additional dilution to our stockholders. In addition, holders of our convertible notes have the right to convert their notes into shares of our Common Stock, subject to a blocker of 9.99% of our outstanding common stock which will result in substantial dilution to our stockholders. In addition, the increase in our number of authorized shares of common stock to 1,250,000,000 in September 2015 allows us to issue many more shares of common stock.

If we issue shares below $0.01 per share, we will need the consent of Alpha Capital and there is no guarantee that we will get such consent

When we issued to Alpha Capital the convertible note in February 2015, a condition of the note was that we are not permitted to issue shares below $0.01 per share without their consent. There is no guarantee that Alpha will provide that consent, or that if they provide consent, that they will not so without an extra cost. If we do not receive their consent, we may not be able to continue to issue stock under the December Equity Purchase Agreement. As part of obtaining Alpha’s consent in order to enable Southridge to sell Andalay shares at a per price below $0.01 per share of common stock under the December Equity Purchase Agreement, (i) in September 2015, Andalay agreed to reduce the convertible price to $0.005 per share of its common stock and (ii) in October 2015 Andalay agreed to reduce the convertible price to $0.005 per share of its common stock.

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

None

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosure.

Not Applicable

Item 5. Other Information.

None

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Item 6. EXHIBITS.

Exhibit Number			Description

	3.1		Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, dated August 3, 2006)

	3.2		By-laws (incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K, dated August 3, 2006)

	3.3		Certificate of Amendment to the Certificate of Incorporation (incorporated herein by reference to Exhibit 3.3 to the August 2006 8-K)

	3.4		Certificate of Amendment to the Certificate of Incorporation (incorporated herein by reference to Exhibit 3.4 to our Current Report on Form 10-Q filed on July 30, 2010)

	3.5		Certificate of Amendment to the Certificate of Incorporation as filed with the Delaware Secretary of State on April 6, 2011 (incorporated herein by reference to Exhibit 3.5 to our Current Report on Form 10-Q filed on May 10, 2011)

	3.6		Amendment to Certificate of Incorporation of the Company, dated September 19, 2013 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on September 23, 2013)

	3.7		Correction to amendment to Certificate of Incorporation of the Company, dated September 20, 2013 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on September 23, 2013)

	4.1		Certificate of Designation of Preferences, Rights and Limitations with respect to Series B 4% Convertible Preferred Stock (the “Series B Certificate of Designation”), as filed on February 17, 2011 (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on February 17, 2011)

	4.2		Certificate of Amendment to the Series B Certificate of Designation (incorporated by reference to Exhibit 3(i) to our Current Report on Form 8-K filed on August 24, 2011)

	4.3		Certificate of Designation of Preferences, Rights and Limitations of Series C 8% Convertible Preferred Stock, as filed on February 17, 2011 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 19, 2012)

	4.4		Certificate of Amendment to the Series B Certificate of Designation, dated as of October 18, 2012 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 19, 2012)

	4.5		Certificate of Designation of Preferences, Rights and Limitations of Series D 8% Convertible Preferred Stock, as filed on February 14, 2013 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on February 15, 2013)

	10.1		Second Amendment to Loan and Security Agreement dated October 20, 2015 between Alpha Capital Anstalt and the Registrant (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 6, 2015).

	31	*	Section 302 Certification of Principal Executive and Financial Officer

	32	*	Section 906 Certification of Principal Executive and Financial Officer

101.INS		*	XBRL Taxonomy Extension Instance Document †

101.SCH*		*	XBRL Taxonomy Extension Schema Linkbase Document †

101.CAL		*	XBRL Taxonomy Extension Calculation Linkbase Document †

101.DEF		*	XBRL Taxonomy Extension Definition Linkbase Document †

101.LAB		*	XBRL Taxonomy Extension Labels Linkbase Document †

101.PRE		*	XBRL Taxonomy Extension Presentation Linkbase Document †

		*	filed herewith

		‡	Management contract or compensatory plan or arrangement.

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SIGNATURES

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


Dated: November 19, 2015	/s/ Steven Chan
	Steven Chan
	Chief Executive Officer and Interim Chief Financial Officer
	(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

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Exhibit Index

Exhibit Number			Description

	3.1		Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K, dated August 3, 2006)

	3.2		By-laws (incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K, dated August 3, 2006)

	3.3		Certificate of Amendment to the Certificate of Incorporation (incorporated herein by reference to Exhibit 3.3 to the August 2006 8-K)

	3.4		Certificate of Amendment to the Certificate of Incorporation (incorporated herein by reference to Exhibit 3.4 to our Current Report on Form 10-Q filed on July 30, 2010)

	3.5		Certificate of Amendment to the Certificate of Incorporation as filed with the Delaware Secretary of State on April 6, 2011 (incorporated herein by reference to Exhibit 3.5 to our Current Report on Form 10-Q filed on May 10, 2011)

	3.6		Amendment to Certificate of Incorporation of the Company, dated September 19, 2013 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on September 23, 2013)

	3.7		Correction to amendment to Certificate of Incorporation of the Company, dated September 20, 2013 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on September 23, 2013)

	4.1		Certificate of Designation of Preferences, Rights and Limitations with respect to Series B 4% Convertible Preferred Stock (the “Series B Certificate of Designation”), as filed on February 17, 2011 (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on February 17, 2011)

	4.2		Certificate of Amendment to the Series B Certificate of Designation (incorporated by reference to Exhibit 3(i) to our Current Report on Form 8-K filed on August 24, 2011)

	4.3		Certificate of Designation of Preferences, Rights and Limitations of Series C 8% Convertible Preferred Stock, as filed on February 17, 2011 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 19, 2012)

	4.4		Certificate of Amendment to the Series B Certificate of Designation, dated as of October 18, 2012 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 19, 2012)

	4.5		Certificate of Designation of Preferences, Rights and Limitations of Series D 8% Convertible Preferred Stock, as filed on February 14, 2013 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on February 15, 2013)

	10.1		Second Amendment to Loan and Security Agreement dated October 20, 2015 between Alpha Capital Anstalt and the Registrant (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 6, 2015).

	31	*	Section 302 Certification of Principal Executive and Financial Officer

	32	*	Section 906 Certification of Principal Executive and Financial Officer

101.INS		*	XBRL Taxonomy Extension Instance Document †

101.SCH*		*	XBRL Taxonomy Extension Schema Linkbase Document †

101.CAL		*	XBRL Taxonomy Extension Calculation Linkbase Document †

101.DEF		*	XBRL Taxonomy Extension Definition Linkbase Document †

101.LAB		*	XBRL Taxonomy Extension Labels Linkbase Document †

101.PRE		*	XBRL Taxonomy Extension Presentation Linkbase Document †

		*	filed herewith

		‡	Management contract or compensatory plan or arrangement.