form_s-1.htm

Andalay Solar, Inc.

Consolidated Balance Sheets

	December 31,
	2013			2012
Assets
Current assets:
Cash	$	150,081		$	127,385
Accounts receivable, net		567,523			365,845
Other receivables		21,378			121,990
Inventory, net		786,636			995,713
Prepaid expenses and other current assets		317,510			420,108
Assets of discontinued operations		—			10,896
Total current assets		1,843,128			2,041,937
Property and equipment, net		13,854			46,877
Patents, net		1,244,712			1,329,046
Other assets, net		163,711			183,258
Assets of discontinued operations – long-term		200,000			200,000
Total assets	$	3,465,405		$	3,801,118

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit
Current liabilities:
Accounts payable	$	4,199,511		$	3,329,537
Accrued liabilities		89,730			488,956
Accrued warranty		344,990			329,680
Common stock warrant liability		—			9
Credit facility		500,000			—
Capital lease obligations – current portion		299			4,385
Derivative liability – embedded conversion feature		177,927			—
Current portion of long-term debt		129,839			—
Convertible notes – short-term		60,000			—
Liabilities of discontinued operations		967,928			1,052,819
Total current liabilities		6,470,224			5,205,386

Capital lease obligations, less current portion		—			328
Convertible notes, less current portion (net of discount)		382,084			—
Total liabilities		6,852,308			5,205,714

Commitments and contingencies (Note 17)

Series C convertible redeemable preferred stock, $0.001 par value; 87 and 800 shares issued and outstanding on December 31, 2013 and 2012, respectively		163,998			983,747

Series D convertible redeemable preferred stock, $0.001 par value; 860 and 0 shares issued and outstanding on December 31, 2013 and 2012, respectively		858,565			—

Stockholders’ deficit:
Series B convertible redeemable preferred stock, $0.001 par value; 467 and 2,243 shares issued and outstanding on December 31, 2013 and 2012, respectively		146,224			741,171
Common stock, $0.001 par value; 500,000,000 shares authorized; 116,339,293 and 26,924,643 shares issued and outstanding at December 31, 2013 and 2012, respectively (Note 1)		116,339			26,925
Additional paid-in capital		78,717,997			76,455,054
Accumulated deficit		(83,390,026	)		(79,611,493	)
Total stockholders’ deficit		(4,409,466	)		(2,388,343	)
Total liabilities, redeemable convertible preferred stock and stockholders’ deficit	$	3,465,405		$	3,801,118

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

F - 2

Andalay Solar, Inc.

Consolidated Statements of Operations

	Year Ended December 31,
	2013			2012

Net revenue	$	1,124,836		$	5,222,248
Cost of goods sold		1,121,612			5,249,121
Gross profit (loss)		3,224			(26,873	)
Operating expenses
Sales and marketing		887,305			2,078,830
General and administrative		2,377,703			6,012,542
Total operating expenses		3,265,008			8,091,372
Loss from operations		(3,261,784	)		(8,118,245	)
Other income (expense)
Interest income (expense), net		(65,031	)		(103,429	)
Other income		420,000			—
Adjustment to the fair value of embedded derivatives		65,962			—
Adjustment to the fair value of common stock warrants		9			(416,526	)
Total other income (expense)		420,940			(519,955	)
Loss before provision for income taxes		(2,840,844	)		(8,638,200	)
Provision for income taxes		—			—
Net loss from continuing operations		(2,840,844	)		(8,638,200	)
Gain from operations of discontinued component		10,797			15,807
Net loss		(2,830,047	)		(8,622,393	)
Preferred stock dividend		(153,305	)		(174,342	)
Preferred deemed dividend		(875,304	)		(362,903	)
Net loss attributable to common stockholders	$	(3,858,656	)	$	(9,159,638	)

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

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

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

F - 3

Andalay Solar, Inc.

Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

	Series C Convertible Redeemable Preferred Stock						Series D Convertible Redeemable Preferred Stock						Series B Convertible Redeemable Preferred Stock						Common Stock
	Number of Shares			Amount			Number of Shares			Amount			Number of Shares			Amount			Number of Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Stockholders' Equity (Deficit)
Balance at January 1, 2012		—		$	—			—		$	—			2,273		$	751,223			16,040,581	$	16,041	$	72,683,781		$	(70,451,856	)	$	2,999,189
Issuance of common stock pursuant to a securities purchase agreement		—			—			—			—			—			—			2,000,000		2,000.00		498,000			—			500,000
Issuance of common stock for supply agreement		—			—			—			—			—			—			2,110,647		2,111		1,140,690			—			1,142,801
Issuance of Series C Convertible preferred stock for cash		1,100			1,100,000			—			—			—			—			—		—		—			—			—
Preferred deemed dividend		—			362,903			—			—			—			—			—		—		—			(362,903	)		(362,903	)
Conversion of convertible redeemable preferred stock to common stock		(300	)		(434,156	)		—			—			(30	)		(10,052	)		4,011,000		4,011		440,197			—			434,156
Conversion of common stock warrant liability upon exercise of warrants		—			—			—			—			—			—			—		—		734,007			—			734,007
Convertible Redeemable Preferred Stock dividends paid in common stock		—			—			—			—			—			—			1,465,304		1,465		172,876			(174,341	)		—
Exercise of warrants for common shares, $0.001 par value		—			—			—			—			—			—			472,222		472		282,861			—			283,333
Placement agent and registration fees and other direct costs		—			(45,000	)		—			—			—			—			—		—		(183,180	)		—			(183,180	)
Grants of restricted stock, net of forfeitures and repurchases for employee taxes		—			—			—			—			—			—			824,889		825		(18,366	)		—			(17,541	)
Stock-based compensation		—			—			—			—			—			—			—		—		704,188						704,188
Net loss		—			—			—			—			—			—			—		—		—			(8,622,393	)		(8,622,393	)
Balance at December 31, 2012		800			983,747			—			—			2,243			741,171			26,924,643		26,925		76,455,054			(79,611,493	)		(2,388,343	)
Issuance of Series C convertible redeemable preferred stock for cash		75			75,000			—			—			—			—			—		—		—			—			—
Issuance of Series D convertible redeemable preferred stock for cash, net		—			—			950			475,000			—			—			—		—		—			—			—
Return of Series D convertible redeemable preferred stock		—			—			(200	)		(80,123	)		—			—			—		—		—			80,123			80,123
Issuance of Series D convertible redeemable preferred stock for payment of financial advisor fees		—			—			230			230,000			—			—			—		—		—			—			—
Preferred deemed dividend		—			410,227			—			465,077			—			—			—		—		—			(875,304	)		(875,304	)
Conversion of Series B Convertible Redeemable preferred stock to common stock		—			—			—			—			(1,776	)		(594,947	)		58,277,813		58,278		536,669			—			—
Conversion of Series C Convertible Redeemable preferred stock to common stock		(788	)		(1,304,976	)		—			—			—			—			18,477,766		18,478		1,286,498			—			1,304,976
Conversion of Series D Convertible Redeemable preferred stock to common stock		—			—			(120	)		(180,010	)		—			—			6,000,000		6,000		174,010			—			180,010
Convertible Redeemable Preferred Stock dividends paid in common stock		—			—			—			—			—			—			4,310,661		4,313		148,992			(153,305	)		—
Grant of warrant on issuance of convertible note		—			—			—			—			—			—			—		—		53,623			—			53,623
Placement agent and registration fees and other direct costs		—			—			—			(51,379	)		—			—			—		—		(40,602	)		—			(40,602	)
Grants of restricted stock, net of forfeitures and repurchases for employee taxes		—			—			—			—			—			—			2,348,410		2,354		(6,456	)		—			(4,102	)
Stock-based compensation		—			—			—			—			—			—			—		—		110,200						110,200
Net loss		—			—			—			—			—			—			—		—		—			(2,830,047	)		(2,830,047	)
Balance at December 31, 2013		87		$	163,998			860		$	858,565			467		$	146,224			116,339,293	$	116,339	$	78,717,997		$	(83,390,026	)	$	(4,409,466	)

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

F - 4

Andalay Solar, Inc.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2013			2012
Cash flows from operating activities
Net loss	$	(2,830,047	)	$	(8,622,393	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation		33,023			149,840
Amortization of patents		113,071			67,919
Bad debt expense		92,224			485,072
Adjustment to the fair value of embedded derivatives		(65,962	)		—
Accretion of interest on convertible notes		21,889			—
Inventory impairment		—			383,081
Unrealized loss (gain) on fair value adjustment of common stock warrants		(9	)		416,526
Non-cash stock-based compensation expense		110,200			704,188
Gain on sale of property and equipment		—			(3,060	)
Changes in assets and liabilities:
Accounts receivable		(293,902	)		645,842
Other receivables		100,612			(52,700	)
Inventory		209,077			2,891,816
Prepaid expenses and other current assets		246,669			558,601
Assets of discontinued operations – short term		10,895			76,560
Assets held for sale		—			18,293
Other assets		(9,189	)		(624,654	)
Accrued interest		7,707			—
Assets of discontinued operations – long-term		—			9,913
Accounts payable		1,159,974			509,498
Accrued liabilities and accrued warranty		(383,916	)		172,011
Liabilities of discontinued operations		(84,891	)		(266,201	)
Net cash used in operating activities		(1,562,575	)		(2,479,848	)
Cash flows from investing activities
Proceeds from disposal of property and equipment		—			3,060
Net cash provided by investing activities		—			3,060
Cash flows from financing activities
Borrowing on long-term debt		650,000			—
Repayment of notes payable		(14,232	)		(283,252	)
Borrowing (repayment) on line of credit, net		500,000			(92,266	)
Repayments on capital lease obligations		(4,414	)		(4,698	)
Proceeds from stock offering		—			1,100,000
Proceeds from securities purchase agreement		550,000			500,000
Proceeds from exercise of warrants		—			283,333
Payment of placement agent and registration fees and other direct costs		(91,981	)		(228,180	)
Employee taxes paid for vesting of restricted stock		(4,102	)		(17,541	)
Net cash provided by financing activities		1,585,271			1,257,396
Net increase (decrease) in cash		22,696			(1,219,392	)
Cash
Beginning of year		127,385			1,346,777
End of year	$	150,081		$	127,385

F - 5

Supplemental cash flows disclosures:
Cash paid during the period for interest	$	6,759	$	26,468
Supplemental disclosure of non-cash financing activity:
Embedded derivatives on convertible note issuances	$	243,889	$	—
Grant of warrant on issuance of convertible note	$	53,623	$	—
Preferred deemed dividend	$	875,304	$	362,903
Conversion of preferred stock to common stock	$	2,079,933	$	310,052
Conversion of common stock warrant liability upon exercise of warrants	$	—	$	252,765
Reclassification of common stock warrant liability to additional paid-in capital	$	—	$	481,242
Preferred stock dividends paid in common stock	$	153,305	$	174,342
Return of Series D convertible preferred stock	$	80,123	$	—
Stock issued to procure inventory	$	—	$	1,142,801
Note payable obtained to finance prepaid insurance	$	144,071	$	—
Preferred stock issued for payment of financial advisor fees	$	230,000	$	—
Note payable for payment of financial advisor fees	$	60,000	$	—

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

F - 6

Andalay Solar, Inc.

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

1. Description of Business

We are a designer and manufacturer of solar power systems and solar panels with integrated microinverters (which we call AC solar panels). We design, market and sell these solar power systems to solar installers 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.

