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ASCENT SOLAR TECHNOLOGIES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes to those financial statements appearing elsewhere in this Form 10-Q. This discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. As a result of many factors, our actual results may differ materially from those anticipated in these forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Overview We are a development stage company formed to commercialize flexible photovoltaic modules using our proprietary technology. For the three months ended March 31, 2014, we generated $0.8 million of revenue. Our revenue from product sales was $0.7 million and our revenue from government research and development contracts was $0.1 million. As of March 31, 2014, we had an accumulated deficit of $259.5 million. Our proprietary manufacturing process deposits multiple layers of materials, including a thin film of highly efficient copper-indium-gallium-diselenide ("CIGS") semiconductor material, on a flexible, lightweight, high tech plastic substrate using a roll-to-roll manufacturing process and then laser patterns the layers to create interconnected photovoltaic ("PV") cells, or PV modules, in a process known as monolithic integration. We believe that our technology and manufacturing process, which results in a lighter, flexible module package, provides us with unique market opportunities relative to both the crystalline silicon ("c-Si") based PV manufacturers that currently lead the PV market, as well as other thin film PV manufacturers that use substrate materials such as glass, stainless steel or other metals that can be heavier and more rigid than plastics. We believe that the use of CIGS on a flexible, durable, lightweight, high tech plastic substrate will allow for unique and seamless integration of our PV modules into a variety of electronic products, building materials, defense, transportation and space applications, as well as other products and applications that may emerge. For markets that place a high premium on weight, such as consumer electronics, rooftop, defense, space, near space, and aeronautic markets, we believe our materials provide attractive increases in power-to-weight ratio, and we believe that our materials have higher power-to-area ratios and voltage-to-area ratios than competing flexible PV thin film technologies. We believe that our lightweight, flexible, and ultra-rugged technology is transformational in nature, and will provide us advantages in serving newly emerging specialty markets such as UAV's (unmanned aerial vehicles) as well as BAPV (building applied photovoltaic) and other applications where it is not possible to add solar panels to existing structures using traditional crystalline solar technology. In 2012, we added a new strategic focus to our business model by introducing consumer oriented products sold under the EnerPlex™ brand, concentrating on charging devices powered by or enhanced by our solar modules. Products in the consumer electronics market are priced based on the overall product value proposition rather than a commodity-style price per watt basis which only takes into account the value of the solar component. The majority of our resources are applied towards developing these consumer products; however we have maintained working relationships with co-development partners in developing products for a number of diverse PV integrated charging applications in industries such as: automotive, military, transportation, outdoor recreation and aerospace. Notable EnerPlex product launches include: • In June 2012, we introduced the EnerPlex Surfr™, a battery and a solar case for the Apple® iPhone® 4/4S smart phone featuring our ultra-light CIGS thin film technology integrated directly into the case. The case incorporates our ultra-light and thin PV module into a sleek, protective iPhone 4/4S case, along with a thin, life extending, battery. The charger adds minimal weight and size to an iPhone, yet provides supplemental charging when needed. In August of 2012, we announced the launch of the second version of Surfr for the Samsung® Galaxy S® III, which provides 85% additional battery life. • December 2012, we introduced the EnerPlex Kickr™ and EnerPlex Jumpr™ product series. The Kickr IV is an extremely portable, compact and durable solar charging device, approximately seven inches by seven inches when folded, and weighs less than half a pound. The Kickr IV provides 6.5 watts of regulated power that can help charge phones, digital cameras, and other small USB enabled devices. The Kickr IV is ideal for outdoor activities such as camping, hiking and mountain climbing as well as daily city use. To complement the Kickr IV, we also released the Jumpr™ series of portable power banks. The Jumpr™ series provides a compact power storage solution for those who need to take the power of the sun with them on the go. • During 2013, the EnerPlex™ brand rapidly expanded adding two additional product series as well as over fifteen new products. In the beginning of 2013, we introduced new additions to the Jumpr™ line of portable power banks; releasing the Jumpr Mini in August, Jumpr Stack in August and Jumpr Max in September. The latest additions to the Kickr™ line of portable solar chargers, the Kickr I and Kickr II were introduced in August at the Outdoor Retailer show. Furthermore, in October 2013 we released our first series of solar integrated backpacks for consumer use, the Packr™, a fashion forward and functional pack perfect. Before the holiday season we debuted the third installment in our phone case line, the Sufr Battery & Solar case for the Samsung Galaxy S4. • To date in 2014, we released the Surfr for the iPhone 5 & 5S and introduced the RedDot award winning Jumpr Slate 10k, the thinnest lithium polymer battery currently available. In addition, we announced our intention to aggressively pursue a product expansion strategy aimed specifically at the outdoor market to complement our position in the urban consumer electronics market. We continue to aggressively pursue new distribution channels for the EnerPlex™ brand and these activities have led to placement in a variety of high-traffic e-commerce venues, such as www. walmart.com, www.brookstone.com, www.newegg.com, as well as many others, including our own e-commerce platform at