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, the stockholders of the Company received one share of Fairview common stock for each issued and outstanding share of The Company’s common stock. The Company’s 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 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.

In September 2007, we introduced our “plug and play” solar panel technology (under the brand name “Andalay”), which we believe significantly reduces the installation time and costs, and provides superior reliability and aesthetics, when compared to other solar panel mounting products and technology. Our panel technology offers the following features: (i) mounts closer to the roof with less space in between panels; (ii) no unsightly racks underneath or beside panels; (iii) built-in wiring connections; (iv) approximately 70% fewer roof-assembled parts and approximately 50% less roof-top labor required; (v) approximately 25% fewer roof attachment points; (vi) complete compliance with the National Electric Code and UL wiring and grounding requirements. We have five U.S. patents (Patent No. 7,406,800, Patent No. 7,832,157, Patent No. 7,866,098, Patent No. 7,987,614 and Patent No. 8,505,248) that cover key aspects of our Andalay solar panel technology, as well as U.S. Trademark No. 3481373 for registration of the mark “Andalay.” In addition to these U.S. patents, we have 7 foreign patents. Currently, we have 12 issued patents and 15 other pending U.S. and foreign patent applications that cover the Andalay technology working their way through the USPTO and foreign patent offices.

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

On May 7, 2012, we announced the execution of an agreement and plan of merger with CBD Energy Limited, an Australian corporation (CBD), which contemplated a merger in which CBD would become our parent company. The targeted completion of the merger was repeatedly delayed and on July 18, 2013 we terminated the merger. During such merger delays, our supply relationships have been disrupted, leading to a significant decline in our revenue and the implementation of significant cost reductions, including the lay-off of employees during the time we pursued the merger. We are now committed to focus our attention on rebuilding our core business, expanding our current product offering and exploring strategic opportunities.

Our Corporate headquarters is located at 2071 Ringwood Ave. Unit C, San Jose, CA 95131. 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.

Discontinued Operations

See Note 3 for a detailed discussion of our Discontinued Operations.

Concentration of Risk in Customer and Supplier Relationships

See Note 18 for a detailed discussion of our concentration of risk in customer and supplier relationships.

2. Summary of 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 purchases for solar panels and microinverters, and to cover our payroll and lease expenses. We have incurred net losses and negative cash flows from operations for each of the years ended December 31, 2013 and 2012. 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 of December 31, 2013, we had approximately $150,000 in cash on hand. We intend to address ongoing working capital needs through sales of remaining inventory, along with raising additional debt and equity financing. In January 2013, our board of directors approved actions to dramatically reduce our variable operating costs, including a 12 person employee headcount reduction effective January 15, 2013, for the period through the anticipated merger closing with CBD, which merger was terminated in July 2013. No restructuring charges or severance payments were incurred. Our revenue levels remain difficult to predict, and we anticipate that we will continue to sustain losses in the near term, and we cannot assure investors that we will be successful in reaching break-even.

F - 7

During 2012, because of our cash position and liquidity constraints, we were late in making payments to both of our former panel suppliers, Suntech and Lightway. We currently have no unshipped orders from these suppliers. In May 2013, we entered into a new supply agreement for assembly of our proprietary modules with Environmental Engineering Group Pty Ltd (“EEG”), an assembler of polycrystalline modules located in Australia. In August 2013, we began receiving product from EEG and began shipping product to customers during the third calendar quarter of 2013. In September 2013, we entered into a second supply agreement for assembly of our proprietary modules with Tianwei New Energy Co, Ltd., a panel supplier located in China. We began receiving product from Tianwei in February 2014. Although we believe we can find alternative suppliers for solar panels manufactured to our specifications, our operations would be disrupted unless we are able to rapidly secure alternative sources of supply, our inventory and revenue could diminish significantly, causing disruption to our operations.

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

Convertible Notes payable

On August 30, 2013, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale and issuance of a convertible note in the principal amount of $200,000 that matures August 29, 2015 (the "Convertible Note"). Subsequently, on November 25, 2013 and December 19, 2013, we entered into additional securities purchase agreements with the same institutional accredited investors relating the sale and issuance of convertible notes in the principal amount of $200,000 and $250,000, respectively, which mature on November 25, 2015 and December 19, 2015. On January 27, 2014, we issued a convertible note in the principal amount of $100,000 that matures January 27, 2016 under the Securities Purchase Agreement we entered into with an accredited investor on December 19, 2013. In connection with the issuance of the December 19, 2013 convertible note, we also issued 6,250,000 warrants to purchase shares of our common stock at a price of $0.02 per share. On February 25, 2014, we entered into a Securities Purchase Agreement with the same accredited investor related to the sale and issuance of a convertible note in the principal amount of $200,000 that matures February 25, 2016. In connection with the issuance of the February 25, 2014 convertible note, we issued 5,000,000 warrants to purchase shares of our common stock at a price of $0.02 per share. 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, 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. Unless waived in writing by the purchaser, no conversion of the convertible notes can be effected to the extent that as a result of such conversion the purchaser would beneficially own more than 9.99% in the aggregate of our issued and outstanding common stock immediately after giving effect to the issuance of common stock upon conversion.

We have the option of repaying the outstanding principal amount of the convertible notes, in whole or in part, by paying the purchaser a sum of money equal to one hundred and twenty percent (120%) of the principal together with accrued but unpaid interest upon 30 days notice, subject to certain beneficial ownership limits. For so long as we have any obligation under the convertible notes, we have agreed to certain restrictions regarding, among other things, incurrence of additional debt, liens, amendments to charter documents, repurchase of stock, payment of cash dividends, affiliated transactions. We are also prohibited from entering into certain variable priced agreements until the convertible notes are repaid in full.

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 $243,889 on the three issuance dates. 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 Consolidated Statements of Operations. We recognized a favorable gain for the year ending December 31, 2013 of $65,962.

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.

Line of credit

On September 30, 2013, we entered into a loan and security agreement to provide financing, on a discretionary basis, for one year, against our accounts receivable and inventory. The maximum amount that can be borrowed under the Agreement is $500,000. We have 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 are secured by a lien on all of our assets. All advances under the 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 Agreement totaling $350,000. Subsequently, on October 21, 2013, we requested and received an additional $100,000 and on November 25, 2013, we requested and received an additional $50,000. As of December 31, 2013, the balance outstanding under our line of credit was $500,000.

F - 8

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 money market 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. As of December 31, 2013 and 2012, we had no cash equivalents.

Accounts Receivable

Accounts receivable consist of trade receivables. We regularly evaluate the collectability of our accounts receivable. An allowance for doubtful accounts is maintained for estimated credit losses. 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.

Inventory

Inventory is stated at the lower of cost (on an average basis) or market value. We determine cost based on the weighted-average purchase price and include both the costs of acquisition and the shipping costs in 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.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the respective assets.

Estimated useful lives are as follows:

Category	Useful Lives
Office Equipment	2-5 years
Vehicles	3-5 years
Leasehold Improvements	2 years

Maintenance and repairs are expensed as incurred. Expenditures for significant renewals or betterments are capitalized. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in current operations.

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of a long-lived asset may not be recoverable. We periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful lives of our long-lived assets or whether the remaining balance of long-lived assets should be evaluated for possible impairment. We do not believe that there were any indicators of impairment that would require an adjustment to such assets or their estimated periods of recovery at December 31, 2013 and 2012.

Goodwill and Other Intangible Assets

We do not amortize goodwill, but rather test goodwill for impairment at least annually.

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 11 years as of December 31, 2013, 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.

Costs associated with patents currently held are approximately $1.4 million, net of approximately $201,000 of accumulated amortization, are included in other assets, net as of December 31, 2013, and are being amortized over the estimated useful life, which was determined to be seventeen years. Amortization expense of patents was approximately $113,000 and $68,000 in each of the years ended December 31, 2013 and 2012, respectively. Estimated amortization expense of patents for the five years subsequent to December 31, 2013, is approximately $114,000 per year. Capitalized filing fees associated with obtaining new patents not yet issued and defense of existing patents (not yet resolved) of approximately $145,000 are included in other assets as December 31, 2013.

F - 9

Discontinued Operations

Discontinued operations are presented and accounted for in accordance with Accounting Standards Codification (ASC) 360, “Impairment or Disposal of Long-Lived Assets,” (ASC 360). When a qualifying component of the Company is disposed of or has been classified as held for sale, the operating results of that component are removed from continuing operations for all periods presented and displayed as discontinued operations if: (a) elimination of the component’s operations and cash flows from the Company’s ongoing operations has occurred (or will occur) and (b) significant continuing involvement by the Company in the component’s operations does not exist after the disposal transaction.

On September 10, 2010, we announced that we were exiting the solar panel installation business. The exit from the installation business was essentially completed at the end of the fourth quarter of 2010. The exit from the installation business was therefore classified as discontinued operations for all periods presented under the requirements of ASC 360.

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 $345,000 at December 31, 2013 and $330,000 at December 31, 2012, is included within “Accrued warranty” in the accompanying consolidated balance sheets.

The liability for our manufacturing warranty consists of the following:

	Twelve Months Ended
	2013			2012
Beginning accrued warranty balance	$	329,680		$	217,812
Reduction for labor payments and claims made under the warranty		(4,400	)		(1,723	)
Accruals related to warranties issued during the period		19,710			113,591
Ending accrued warranty balance	$	344,990		$	329,680

We previously recorded a provision for warranty liability related to our discontinued installation operations. We provided for a 5-year or a 10-year warranty on the installation of a system and all equipment and incidental supplies other than solar panels and inverters that are covered under the manufacturer warranty. The liability for the installation warranty at December 31, 2013 and 2012 was approximately $968,000 and $1.1 million, respectively, and is included within “Liabilities of Discontinued Operations” in the accompanying consolidated balance sheets. Defective solar panels or inverters are covered under the manufacturer warranty. In the event that a panel or inverter needs to be replaced, we will replace the defective item within the manufacturer’s warranty period (between 5-25 years).

Fair Value of Financial Instruments

The carrying values reported for cash equivalents, accounts receivable, assets associated with discontinued operations, accounts payable, accrued liabilities and the outstanding credit facility approximated their respective fair values at each balance sheet date due to the short-term maturity of these financial instruments.

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.

Stock-based Compensation

We apply the fair value method under Accounting Standards Codification (ASC) 718 in accounting for our 2001 Stock Option Plan and our 2006 Stock Incentive Plan. Under ASC 718, compensation cost is measured at the grant date based on the fair value of the equity instruments awarded and is recognized over the period during which an employee is required to provide service in exchange for the award, or the requisite service period, which is usually the vesting period. The fair value of the equity award granted is estimated on the date of the grant.

Advertising

We expense advertising costs as incurred. Advertising expense, included in “Sales and marketing expenses,” for the years ended December 31, 2013 and 2012, was approximately $16,000 and $144,000, respectively.

Research and Development Costs

Research and development expenses, which include the cost of activities that are useful in developing new products, processes or techniques, as well as expenses for activities that may significantly improve existing products or processes are expensed as incurred. In the years ended December 31, 2013 and 2012, we expensed approximately $243,000 and $649,000, respectively, in general and administrative costs.

Shipping and Handling Costs

Shipping and handling costs associated with inbound freight are included in cost of inventory and expensed as cost of goods sold when the related inventory is sold.

Income Taxes

Deferred income taxes arise from timing differences resulting from income and expense items reported for financial accounting 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. Utilization of net operating loss carryforwards may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss carryforwards before utilization. We apply the provisions of ASC 740, formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

F - 10

Earnings Per Share

As of January 1, 2009, we adopted Accounting Standards Codification (ASC) 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. The effect of the adoption of the Staff Position was not material to our net loss per share.

In accordance with the Staff Position, 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.

The following table sets forth the computation of basic and diluted net loss per share:

	Year Ended December 31,
	2013			2012
Basic:
Numerator:
Net loss	$	(2,830,047	)	$	(8,622,393	)
Less: Net loss allocated to participating securities		12,503			170,052
Net loss attributable to stockholders		(2,817,544	)		(8,452,341	)
Preferred stock dividend		(153,305	)		(174,342	)
Preferred deemed dividend		(875,304	)		(362,903	)
	$	(3,846,153	)	$	(8,989,586	)
Denominator:
Weighted-average shares outstanding		69,477,915			19,791,045
Weighted-average unvested restricted shares outstanding		(306,958	)		(390,321	)
Denominator for basic net loss per share		69,170,957			19,400,724

Basic net loss per share attributable to common stockholders	$	(0.06	)	$	(0.46	)

Diluted:
Numerator:
Net loss	$	(2,830,047	)	$	(8,622,393	)
Less: Net loss allocated to participating securities		12,503			170,052
Net loss attributable to stockholders		(2,817,544	)		(8,452,341	)
Preferred stock dividend		(153,305	)		(174,342	)
Preferred deemed dividend		(875,304	)		(362,903	)
	$	(3,846,153	)	$	(8,989,586	)
Denominator:
Denominator for basic calculation		69,170,957			19,400,724
Weighted-average effect of dilutive stock options		—			—
Denominator for diluted net loss per share		69,170,957			19,400,724

Diluted net loss per share attributable to common stockholders	$	(0.06	)	$	(0.46	)

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:

	December 31, 2013		December 31, 2012
Stock options outstanding		5,368,233		679,744
Unvested restricted stock		1,890,952		48,073
Warrants to purchase common stock		9,648,045		3,398,045
Preferred stock convertible into common stock		68,353,582		35,230,263

F - 11

Segment Reporting

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. We are engaged in a single business segment wherein we design, manufacture and sell our solar panels to solar installers, trade workers and do-it-yourself customers through distribution partnerships, our dealer network and retail outlets. All tangible assets are located in the United States.

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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Andalay Solar and Fairview, pursuant to the Merger as described in Note 1. We also have two wholly-owned subsidiaries as of December 31, 2013 and 2012. Akeena Corp. is a wholly-owned subsidiaries of Andalay Solar, Inc. All inter-company accounts have been eliminated in consolidation.

3. Discontinued Operations

On September 10, 2010, we announced that we were exiting the solar panel installation business and we were expanding our distribution business to include sales of our Andalay Solar Power Systems directly to dealers in California. The exit from the installation business was essentially completed by the end of 2010. As a result of the decision to exit the California installation business we recorded a restructuring charge totaling approximately $3.0 million for the year ended December 31, 2010, the majority of which were non-cash charges. This restructuring charge was comprised primarily of (i) one-time severance costs of $765,000 related to headcount reductions paid primarily in shares of our common stock, (ii) inventory write downs of $948,000, (iii) lease accelerations and the write off of leasehold improvements of $307,000, (iv) goodwill impairment of $299,000, (v) vehicle, furniture and fixtures and computer equipment write downs of $290,000 and (vi) other prepaid costs write-downs of $367,000. During the year ended December 31, 2010, we recorded a loss from discontinued operations of $6.5 million. During the years ended December 31, 2013 and 2012, we recorded an $11,000 gain and a $16,000 gain, respectively, from the discontinued installation business.

The assets and liabilities of discontinued operations are presented separately under the captions “Assets of discontinued operations,” “Liabilities of discontinued operations” and “Long-term liabilities of discontinued operations,” respectively, in the accompanying consolidated balance sheets at December 31, 2013 and 2012, and consist of the following:

Assets of discontinued operations:	December 31, 2013		December 31, 2012
Accounts receivable and other receivables	$	—	$	1,340
Prepaid expenses and other current assets		—		—
Other assets		—		9,556
Total current assets of discontinued operations		—		10,896
Security deposits on operating leases		—		—
Security deposit – escrow account for installation jobs		200,000		200,000
Total assets of discontinued operations	$	200,000	$	210,896

Liabilities of discontinued operations:	December 31, 2013		December 31, 2012
Accrued liabilities	$	—	$	8,656
Accrued warranty		967,928		1,042,663
Deferred revenue		—		1,500
Total current liabilities		967,928		1,052,819

Other long-term liabilities		—		—
Total discontinued operations liabilities	$	967,928	$	1,052,819

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. The amount is reflected in long-term assets of discontinued operations in the balance sheet. 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.

F - 12

4. Accounts Receivable

Accounts receivable consists of the following:

	December 31, 2013			December 31, 2012
Trade accounts	$	575,375		$	490,401
Less: Allowance for bad debts		(2,899	)		(108,750	)
Less: Allowance for returns		(4,953	)		(15,806	)
	$	567,523		$	365,845

The following table summarizes the allowance for doubtful accounts as of December 31, 2013 and 2012:

	Balance at Beginning of Period		Provisions, net		Write-Off/ Recovery		Balance at End of Period
Year ended December 31, 2013	$	108,750	$	92,224	$	(198,325)	$	2,899
Year ended December 31, 2012	$	39,000	$	485,072	$	(415,322)	$	108,750

5. Inventory

Inventory consists of the following:

	December 31, 2013		December 31, 2012
Finished goods	$	654,970	$	755,643
Work in process		131,666		240,070
	$	786,636	$	995,713

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 year ended December 31, 2012, we recorded a $206,000 non-cash inventory write-down, a $65,000 write-off of accumulated inventory overhead costs and a $112,000 non-cash inventory write-off. The $206,000 write-down was an adjustment to the carrying value of our older, smaller-format solar panels and older microinverter inventory to reflect the decline in market prices compared to our original cost and the $112,000 was an inventory write-off of obsolete inventory.

6. Prepaid expenses and other current assets

Prepaid expenses and other current assets consist of the following:

	December 31, 2013		December 31, 2012
Prepaid insurance	$	152,812	$	8,046
Prepaid - other		68,906		160,385
Vendor deposits		95,792		251,677
	$	317,510	$	420,108

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7. Property and Equipment, Net

Property and equipment, net consist of the following:

	December 31, 2013			December 31, 2012
Office equipment	$	436,051		$	522,745
Leasehold improvements		123,278			148,759
Vehicles		17,992			17,992
		577,321			689,496
Less: Accumulated depreciation and amortization		(563,467	)		(642,619	)
	$	13,854		$	46,877

Depreciation expense for the twelve months ended December 31, 2013 and 2012 was approximately $33,000 and $150,000, respectively. Beginning in the fourth quarter 2010, concurrent with our change in business model to a pure a manufacturing and distribution business, a portion of depreciation expense related to leasehold improvements and equipment in our warehouse is allocated to cost of goods sold. All other depreciation is included in general and administrative expense.

8. Accrued Liabilities

Accrued liabilities consist of the following:

	December 31, 2013		December 31, 2012
Accrued salaries, wages, benefits and bonus	$	45,456	$	65,581
Sales tax payable		4,409		877
Accrued accounting and legal fees		—		5,160
Customer deposit payable		580		36,540
Accrued interest		6,288		76,438
Royalty payable		—		262,500
Other accrued liabilities		32,997		41,860
	$	89,730	$	488,956

F - 14

9. Convertible Notes Payable and Credit Facility

Convertible Notes payable

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

Because of certain down-round protection in the conversion rate of the convertible notes, we determined that derivative liability related to the embedded conversion feature met the criteria for bifurcation. Accordingly, we recognized an aggregate liability of $243,889 on the three issuance dates. 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 Consolidated Statements of Operations. We recognized a favorable gain for the year ended December 31, 2013 of $65,962.

On November 1, 2013 and December 1, 2013, we issued two convertible notes to our financial advisory firm in the principal amount of $30,000 each for a total of $60,000, which mature on October 31, 2014 and November 30, 2014, respectively. 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. 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.

Below is a table showing the convertible notes payable, the beneficial conversion feature and fair value of the warrants as of December 31, 2013:

	December 31, 2013
Convertible notes payable cash proceeds	$	650,000
Convertible notes payable issued for financial advisory services		60,000
Less: Derivative liability		(243,889	)
Less: Relative fair value of warrants		(53,623	)
Accreted interest		21,889
Accrued interest		7,707
Convertible notes payable, net		442,084
Less current portion		(60,000	)
	$	382,084

Line of credit

On September 30, 2013, we entered into a loan and security agreement with Alpha Capital Anstalt and Collateral Services, LLC to provide financing, on a discretionary basis, for one year, against our accounts receivable and inventory. The maximum amount that can be borrowed under the Agreement is $500,000. We have 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 are secured by a lien on all of our assets. All advances under the 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 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, 2013, the balance outstanding under our line of credit was $500,000.

On February 15, 2011, we entered into a Business Financing Agreement (the "2011 Credit Facility") with Bridge Bank, National Association (“Bridge Bank”) to finance our accounts receivables. The 2011 Credit Facility provided for a credit limit of $750,000, representing the maximum amount of advances based on up to 50% of $1.5 million of gross eligible accounts receivables. The 2011 Credit Facility was terminated on August 16, 2013.

F - 15

10. Long-term Debt and Capital Lease Obligations

Long-term debt

Our long-term debt consists of three convertible notes. See Note 9 for a discussion of these notes. The scheduled principal maturities of long-term debt at December 31, 2013 are as follows:

2014	$	—
2015		650,000
2016		—
2017		—
2018		—
2019		—
		650,000
Less: current portion		—
	$	650,000

Capital lease obligations

Our capital lease obligation consists of a lease on equipment. Our scheduled principal maturities relating to this capital lease obligation at December 31, 2013 is approximately $299 in 2014.

11. Stockholders’ Deficit

We were incorporated in 2001 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 as discussed in Note 1. Pursuant to the Merger, the stockholders of Andalay Solar received one share of Fairview common stock for each issued and outstanding share of Andalay Solar common stock. Andalay Solar’s common shares were also adjusted from $0.01 par value to $0.001 par value at the time of the Merger. Since the stockholders of Andalay Solar owned a majority of the outstanding shares of Fairview common stock immediately following the Merger, and the management and board of Andalay Solar became the management and board of Fairview immediately following the Merger, the Merger is being accounted for as a reverse merger transaction and Andalay Solar was deemed to be the acquirer. The assets, liabilities and the historical operations prior to the Merger are those of Andalay Solar. Subsequent to the Merger, the consolidated financial statements include the assets, and the historical operations of Andalay Solar and Fairview from the closing date of the Merger.

We have 501,000,000 shares of capital stock authorized under our certificate of incorporation, consisting of 500,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of December 31, 2013, we have authorized (i) 2,000 shares of Series A Convertible Preferred Stock, par value $0.001, all of which have been converted or cancelled and none of which remain outstanding, (ii) 4,000 shares of Series B 4% Convertible Preferred Stock, par value $0.001, of which 467 shares remain outstanding, (iii) 1,750 shares of our Series C 8% Convertible Preferred Stock, par value $0.001, of which 87 shares remain outstanding, and (iv) 1,180 shares of our Series D 8% Convertible Preferred Stock, par value $0.001, of which 860 shares remain outstanding.

On March 30, 2012, we entered into an amendment to the outstanding Series K warrants which removed the provision for any future price adjustment to the exercise price. See “Stock Warrants and Warrant Liability” for a discussion on the accounting treatment of these warrants.

Pursuant to the Lightway Supply Agreement, on March 30, 2012, we issued 1,900,000 shares of our common stock to Lightway. The shares were issued at $0.55 per share based on the latest closing sale price on the date of issuance. The issuance of the common stock, valued at $1,045,000, increased equity and reduced accounts payable by an equal amount.

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

See Note 14 for a discussion of the accounting treatment of the stock warrant transactions discussed above.

12. Convertible Redeemable Preferred Stock and Preferred Deemed Dividend

On February 17, 2011, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale of 4,000 units at a price of $900 per unit (the “Securities Purchase Agreement”). The aggregate purchase price for the Securities was $3,600,000, less $532,000 in issuance costs.

The Certificate of Designation to create the Series B Preferred includes certain negative covenants regarding indebtedness and other matters, and includes provisions under which the holders of the Series B Preferred are entitled to demand redemption for cash upon specified triggering events. The Series B Preferred bears dividends at the rate 4% per year for the first year, and 8% per year thereafter, payable in stock or in cash at our election, subject to certain restrictions.

On October 18, 2012, we filed with the Secretary of State of the State of Delaware a Certificate of Designation creating and specifying the rights of our Series C Preferred Stock. The number of shares designated Series C Preferred Stock is 1,750 (which shall not be subject to increase without the written consent of the holders of a majority of such series of preferred stock). Each share of Series C Preferred has a par value of $0.001 per share and a stated value equal to $1,000, subject to increase under certain circumstances. Each share of Series C Preferred is convertible, at any time at the option of the holder thereof, into shares of our common stock determined by dividing the stated value per share of our Series C Preferred by the closing price per share of our common stock as reported on the OTCQB Marketplace (OTCQB) on October 18, 2012, which was $0.155. The conversion price is subject to further adjustments as set forth in the Series C Certificate of Designation.

The holders of our Series C Preferred are entitled to receive, and we are obligated to pay, cumulative dividends at the rate per share (as a percentage of the stated value per share) of 8% per annum, payable quarterly on March 31, June 30, September 30 and December 31. Dividends are payable in cash or in shares of newly issued common stock, depending on whether we have cash available for lawful payment of dividends and whether we satisfy certain conditions for the alternative to pay the dividends in shares.

F - 16

Our Series C Preferred generally is non-voting, provided that our holders of Series C Preferred have rights of approval with regard to amendments to our Certificate of Incorporation or to the Certificate of Designation that would adversely affect the rights of our Series C Preferred. Our Series C Preferred provides for a number of negative covenants applicable to us, including restrictions on the amount of our indebtedness (generally, to an amount not to exceed $5 million) and related liens, and restrictions on our use of cash to redeem or to pay dividends with respect to our common stock or other junior securities. In various “triggering event” circumstances set forth in the Series C Certificate of Designation, the holders of our Series C Preferred have rights to demand the redemption of their shares, for cash or for shares of our common stock, depending on the nature of the triggering event.

On October 18, 2012, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale and issuance of up to 1,245 shares of our newly created Series C Preferred Stock, for aggregate proceeds of up to $1,245,000. At the initial closing, we sold and issued 750 shares of Series C Preferred, for initial aggregate proceeds of $750,000. On November 2, 2012, we provided to the purchasers of our Series C Preferred Stock a draw down notice under the Purchase Agreement. As a result of the draw down, we sold an aggregate of 350 additional shares of our Series C Preferred to the purchasers for aggregate proceeds of $350,000. Based on the closing price of our common stock as reported on the OTCQB Marketplace (OTCQB) on November 2, 2012 (which was $0.08 per share), the 350 shares of Series C Preferred issued pursuant to the draw down was convertible into 4,375,000 shares of our common stock. As a result of the contingent conversion feature on the Series C Preferred, which reduced the conversion price from $0.155 to $0.08 per share on the total 750 shares of Series C Preferred Stock issued and outstanding at November 2, 2012, and which resulted in an increase in the number of common shares issuable, we recognized a preferred deemed dividend of $362,903.

Effective October 18, 2012, we amended our Series B Certificate of Designation to reduce the “Floor Price” limitation related to the conversion rights of the Series B Preferred Stock from $0.10 to $0.01 per share.

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

As a result of the January 24, 2013 draw down notice, pursuant to the terms of the outstanding Series B Preferred Stock, the conversion price of the Series B Preferred was reduced from $0.08 per share of common stock to become equal to $0.05, and the conversion price of the Series C Preferred issued under the initial closing was reduced from $0.08 per share of common stock to become equal to $0.05. As a result of the May 13, 2013 draw down notice, the price of the Series B Preferred was further reduced from $0.05 per share of common stock to become equal to $0.03, and the conversion price of the Series C Preferred was also further reduced from $0.05 per share of common stock to $0.03. As of December 31 2013, there were 467 shares of Series B Preferred that remain outstanding. With the May 13, 2013 draw down, and after recent conversions of our Series C Preferred, there are 87 shares of Series C Preferred that remain outstanding. As a result of our August 30, 2013 financing, the conversion prices of the Series B and Series C Preferred were further reduced from $0.03 per share of common stock to $0.02. After adjustment to the conversion prices as a result of the August 30, 2013 financing and for subsequent conversions of our preferred stock to common stock, the outstanding Series B Preferred and Series C Preferred would be convertible into 21,020,232 shares and 4,333,350 shares, respectively, of our common stock.

On February 15, 2013, we entered into a securities purchase agreement with an institutional accredited investor relating to the sale and issuance of up to 1,180 shares of our newly created Series D Preferred Stock at a price per share equal to the stated value, which is $1,000 per share, for aggregate proceeds of up to $1,000,000. At the initial closing, concurrent with entering the agreement, we issued 150 shares of Series D Preferred, for initial aggregate proceeds of $150,000. After the initial closing, the securities purchase agreement permits the purchaser to exercise a “call” right to purchase additional Series D Preferred in multiple draw downs from time to time until December 31, 2013, subject to certain limits, terms and conditions. In March 2013, the Company and investors entered into a letter agreement to the securities purchase agreement dated as of February 15, 2013, modifying the number of shares of Series D Preferred Stock to be issued upon settlement of any purchaser draw downs made on or after March 18, 2013, equal to the purchaser investment amount divided by the stated value multiplied by a number agreed upon by the Company and the purchaser, which shall not be higher than 1.67. Subsequently, on March 21, 2013, we issued 167 shares of Series D Preferred for aggregate proceeds of $100,000. On May 13, 2013, the Company and investors entered into a letter agreement amendment to the securities purchase agreement dated as of February 15, 2013, modifying the number of shares of Series D Preferred Stock that may be issued upon draw downs made on or after May 13, 2013, equal to the purchaser investment amount divided by the stated value multiplied by a number agreed upon by the Company and the purchaser, which shall not be higher than 3.34. The corresponding conversion price into underlying shares of our common stock was $0.03 per share. On May 13, 2013, we issued 583 shares of Series D Preferred to an investor for aggregate proceeds of $175,000. As a result of the contingent conversion feature on the Series C Preferred, which reduced the conversion price from $0.05 to $0.03 per share on the total 260 shares of Series C Preferred Stock issued and outstanding at May 13, 2013, and which resulted in an increase in the number of common shares issuable, we recognized additional preferred deemed dividends of $104,000. On August 30, 2013, we entered into an agreement to sell $200,000 in convertible notes. As a result of the sale of these convertible notes and as a result of the contingent conversion feature on the Series C Preferred and Series D Preferred, which reduced the conversion price from $0.03 to $0.02 per share on the Series C and from $0.10 to $0.02 per share on the Series D on the total 147 shares and 930 shares, respectively, of Series C Preferred Stock and Series D Preferred Stock issued and outstanding at August 30, 2013, and which resulted in an increase in the number of common shares issuable, we recognized additional preferred deemed dividends of $36,000 on the Series C Preferred Stock and $465,077 on the Series D Preferred Stock. The net loss attributable to common shareholders reflects both the net loss and the deemed dividend. As a result of the $500,000 loan and security agreement entered into on September 30, 2013, we issued to the lender 50 shares of our Series D Preferred stock for the $50,000 loan origination fee.

See Note 14 for a discussion of the accounting treatment of the stock warrant transactions described above.

13. Stock Option and Incentive Plan

On August 8, 2006, we adopted the Andalay 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 3,000,000 shares and there were 1,112,310 shares available for issuance under the Stock Plan as of December 31, 2012. At our Annual Meeting of Stockholders held on September 19, 2013, our stockholders approved and adopted an amendment to our 2006 Incentive Stock Plan, increasing the number of shares of our common stock reserved for issuance under the Plan from 3,000,000 to 50,000,000.

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Restricted stock and options to purchase common stock may be issued under the Stock Plan. The restriction period on restricted stock grants generally expire at a rate of 25% per quarter over one year or 25% per year over four years, unless decided otherwise by our Compensation Committee. Options to purchase common stock generally vest and become exercisable at a rate of 25% per quarter over one year or 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 (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 (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 $110,200 and $704,188 during the twelve months ended December 31, 2013 and 2012, 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.

The following table sets forth a summary of restricted stock activity for the twelve months ended December 31, 2013 and 2012:

	Number of Restricted Shares			Weighted-Average Grant Date Fair Value
Outstanding and not vested beginning balance at January 1, 2012		289,795		$	1.92
Granted		1,029,113		$	0.31
Forfeited/cancelled		(131,216	)	$	1.68
Released/vested		(1,139,619	)	$	0.47
Outstanding and not vested beginning balance at January 1, 2013		48,073		$	2.50
Granted		2,500,000		$	0.03
Forfeited/cancelled		(21,798	)	$	2.46
Released/vested		(635,323	)	$	0.08
Outstanding and not vested at December 31, 2013		1,890,952		$	0.05

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. At December 31, 2013 and 2012, there was approximately $71,000 and $96,000, respectively, of unrecognized stock-based compensation expense associated with the granted but unvested restricted stock. Stock-based compensation expense relating to these restricted shares is being recognized over a weighted-average period of 0.8 years. The total fair value of shares vested during the twelve months ended December 31, 2013 and 2012, was approximately $19,000 and $256,000, 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 twelve months ended December 31, 2013 and 2012, there were no excess tax benefits relating to restricted stock and therefore there is no impact on the accompanying consolidated statements of cash flows.

The following table sets forth a summary of stock option activity for the twelve months ended December 31, 2013 and 2012:

	Number of Shares Subject To Option 2013			Weighted-Average Exercise Price		Number of Shares Subject To Option 2012			Weighted-Average Exercise Price
Outstanding beginning balance		679,744		$	2.82		1,077,744		$	5.47
Granted during the year		6,400,000			0.03		46,875			0.26
Forfeited/cancelled/expired during the year		(461,511	)		3.29		(444,875	)		9.08
Exercised during the year		—			—		—			—
Outstanding at end of year		6,618,233		$	0.11		679,744		$	2.75
Exercisable at end of year		2,330,650		$	0.28		477,538		$	2.82
Outstanding and expected to vest		6 191,212		$	0.11		669,049		$	2.82

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Stock options are valued at the estimated fair value on the 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. The fair value of stock option grants during the twelve months ended December 31, 2013 and 2012 was estimated using the Black-Scholes option-pricing model with the following assumptions:

	Twelve Months Ended December 31,
	2013			2012
Weighted-average volatility		105.5	%		105.5	%
Expected dividends		0.0	%		0.0	%
Expected life	2.0 years			2.9 years
Weighted-average risk-free interest rate		0.30	%		0.25	%

The weighted-average fair value per share of the stock options as determined on the date of grant was $0.02 for the stock options to purchase 6,400,000 shares of common stock granted during the twelve months ended December 31, 2013 and $0.14 for the stock options to purchase 46,875 share of common stock granted during the twelve months ended December 31, 2012. The weighted-average remaining contractual term for the stock options outstanding (vested and expected to vest) and exercisable as of December 31, 2013 and 2012, was 4.7 years and 2.9 years, respectively. The total estimated fair value of stock options vested during the twelve months ended December 31, 2013 and 2012 was approximately $80,000 and $406,000, respectively. The aggregate intrinsic value of stock options outstanding as of December 31, 2013 and 2012 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. At December 31, 2013 and 2012, there was approximately $81,000 and $94,000, respectively, 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 1.6 years and 1.0, respectively. 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 twelve months ended December 31, 2013 and 2012, there were no excess tax benefits relating to stock options and therefore there is no impact on the accompanying consolidated statements of cash flows.

Non-vested stock option activity for the year ended December 31, 2013 is as follows:

	Non-Vested Stock Options			Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2012		202,206		$	0.65
Granted		6,400,000		$	0.02
Forfeited/cancelled		(119,499	)	$	2.65
Released/vested		(2,195,124	)	$	0.14
Outstanding at December 31, 2013		4,287,583		$	0.02

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Options outstanding at December 31, 2013 are summarized as follows:

	Options Outstanding						Vested Options
	Number Outstanding		Weighted- Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price		Number Outstanding		Weighted- Average Exercise Price
$0.03 - $0.11		6,412,500		4.9	$	0.03		2,145,750	$	0.03
$0.40 - $0.75		41,495		3.0	$	0.63		41,495	$	0.63
$1.92 - $3.48		124,238		2.0	$	2.41		103,405	$	2.46
$4.00 - $7.40		40,000		0.6	$	5.15		40,000	$	5.15
$0.03 - $7.40		6,618,233		4.8	$	0.11		2,330,650	$	0.24

14. Stock Warrants and Warrant Liability

During March 2009, in connection with an equity financing, we issued Series E Warrants to purchase 334,822 shares of common stock at an exercise price of $5.36 per share. The fair value of the warrants was estimated using Black-Scholes with the following weighted average assumptions: risk-free interest rate of 2.69%, an expected life of five years; an expected volatility factor of 112% and a dividend yield of 0.0%. The value assigned to these warrants was approximately $1.0 million, of which $1.0 million was reflected as common stock warrant liability with an offset to additional paid-in capital as of the offering close date. The fair value of the warrants decreased to zero as of December 31, 2013 and we recognized a $9 favorable non-cash adjustment from the change in fair value of these warrants for the twelve months ended December 31, 2013.

On February 17, 2011, we entered into a securities purchase agreement and issued Series K Warrants to purchase up to 1,700,002 shares of common stock at an exercise price of $2.40 per share, which warrants are not exercisable until six months after issuance and have a term of five and one-half years. The fair value of the warrants was estimated using Black-Scholes with the following weighted-average assumptions: risk-free interest rate of 1.4%, an expected life of 4.1 years; an expected volatility factor of 103.2% and a dividend yield of 0.0%. The estimated value of these warrants was approximately $2.6 million, of which $2.6 million was reflected as common stock warrant liability with an offset to preferred stock as of the offering close date. During the quarter ended March 31, 2012, 472,222 Series K Warrants were exercised at a price of $0.60 and total proceeds of approximately $283,000. As a result of the exercise, we recognized approximately $253,000 in the change in the estimated value assigned to the warrants as an increase to equity and a decrease to the warrant liability. On March 30, 2012, we entered into an Amendment to Securities Purchase Agreement with the holders of the remaining Series K warrants (Series K Amendment) reducing the exercise price to $0.40 and removing provisions for any future price adjustment to the exercise price. On March 30, 2012, the fair value of the warrants was estimated using Black-Scholes with the following weighted average assumptions: risk-free interest rate of 0.5%, an expected life of 3.0 years; an expected volatility factor of 109.3% and a dividend yield of 0.0%. The fair value of the warrants increased to approximately $481,000 as of March 30, 2012 and we recognized a $425,000 unfavorable non-cash adjustment from the change in fair value of these warrants for the three months ended March 31, 2012. As a result of the Series K Amendment, the fair value of the warrants of approximately $481,000 was reclassified from warrant liability to equity.

On December 19, 2013, we entered into a securities purchase agreement with certain institutional accredited investors relating to the sale and issuance of a (i) convertible note in the principal amount of $250,000 that matures December 19, 2015 and (ii) five- year warrant (with a cashless exercise feature under certain circumstances) to purchase 6,250,000 shares of our common stock at an exercise price of $0.02, subject to adjustment under certain circumstances. See Note 9 for further discussion of the issuance of the convertible note.

The following table summarizes the Warrant activity for the twelve months ended December 31, 2013 and 2012:

	Warrants for Number of Shares			Weighted-Average Exercise Price
Outstanding at January 1, 2012		4,106,016		$	3.57
Issued		—			—
Exercised		(472,222	)		(0.60	)
Cancelled/expired		(235,749	)		(40.32	)
Outstanding at December 31, 2012		3,398,045			1.36
Issued		6,250,000			0.02
Exercised		—			—
Cancelled/expired		—			—
Outstanding at December 31, 2013		9,648,045		$	0.49

The majority of our warrants outstanding are not exercisable for six months from the date of issuance and are exercisable for either 4½ years or 5 years thereafter. Our outstanding warrants expire on various dates between December 2014 and December 2018.

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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, 2013
Fair value of embedded derivatives		—		—	$	177,927	$	177,927
Total	$	—	$	—	$	177,927	$	177,927


Liabilities	Level 1		Level 2		Level 3		December 31, 2012
Fair value of common stock warrant liability	$	—	$	—	$	9	$	9
Accrued rent related to office closures		—		—		8,657		8,657
Total	$	—	$	—	$	8,666	$	8,666

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. 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.

A discussion of the valuation techniques used to measure fair value for the common stock warrants is in Note 14. The accrued rent relates to a non-cash charge for the closure of our Anaheim, California location, calculated by discounting the future lease payments to their present value using a risk-free discount rate from 0.6%. The accrued rent is included within liabilities of discontinued operations and long-term liabilities of discontinued operations in our consolidated balance sheets.

The following table shows the changes in Level 3 liabilities measured at fair value on a recurring basis for the twelve months ended December 31, 2013:

	Other Liabilities*			Common Stock Warrant Liability			Embedded Derivative on Convertible Notes			Total Level 3
Beginning balance – January 1, 2013	$	8,657		$	9		$	—		$	8,666
Issuances		—			—			243,889			243,889
Total realized and unrealized gains or losses		43			(9	)		(65,962	)		(65,928	)
Repayments		(8,700	)		—			—			(8,700	)
Transfers out of level 3 upon exercise or conversion		—			—			—			—
Ending balance – December 31, 2013	$	—		$	—		$	177,927		$	177,927

* Represents the estimated fair value of the office closures included in accrued and other long-term liabilities.

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16. Income Taxes

During the years ended December 31, 2013, 2012 and 2011, respectively, there was no income tax expense or benefit for federal and state income taxes in the accompanying consolidated statements of operations due to our net loss and a valuation allowance on the resulting deferred tax assets.

The actual tax expense differs from the “expected” tax expense for the years ended December 31, 2013 and 2012 (computed by applying the U.S. Federal Corporate tax rate of 34% to income before taxes) as follows:

	December 31,			December 31,
	2013			2012
Tax at federal statutory rate	$	(967,000	)	$	(2,936,000	)
State taxes, net of federal benefit		(160,000	)		(454,000	)
Research and development credits		(12,000	)		—
Fair market value of warrants & derivatives		(22,000	)		142,000
Stock based compensation		29,000			145,000
Other permanent items		1,000			(7,000	)
Valuation allowance		1,131,000			3,110,000
Income tax provision	$	—		$	—

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2013 and 2012 are as follows:

	December 31,			December 31,
	2013			2012
Deferred tax assets:
Net operating loss and credit carryforwards	$	29,431,000		$	27,874,000
Stock-based compensation		1,193,000			1,190,000
Accruals		558,000			976,000
Basis difference for fixed assets and intangibles		174,000			190,000
Total gross deferred tax assets		31,356,000			30,230,000
Valuation allowance		(31,356,000	)		(30,230,000	)
Net deferred tax assets	$	—		$	—

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. We established a 100% valuation allowance due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. At December 31, 2013, we had useable net operating loss carryforwards of approximately $73.2 million for federal and $71.0 million for state income tax purposes available to offset future taxable income expiring through 2033 for both federal and California. At December 31, 2013, we had useable research and development credits of approximately $361,000 for federal and $231,000 for California. The federal credits expire through 2032 and the state credits have no expiration. The net change in the valuation allowance during the years ended December 31, 2013 and 2012 was an increase of approximately $1,100,000 primarily due to current year losses.

Internal Revenue Code Section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income, which can be offset by net operating loss carryforwards after a change in control (generally greater than a 50% change in ownership) of a loss corporation. Generally, after a control change, a loss corporation cannot deduct operating loss carryforwards in excess of the Section 382 Limitation. Due to these "change in ownership" provisions, utilization of the net operating loss and periods. The company has not concluded its analysis of Section 382 through December 31, 2013 but believes that these provisions will not limit the availability of losses to offset future income.

On January 1, 2007, the Company adopted ASC Topic 740—Income Taxes (“ASC 740”) FASB ASC 740, Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). Due to net operating loss and research credit carryforwards, substantially all of the Company’s tax years remain open to U.S. federal and state tax examinations. The Company classifies interest and penalties recognized pursuant to Interpretation 48 as part of income tax expense. No interest or penalties related to unrecognized tax benefits have been accrued for the year ended December 31, 2013.

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The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):

	2013		2012
Balance, beginning of year	$	140,000		$	136,000
Additions based on tax positions related to the current year		—			—
Additions for tax positions related to prior years		7,000			4,000
Reductions for tax positions related to prior years		—			—
Balance, end of year	$	147.000		$	140.000

In the event that any unrecognized tax benefits are recognized, the effective tax rate will be affected. Approximately $121,000 and $128,000 at December 31, 2012 and 2013, respectively, of unrecognized tax benefits would impact the effective rate, if recognized.

17. Commitments and Contingencies

Westinghouse License

On May 17, 2010, we entered into an exclusive worldwide agreement that permits us to manufacture, distribute and market our solar panels under the Westinghouse name. On August 23, 2013, the license agreement with Westinghouse, Inc. was terminated.

Operating Leases

The lease on our Campbell, California corporate office and San Jose, California warehouse facility was month-to-month during 2013. Total rent paid for continuing operations amounted to approximately $203,000 for each of the years ended December 31, 2013 and 2012, respectively. Our corporate office lease terminated as of December 31, 2013, and effective January 1, 2014, we consolidated our executive offices with our warehouse premises. Our warehouse lease agreement expires on February 28, 2015.

Litigation

On May 1, 2012, Suntech America, Inc., a Delaware corporation (Suntech America), 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 America alleged that it delivered products and did not receive full payment from us. On July 31, 2012, we and Suntech entered into a settlement of this dispute. Because of our inability to make scheduled settlement payments, on March 15, 2013, Suntech entered a judgment against us in the amount of $946,438. As of December 31, 2013, Suntech has not sought to enforce its judgment. As of December 31, 2013, we have included in accounts payable in our Consolidated Balance Sheets a balance due to Suntech America of $946,438.

On February 21, 2014 ASC Recap filed with the Circuit Court of the Second Judicial Circuit, Leon County, Florida (the “Court”) an amended complaint and demand for payment of the debt it acquired from one of our creditors. On February 26, 2014, we entered into a Settlement Agreement and Stipulation with ASC Recap LLC that was filed with the Court pursuant to which we agreed, subject to court approval, to issue shares of our common stock in a Section 3(a) (10) proceeding 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 form one Creditor (the value of the stock that we agreed to issue was two hundred and fifty percent (250%) of the discounted purchase price ASC paid to purchase the debt from the Creditor, and approximately 25% of the original amount we owed to the Creditor). We are awaiting court approval of the settlement.

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.

18. Concentration of Risk in Customer and Supplier Relationships

Supplier Relationships

Historically, we obtained virtually all of our solar panels from Suntech and Lightway. During 2012, because of our cash position and liquidity constraints, we were late in making payments to both of these suppliers. On March 30, 2012, pursuant to our Supply Agreement with Lightway, we issued 1,900,000 shares of our common stock to Lightway in partial payment of our past due account payable to them. At the time of issuance, the shares were valued at $1,045,000. On May 1, 2012, Suntech filed a complaint for breach of contract, goods sold and delivered, account stated and open account against us in the Superior Court of the State of California, County of San Francisco. Suntech alleged that it delivered products and did not receive full payment from us. On July 31, 2012, we and Suntech entered into a settlement of this dispute. Because of our inability to make scheduled settlement payments, on March 15, 2013, Suntech entered a judgment against us in the amount of $946,438. As of December 31, 2013, Suntech has not sought to enforce its judgment. As of December 31, 2013, we have included in accounts payable in our Consolidated Balance Sheets a balance due to Suntech America of $946,438. We currently have no unshipped orders from Suntech or Lightway.

In May 2013, we entered into a new supply agreement for assembly of our proprietary modules with Environmental Engineering Group Pty Ltd (“EEG”), an assembler of polycrystalline modules located in Australia. In August 2013, we began receiving product from EEG and began shipping product to customers during the third calendar quarter of 2013. In September 2013, we entered into a second supply agreement for assembly of our proprietary modules with Tianwei New Energy Co, Ltd. (Tianwei), a panel supplier located in China. We began receiving product from Tianwei in February 2014. Although we believe we can find alternative suppliers for solar panels manufactured to our specifications, our operations would be disrupted unless we are able to rapidly secure alternative sources of supply, our inventory and revenue could diminish significantly, causing disruption to our operations.

F - 23

Customer Relationships

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

	Year Ended December 31,
	2013			2012

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

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

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

19. Employee Benefit Plan

On December 14, 2007, the Board of Directors approved the 401(k) profit sharing plan (the “401(k) Plan”) effective January 1, 2008. Employees began deferring a portion of their compensation into the 401(k) Plan commencing on January 1, 2008. In 2011, we began making matching contributions equal to 10% of the employee contribution. For the years ended December 31, 2013 and 2012, there was no accrual relating to this matching contribution.

20. Subsequent Events

On January 22, 2014, we entered into a Settlement of Potential Claims Agreement with ASC Recap LLC (ASC). Pursuant to the 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 our 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, the value of the stock that we have 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 stock to be issued by us and the purchase of the debt by ASC of the remaining three Creditors is subject to the acceptance of offers by the Creditors.

F - 24

On January 23, 2014, we entered into a new 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 new Equity 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 New 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 New 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 is subject to various conditions, including, but not limited to, limitations based on the trading volume of our common stock.

On January 27, 2014, we issued a convertible note in the principal amount of $100,000 that matures January 27, 2016 under the Securities Purchase Agreement we entered into with an institutional investor on December 19, 2013. The convertible note bears interest at the rate of 8% per annum compounded annually, is payable at maturity and the principal and interest outstanding under the convertible note 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. See Note 9 for further description of this note payable.

On February 25, 2014, we entered into a securities purchase agreement with a certain institutional accredited investor 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, subject to adjustment under certain circumstances. The convertible note bears interest at the rate of 8% per annum compounded annually, is payable at maturity and the principal and interest outstanding under the convertible note 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 us fulfilling certain conditions, including beneficial ownership limits, the convertible note is 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 note equals or exceeds $0.04. Unless waived in writing by the purchaser, no conversion of the convertible note 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.

Large accelerated filer		Accelerated filer	
Non-accelerated filer		Smaller reporting company	x

Title of each class of securities to be registered		Amount to be registered (1)				Proposed maximum offering price per share (2)				Proposed maximum aggregate offering price (1)				Amount of registration fee (3)
Common Stock, $.001 par value per share			85,000,000			$	0.0179			$	1,521,500			$	176.80

	Page
PROSPECTUS SUMMARY		1

RISK FACTORS		4

USE OF PROCEEDS		18

DILUTION		19

DETERMINATION OF OFFERING PRICE		20

BUSINESS		23

MARKET PRICE OF COMMON STOCK AND OTHER STOCKHOLDER MATTERS		34

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS		36

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION		37

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS		51

EXECUTIVE COMPENSATION		53

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		57

TRADING MARKET		58

SELLING SECURITY HOLDER		58

RELATIONSHIP BETWEEN THE ISSUER AND THE SELLING SECURITY HOLDER		59

PLAN OF DISTRIBUTION		59

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		60

DESCRIPTION OF SECURITIES		61

SHARES ELIGIBLE FOR FUTURE SALE		64

EXPERTS		64

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES		64

LEGAL MATTERS		64

WHERE YOU CAN FIND MORE INFORMATION		64

PART II		65

Common stock that may be offered by selling stockholder		85,000,000 shares

Common stock currently outstanding		274,564,124 shares

Total proceeds raised by offering		We will not receive any proceeds from the resale or other disposition of the shares covered by this prospectus by Southridge, the selling shareholder. We will receive proceeds from the sale of shares to Southridge. Southridge has committed to purchase up to $5,000,000 worth of shares 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 filed in connection with the December Equity Purchase Agreement; or (ii) the date on which Southridge has purchased shares of our common stock pursuant to the December Equity Purchase Agreement for an aggregate maximum purchase price of $5,000,000. The purchase price to be paid by Southridge will be 90% of the average of the daily VWAP during the Valuation Period. 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 on 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 than 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.

Risk Factors		There are significant risks involved in investing in our company. For a discussion of risk factors you should consider before buying our common stock, see “Risk Factors” beginning on page 4.

Public offering price				$	0.0179
Net tangible book value per share as of September 30, 2014	$	(0.0173	)
Increase in net tangible book value per share attributable to new investors		0.0084
Net tangible book value per share after offering					(0.0089	)
Dilution per share to new investors in this offering				$	0.0268

	September 30, 2014
Stock options outstanding		22,050,733
Unvested restricted stock		7,186
Warrants to purchase common stock		22,148,045

●	we will not be entitled to put shares to Southridge unless there is an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), to cover the resale of the shares by Southridge;

●	we will not be entitled to put shares to Southridge unless our common stock continues to be quoted on the OTC-QB and has not been suspended from trading;

●	we will not be entitled to put shares to Southridge if an injunction shall have been issued and remain in force against us, or action commenced by a governmental authority which has not been stayed or abandoned, prohibiting the purchase or the issuance of the shares to Southridge;

●	we will not be entitled to put shares to Southridge if we have not complied with our obligations and are otherwise in breach of or in default under, the December Equity Purchase Agreement, our registration rights agreement with Southridge (the “Registration Rights Agreement”) or any other agreement executed in connection therewith with Southridge;

●	we will not be entitled to put shares to Southridge to the extent that such shares would cause Southridge’s beneficial ownership to exceed 9.99% of our outstanding shares; and

●	we will not be entitled to put shares to Southridge if we take any of the following actions on any trading day after a Draw Down Notice is delivered: (a) subdivide or combine shares of common stock; (b) pay a dividend in shares of common stock or make any other distribution of shares of common stock, except for dividends paid with respect to any series of preferred stock authorized by us, whether existing now or in the future; (c) issue any options or other rights to subscribe for or purchase shares of common stock other than pursuant to the December Equity Purchase Agreement, and other than options or stock grants issued or issuable to directors, officers and employees pursuant to a stock option program, whereby the price per share for which shares of common stock may at any time thereafter be issuable pursuant to such options or other rights shall be less than the closing bid price in effect immediately prior to such issuance; (d) issue any securities convertible into or exchangeable for shares of common stock and the consideration per share for which shares of common stock may at any time thereafter be issuable pursuant to the terms of such convertible or exchangeable securities shall be less than the closing bid price in effect immediately prior to such issuance; (e) issue shares of common stock otherwise than as provided in the foregoing subsections (a) through (d), at a price per share less, or for other consideration lower, than the closing bid price in effect immediately prior to such issuance, or without consideration; or (f) make a distribution of our assets or evidences of indebtedness to the holders of common stock as a dividend in liquidation or by way of return of capital or other than as a dividend payable out of earnings or surplus legally available for dividends under applicable law or any distribution to such holders made in respect of the sale of all or substantially all of our assets (other than under the circumstances provided for in the foregoing subsections (a) through (e).

Draw Down Amount		Price to be Paid by Southridge			Number of Shares to be Issued
$50,000		$45,000			2,513,966

Country of issuance	Patent Number		Date of Expiration
United States		8,813,460 B2	September 20, 2027
United States		7,406,800	May 18, 2024
United States		7,832,157	May 18, 2024
United States		7,866,098	May 18, 2024
United States		7,987,614	May 18, 2024
United States		8,505,248	March 13, 2028
India		243,626	May 18, 2024
Mexico		274,182	May 18, 2024
China		200580015652.1	May 18, 2024
Canada		2,566,296	May 18, 2024
Japan		4790718	May 18, 2024
EPO (Validated in United Kingdom)		2118935	September 21, 2027
Japan		5175354	September 21, 2027

	High $		Low $

Quarter Ended
Through December 5, 2014	$	0.02	$	0.01
September 30, 2014	$	0.03	$	0.01
June 30, 2014	$	0.04	$	0.02
March 31, 2014	$	0.05	$	0.02

Fiscal Year Ending December 31, 2013	High $		Low $
Quarter Ended
December 31, 2013	$	0.05	$	0.02
September 30, 2013	$	0.05	$	0.02
June 30, 2013	$	0.06	$	0.02
March 31, 2013	$	0.13	$	0.03

Fiscal Year Ending December 31, 2012
Quarter Ended	High $		Low $
December 31, 2012	$	0.20	$	0.04
September 30, 2012	$	0.39	$	0.16
June 30, 2012	$	0.57	$	0.15
March 31, 2012	$	0.88	$	0.32

	Number of securities to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options		Number of securities remaining available for issuance under equity compensation plans (excluding outstanding options and restricted stock awards)
Equity compensation plans approved by stock holders:
2006 Stock Incentive Plan		37,035,419	$	0.03		8,557,802
Equity compensation plans not approved by stock holders		—	$	—		—

	Nine Months Ended September 30,
	2014			2013
WDC Solar, Inc.		14.7	%		—
Smart Energy Today		13.5	%		—
JCF Wholesale		10.6	%		—
Sustainable Environmental Enterprises		1.6	%		28.3	%
PROSOL S.A. Total		—			19.1	%
Starwood Vacation Ownership, Inc.,		—			12.4	%

	Years Ended December 31,
	2013			%			2012			%

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

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

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

Name	Age		Position
Steven Chan		46	President, Chief Executive Officer, Interim Chief Financial Officer, Treasurer, Secretary and Director

Wei-Tai Kwok		50	Chief Operating Officer

Edward L. Bernstein		61	Director

Mark L. Kalow		58	Chairman of the Board of Directors

Ron Kenedi		65	Director

Margaret Randazzo		46	Director

Edward Roffman		64	Director

Name and Principal Position	Year	Salary		Stock Awards(1)		Option Awards(1)		All Other Compensation				Total

Margaret Randazzo, President, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer	2013	$	216,563	$	9,430	$	—	$	1,200	(2	)	$	227,193
	2012	$	212,652	$	10,633	$	—	$	1,899	(3	)	$	225,184

(1	)	The amounts in this column represent the aggregate grant date fair values of the restricted stock and the option awards granted to the executive in each of the years in accordance with stock compensation accounting. See “Stock Incentive Plan” footnote in the Notes to our Consolidated Financial Statements for the year ended December 31, 2013, for a discussion of all assumptions made by us in determining the valuation of the equity awards.
(2	)	Represents reimbursement for cell phone expense.
(3	)	Represents reimbursement of medical insurance.

	Option Awards							Stock Awards
Name	Grant Date	Number of Securities Underlying Unexercised Options Exercisable (1) (#)		Number of Securities Underlying Unexercised Options Unexercisable (1) (#)	Option Exercise Price ($/Sh)		Option Expiration Date	Number of Shares of Stock that Have Not Vested (2) (#)		Market Value of Shares or Units that Have Not Vested (2) ($)
Margaret Randazzo	02/01/2009		12,500	—	$	7.40	01/31/2014		—	—
	12/04/2009		18,750	—	$	4.00	12/03/2014		—	—
	07/26/2010		18,750	—	$	0.87	07/26/2015		—	—
	07/26/2010		—	—	$	—	—		1,250	31
	02/15/2011		41,667	20,833	$	2.16	02/14/2016		—	—
	03/01/2012		—	—	$	—	02/14/2016		—	—
	11/06/2013		833,250	1,666,750	$	0.03	11/05/2018		937,500	23,438

(1)	Options granted vest over a three-year period beginning on each anniversary of the date of grant.
(2)	Unless otherwise indicated, restricted stock vests as to one-fourth of the shares over a four-year vesting period beginning on each anniversary of the date of grant.

Name	Fees Earned or Paid in Cash		Restricted Stock Awards Aggregate Fair Value		Stock Option Awards Aggregate Fair Value (1)		Total
Edward L. Bernstein	$	—	$	—	$	16,051	$	16,051
Mark L. Kalow	$	1,808	$	—	$	16,051	$	17,859
Ron Kenedi	$	—	$	—	$	16,051	$	16,051
Edward Roffman	$	1,808	$	—	$	16,051	$	17,859

Name and Address of Beneficial Owner (1)			Amount and Nature of Beneficial Ownership	Percent of Class (2)
Alpha Capital Anstalt Pradafant 7, Furstentums 9490 Vaduz, Liechtenstein	(3	)	30,266,130		9.99	%
Edward L. Bernstein	(4	)	796,333		*
Mark Kalow	(5	)	786,586		*
Ron Kenedi	(6	)	807,076		*
Ed Roffman	(7	)	746,307		*
Margaret Randazzo	(8	)	2,424,000		*
Steven Chan	(9	)	1,937,490		*
Wei-Tai Kwok			—		—
All Executive officers and directors as a group (7 persons, including the executive officer and directors names above)			7,497,792		2.7	%

	(1)		Unless otherwise indicated, the address for each of the stockholders is c/o Andalay Solar, Inc. 2071 Ringwood Ave., Unit C, San Jose, CA 95131.
	(2)		The applicable percentage of ownership for each beneficial owner is based on 274,564,124 shares of common stock outstanding as of December 5, 2014. In calculating the number of shares beneficially owned by a stockholder and the percentage of ownership of that stockholder, shares of common stock issuable upon the exercise of options or warrants, or the conversion of other securities held by that stockholder, that are exercisable within 60 days, are deemed outstanding for that holder; however, such shares are not deemed outstanding for computing the percentage ownership of any other stockholder.
	(3)		Includes 2,168,936 shares of common stock, as reported in Schedule 13 G/A dated February 28, 2013 and 28,097,194 shares of common stock, in aggregate, that may be obtained upon conversion of outstanding convertible notes payable. The holder currently holds $590,000 in convertible notes, which are convertible into 29,500,000 shares. In addition, the holder currently holds warrants to purchase 21,428,437 shares of common stock.
	(4)		Includes 678,125 shares of nonqualified stock options which are exercisable for shares of Andalay Solar’s common stock within 60 days of December 5, 2014. Does not include 325,000 shares of nonqualified stock issuable upon exercise of options which vest in November 2015.
	(5)		Includes 663,370 shares of nonqualified stock options which are exercisable for shares of Andalay Solar’s common stock within 60 days of December 5, 2014. Does not include 325,000 shares of nonqualified stock issuable upon the exercise of options which vest in November 2015.
	(6)		Includes 674,238 shares of nonqualified stock options which are exercisable for shares of Andalay Solar’s common stock within 60 days of December 5, 2014. Does not include 325,000 shares of nonqualified stock issuable upon the exercise of options which vest in November 2015.
	(7)		Includes 678,125 shares of nonqualified stock options which are exercisable for shares of Andalay Solar’s common stock within 60 days of December 5, 2014. Does not include 325,000 shares of nonqualified stock issuable upon the exercise of options which vest in November 2015.
	(8)		Includes 1,747,750 shares of nonqualified stock options which are exercisable for shares of Andalay Solar’s common stock within 60 days of December 5, 2014. Does not include 833,500 shares of nonqualified stock issuable upon the exercise of options which vest in November 2015.
	(9)		Includes 1,937,490 shares of nonqualified stock options which are exercisable for shares of Andalay Solar’s common stock within 60 days of December 5, 2014. Does not include 13,062,510 shares of nonqualified stock issuable upon the exercise of options which vest in various dates over the next five years.

Shareholder and Name of Person Controlling	Amount of Shares owned before Offering		Number of shares offered		Amount of shares owned after Offering		Percent of shares held after Offering

Southridge Partners II LP (1) (2)		500,000		85,000,000		500,000		*	%

Total		500,000		85,000,000		500,000		*	%

SEC registration fee	$	177
Accounting fees and expenses		12,000
Legal fees and expenses		15,000
Printing and related expenses		1,000
Transfer agent fees and expenses		1,000
Miscellaneous		823
Total	$	30,000

			Description

	2.1		Agreement of Merger and Plan of Reorganization, dated August 11, 2006, by and among Fairview Energy Corporation, Inc., ASI Acquisition Sub, Inc. and Registrant (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, dated August 11, 2006 (the “August 2006 8-K”))

	2.2		Agreement and Plan of Merger, dated May 7 2012, by and among the Registrant, CBD Energy Limited and CBD-WS Merger Sub, Inc. (incorporated herein by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed on May 9, 2012)

	2.3		Amendment No. 1 to Waiver Agreement, by and among Capital Anstalt, Registrant, and CBD Energy Limited, dated as of September 21, 2012 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on September 27, 2012)

	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 our Current Report on Form 8-K filed on August 3, 2006)

	3.4		Certificate of Amendment to the Certificate of Incorporation (incorporated herein by reference to Exhibit 3.4 to our Quarterly 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 Quarterly Report on Form 10-Q filed on May 10, 2011)

	3.6		Certificate of Designation of Preferences, Rights and Limitations with respect to Series B 4% Convertible Preferred Stock (the “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)

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

	3.8		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)

	3.9		Certificate of Amendment of the Certificate of Designation of Preferences, Rights and Limitations of the Series B 4% Convertible Preferred Stock, 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)

	3.10		Form of Certificate of Designation of Preferences, Rights, and Limitations of Series D 8% Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 15, 2013)

	3.11		Amendment to Certificate of Incorporation of the Registrant, dated September 19, 2013 (incorporated by referenced to Exhibit 3.1 to our Current Report on Form 8-K filed on September 5, 2013)

	3.12		Correction to amendment to Certificate of Incorporation of the Registrant, dated September 20, 2013 (incorporated by referenced to Exhibit 3.2 to our Current Report on Form 8-K filed on September 5, 2013)

	4.1		Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 4.1 to our Annual Report on Form 10-KSB filed with the SEC on March 29, 2007)


4.2		Form of Series E/F/G Warrants (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on February 26, 2009)

4.3		Form of Securities Purchase Warrant (incorporated by reference to Exhibit 4.6 to our Current Report on Form 8-K filed on October 22, 2009)

4.4		Form of Series I Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on May 17, 2010)

4.5		Form of Series J Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 8, 2010)

4.6		Form of Series K Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on February 17, 2011)

4.7		Form of Series L Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on August 17, 2011)

4.8		Form of Series M Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on September 28, 2011)

4.9		Form of Note issued to Alpha Capital Anstalt dated August 30, 2013 (incorporated by reference to Exhibit 4.1 of our current Report on Form 8-k filed on September 5, 2013)

4.10		Loan and Security Agreement by and among the Registrant, Alpha Capital Anstalt and Collateral Services, LLC dated as of September 30, 2013. (incorporated by referenced to Exhibit 4.1 to our Current Report on Form 8-K filed on September 23, 2013)

4.11		Form of Note issued to Alpha Capital Anstalt dated November 25, 2013 (incorporated by reference to Exhibit 4.1 of our current Report on Form 8-K filed on November 25, 2013)

4.12		Form of Convertible Note Due December 19, 2015 (incorporated by reference to Exhibit 4.1 of our current Report on Form 8-K filed on December 20, 2013)

4.13		Form of Warrant dated December 19, 2013 (incorporated by reference to Exhibit 4.2 of our current Report on Form 8-K filed on December 20, 2013)

5.1	*	Opinion of Gracin & Marlow, LLP

10.1	‡	2006 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the August 14, 2006 8-K)

10.1a	‡	2006 Stock Incentive Plan Form of Restricted Stock Agreement (incorporated herein by reference to Exhibit 10.11 to the August 14, 2006 8-K)

10.1b	‡	2006 Stock Incentive Plan Form of Nonqualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.11 to the August 14, 2006 8-K)

10.2	‡	First Amendment to the 2006 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, dated December 20, 2006)

10.3		Form of Subscription Agreement (incorporated herein by reference to Exhibit 10.2 to the August 2006 8-K)

10.4		Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.3 to the August 2006 8-K)

10.5		Form of Lockup Agreement (incorporated herein by reference to Exhibit 10.4 to the August 2006 8-K)

10.6	‡	Restricted Stock Agreement, dated December 29, 2006, between the Registrant and Edward Roffman (incorporated herein by reference to Exhibit 10.8 to our Annual Report on Form 10-KSB filed with the SEC on March 29, 2007)

10.7		Form of Director and Officer Indemnification Agreement (incorporated herein by reference to Exhibit 10.9 to the August 2006 8-K)

10.8	‡	Second Amendment to the 2006 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.11 to our Quarterly Report on Form 10-KSB filed with the SEC on March 19, 2008)

10.9		Standard Industrial/Commercial Single-Tenant Lease – Net, dated September 30, 2002, between Mattiuz Children’s Trust and the Company, as amended by First Addendum to Standard Industrial/Commercial Single-Tenant Lease — Net, dated April 26, 2004, Second Addendum Standard Industrial/Commercial Single-Tenant Lease — Net, dated April 30, 2005 and Third Addendum to Standard Industrial/Commercial Single-Tenant Lease, dated July 7, 2006 (incorporated herein by reference to Exhibit 10.11 to our Current Report on Form 8-K/A, dated August 11, 2006 (the “August 2006 8-K/A”))

10.10		Securities Purchase Agreement, dated March 8, 2007, between the Registrant and the purchasers signatory thereto (incorporated herein by reference to Exhibit 10.1 to the March 8, 2007 8-K)

10.11		Securities Purchase Agreement, dated May 25, 2007, between the Registrant and the purchasers signatory thereto (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, dated June 4, 2007)

10.12		Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K, dated June 4, 2007)

10.13		Securities Purchase Agreement, dated November 1, 2007, between the Registrant and the investors signatory thereto (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, dated November 1, 2007)

10.14		Security Purchase Agreement by and among the Registrant and the Purchaser(s) (as defined therein), dated as of February 26, 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 26, 2009)

10.15		Securities Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of October 21, 2009 (incorporated by reference to Exhibit 10.18 to our Current Report on Form 8-K filed on October 22, 2009)

10.16	‡	Third Amendment to the Registrant 2006 Incentive Stock Plan (incorporated by reference to Exhibit 10.17 to our Annual Report on Form 10-K filed on March 16, 2009)

10.17		Stock Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of May 17, 2010 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 17, 2010)

10.18		Stock Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of October 7, 2010 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 7, 2010)

10.19		Master Assignment and Assumption Agreement by and among the Registrant, Real Goods Energy Tech, Inc. and SunRun Inc., dated as of October 12, 2010 (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 10-Q filed on November 10, 2010)

10.20		Supply and Warranty Agreement by and between the Registrant and Real Goods Energy Tech, Inc., dated as of October 7, 2010 (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 10-Q filed on November 10, 2010)

10.21		Supply agreement by and among Akeena Solar, Inc. and Enphase Energy, dated on January 31, 2009 (incorporated herein by reference to Exhibit 10.26 to our Annual Report on Form 10-K/A filed on June 14, 2011)

10.22		License Agreement by and among Akeena Solar, Inc. and Andalay Electric Corporation, dated on January 1, 2010.

10.23		Business Financing Agreement by and among the Registrant its subsidiaries and Bridge Bank, National Association, dated February 15, 2011. (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 10-K filed on March 2, 2011)

10.24		Securities Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of February 17, 2011 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 17, 2011)

10.25		Form of Registration Rights Agreement by and among the Registrant and the Purchases (as defined therein) (incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on February 17, 2011)

10.26		Securities Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of August 16, 2011 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 17, 2011)

10.27		Securities Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of September 28, 2011 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 28, 2011)

10.28		Securities Purchase Agreement by and among the Registrant and the CBD Energy Limited, dated as of December 30, 2011 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 12, 2012)

10.29		Employment Agreement between the Registrant and Margaret Randazzo, dated May 7, 2012 (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 10-Q, filed on August 14, 2012)

10.30		Securities Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of August 14, 2012 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 14, 2012)

10.31		Securities Purchase Agreement by and among the Registrant and the Purchaser (as defined therein), dated as of October 18, 2012 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 19, 2012)

10.32		Form of Securities Purchase Agreement by and among the Registrant and the Purchasers thereto, dated as of February 15, 2013. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on February 15, 2013)

10.33		Form of Securities Purchase Agreement by and among the Registrant and the Purchasers thereto, dated as of August 30, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on September 5, 2013)

10.34		Loan and Security Agreement by and among Alpha Capital Anstalt, the Registrant and Collateral Services, LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 2, 2013)

10.35		Fourth Amendment to the Registrant 2006 Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 13, 2013)

10.36		Fifth Amendment to the Registrant 2006 Incentive Stock Plan (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on November 13, 2013)

10.37		Consulting Agreement dated February 20, 2013, by and between SC Advisors, Inc.

10.38		Equity Purchase Agreement dated November 25, 2013 by and between Southridge Partners II, LP and Andalay Solar, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on November 25, 2013)

10.39		Form of Securities Purchase Agreement by and among the Registrant and the Purchasers thereto, dated as of November 25, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 25, 2013)

10.40		Form of Securities Purchase Agreement by and among Andalay Solar, Inc. and the Purchaser thereto, dated as of December 19, 2013 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on December 20, 2013)

10.41		Equity Purchase Agreement dated January 23, 2014 by and between Southridge Partners II, LP and Andalay Solar, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 24, 2014)

10.42		Registration Rights Agreement dated January 23, 2014, by and between Southridge Partner II, LP and Andalay Solar, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on January 24, 2014)

10.43		Form of Securities Purchase Agreement by and among the Registrant and the Purchasers thereto, dated as of January 27, 2014 (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed on January 31, 2014)

10.45		Form of Securities Purchase Agreement by and among the Registrant and the Purchasers thereto, dated as of February 28, 2014 (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed on February 28, 2014)

10.45		Settlement Agreement and stipulation by and among the Registrant and ASC Recap LLC, dated as of February 26, 2014 (incorporated by reference to Exhibit 10.45 to our Annual Report on Form 10-K filed on March 9, 2014)

10.46		Employment Agreement, dated April 14, 2014, by and between Steven Chan and Andalay Solar, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 16, 2014)

10.47		Indemnification Agreement between Steven Chan and Andalay Solar, Inc. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on April 16, 2014).

10.48		Form of Employment Agreement between Andalay Solar, Inc. and Wei-Tai Kwok . (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on November 13, 2014).

21.1		List of Subsidiaries (incorporated by reference to Exhibit 21.1 to our Annual Report on Form 10-K filed on March 29, 2013)

23.1	*	Consent of Independent Registered Public Accounting Firm Burr Pilger Mayer, Inc.*

23.2	*	Consent of Gracin & Marlow, LLP (included in exhibit 5.1)

24.1	*	Power of Attorney

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013

Net revenue	$	605,943		$	156,630		$	1,055,344		$	367,870
Cost of goods sold		550,630			167,891			982,658			407,359
Gross profit (loss)		55,313			(11,261	)		72,686			(39,489	)
Operating expenses
Sales and marketing		93,861			201,590			232,577			804,048
General and administrative		481,398			595,241			1,622,944			1,816,338
Total operating expenses		575,259			796,831			1,855,521			2,620,386
Loss from continuing operations		(519,946	)		(808,092	)		(1,782,835	)		(2,659,875	)
Other income (expense)
Interest income (expense), net		(99,212	)		(1,367	)		(290,171	)		(6,730	)
Adjustment to the fair value of embedded derivatives		48,607			—			31,924			—
Adjustment to the fair value of common stock warrants		—			—			—			9
Settlement of prior debt owed		—			—			769,148			420,000
Total other income (expense), net		(50,605	)		(1,367	)		510,901			413,279
Loss before provision for income taxes and discontinued operations		(570,551	)		(809,459	)		(1,271,934	)		(2,246,596	)
Provision for income taxes		—			—			—			—
Net loss from continuing operations		(570,551	)		(809,459	)		(1,271,934	)		(2,246,596	)
Net income from discontinued operations, net of tax (Note 3)		—			3,200			—			10,797
Net loss		(570,551	)		(806,259	)		(1,271,934	)		(2,235,799	)
Preferred stock dividend		(83	)		(28,980	)		(18,927	)		(124,509	)
Preferred deemed dividend		—			(501,304	)		—			(875,304	)
Net loss attributable to common stockholders	$	(570,634	)	$	(1,336,543	)	$	(1,290,861	)	$	(3,235,612	)

Net loss attributable to common stockholders per common share (basic and diluted)	$	(0.00	)	$	(0.02	)	$	(0.01	)	$	(0.06	)

Weighted-average shares used in computing loss per common share:		240,341,308			81,746,372			188,131,135			56,695,767

Supplemental cash flows disclosures:
Cash paid during the period for interest	$	51,667	$	6,759
Supplemental disclosure of non-cash financing activity:
Conversion of preferred stock to common stock	$	1,168,787	$	1,809,317
Return of Series D Convertible Preferred Stock		—	$	80,123
Embedded derivative on convertible note issued	$	122,630	$	—
Embedded derivative converted to equity	$	102,731	$	—
Grant of warrants on issue of convertible note	$	170,767	$	—
Preferred deemed dividend	$	—	$	875,304
Preferred stock dividends paid in common stock	$	18,927	$	124,509
Preferred stock issued for payment of financial advisor fees	$	—	$	210,000
Conversion of convertible note to common stock	$	392,612	$	—
Common stock issued to settle claim	$	250,000	$	—
Convertible note issued to financial advisor in exchange for accounts payable	$	160,000	$	—

	Number of Shares Subject to Option			Weighted-Average Exercise Price
Outstanding as of January 1, 2014		6,618,233		$	0.11
Granted		15,450,000		$	0.02
Forfeited/cancelled/expired		(17,500	)	$	(6.62	)
Exercised		—		$	—
Outstanding as of September 30, 2014		22,050,733		$	0.04
Exercisable as of September 30, 2014		2,333,983		$	0.21

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Weighted-average volatility		212.8	%		—		197.6	%		—
Expected dividends		0.0	%		—		0.0	%		—
Expected life		4.5			—		4.2			—
Weighted-average risk-free interest rate		1.5	%		—		1.3	%		—

	Warrants for Number of Shares		Weighted-Average Exercise Price
Outstanding as of December 31, 2013		9,648,045	$	0.49
Issued		12,500,000		0.02
Exercised		—		—
Cancelled/expired		—		—
Outstanding as of September 30, 2014		22,148,045	$	0.23

	Derivative Liability – Embedded Conversion Feature			Total Level 3
Beginning balance – January 1, 2014	$	177,927		$	177,927
Issuances		122,630			122,630
Conversions		(102,731	)		—
Total realized and unrealized gains or losses		(31,925	)		(134,656	)
Ending balance – September 30, 2014	$	165,901		$	165,901

ANDALAY SOLAR, INC.

By:	/s/ Steven Chan
	Steven Chan, President, Chief Executive Officer, Interim Chief Financial Officer and Principal Accounting Officer

Signature	Title	Date

/s/ Steven Chan	President, Chief Executive Officer, Interim Chief Financial Officer and Principal Accounting Officer and Director	December 11, 2014
Steven Chan

/s/ Margaret Randazzo	Director	December 11, 2014
Margaret Randazzo

/s/ Edward Bernstein	Director	December 11, 2014
Edward Bernstein

/s/ Edward Roffman	Director	December 11, 2014
Edward Roffman

/s/ Mark Kalow	Director	December 11, 2014
Mark Kalow

/s/ Ron Kenedi	Director	December 11, 2014
Ron Kenedi