www.goenerplex.com. EnerPlex products are also carried in all 34 Fry's Electronics stores across 9 states. Each store is provided with EnerPlex branded merchandising assets to highlight the uniqueness of our product lines. We began our direct sales to consumers through kiosks in the second half of 2013, and currently have 15 kiosks in 4 states (Colorado, California, Nevada and Texas) with plans for expansion throughout the remainder of 2014. Commercialization and Manufacturing Strategy Our proprietary manufacturing process deposits multiple layers of materials, including a thin film of highly efficient Copper-Indium-Gallium-diSelenide ("CIGS") semiconductor material, on a flexible, lightweight, plastic substrate using a roll-to-roll manufacturing process and then laser patterns the layers to create interconnected PV cells, or PV modules, in a process known as monolithic integration. Our monolithic integration techniques enable us to form complete PV modules with less or no costly back end assembly of intercell connections. Traditional PV manufacturers assemble PV modules by bonding or soldering discrete PV cells together. This manufacturing step typically increases manufacturing costs and at times proves detrimental to the overall yield and reliability of the finished product. By reducing or eliminating this added step using our proprietary monolithic integration techniques, we believe we can achieve cost savings in, and increase the reliability of, our PV modules. We believe our technology and manufacturing process, which results in a lighter, flexible module package, provides us with unique market opportunities relative to both the crystalline silicon ("c-Si") based PV manufacturers that currently lead the PV market, as well as other thin-film PV manufacturers that use substrate materials such as glass, stainless steel or other metals that can be heavier and more rigid than plastics. 15-------------------------------------------------------------------------------- Table of Contents Currently, we are producing consumer oriented products focusing on charging devices powered by or enhanced by our solar modules. We continue to develop new consumer products and we have adjusted our utilization of our equipment to meet our near term forecast sales. We plan to continue the development of our current PV technology to increase module efficiency, improve our manufacturing tooling and process capabilities and reduce manufacturing costs. We also plan to continue to take advantage of research and development contracts to fund a portion of this development. On December 28, 2013, we entered into a definitive agreement for the establishment of a joint venture with the Government of the Municipal City of Suqian in Jiangsu Province, China ("Suqian"). The agreement covers a multi-faceted, three-phase project. Completion of all three phases would involve an anticipated investment of up to $500 million over 6 years, comprised of equipment, intellectual property and cash funded by Suqian, our business, and other supporting investors brought into the project by us. In the initial phase of the project during the first half of 2014, we and Suqian will form a joint venture entity ("JV") in which Suqian will inject approximately $4.8 million in cash and have a majority interest of 75%. We shall inject approximately $1.6 million in cash and hold a minority interest of 25%. Later in 2014, Suqian will further inject the balance of the committed $32.5 million while we will contribute our proprietary technology and intellectual property, as well as certain equipment from our Colorado facility, thereby increasing our shareholdings progressively up to an 80% ownership. The JV will build a factory to manufacture our proprietary photovoltaic modules. We are committed to purchase this factory within the first 5 years, at the initial construction cost, and we will also purchase Suqian's ownership interest in the JV at a cost of 1.5 times Suqian's cash investment. The implementation of the agreement, including the formation of the JV entity, will be subject to a number of contractual conditions and governmental approvals. Such conditions and approvals must be obtained in the future in order for the Suqian factory to be built and become operational. Related Party Activity In February 2012, we announced the appointment of Victor Lee as President and Chief Executive Officer. Mr. Lee had served on our Board of Directors since November 2011 and is currently the managing director of Tertius Financial Group Pte Ltd, the joint venture partner with Radiant Group, in TFG Radiant. In April 2012, we appointed the Chairman of TFG Radiant, Mr. Winston Xu (aka Xu Biao), as a member of our Board of Directors. TFG Radiant owns approximately 22% of our outstanding common stock as of March 31, 2014. The addition of TFG Radiant as a major shareholder has significantly improved our capabilities on a number of fronts. TFG Radiant's domicile in China provides us access to high quality, low cost contract manufacturing in Asia through expansion of TFG Radiant's existing relationships, developed through many years of successful operation in China. Integrating these suppliers into our supply chain enables us to bring our products to market faster. TFG Radiant also provides a global product perspective that significantly improves the product design activities of our Thornton, Colorado designers as they collaborate with designers in Asia. We continue to integrate and improve the design-to-manufacture process where we manufacture modules in our US plant, ship them to Asia for completion into finished goods at low cost and then ship products to all markets we will serve. In June 2012, we entered into a supply agreement and a contract manufacturing agreement with TFG Radiant. Under the terms of the contract manufacturing agreement TFG Radiant will oversee certain aspects of the contract manufacturing process related to our EnerPlex™ line of consumer products. We will compensate TFG Radiant for acting as general contractor in the contract manufacturing process. Under the supply agreement TFG Radiant intends to distribute our consumer products in Asia. In December 2012, we entered into a consulting agreement with TGF Radiant for product design, product development and manufacturing coordination activities provided by TFG Radiant to us in connection with our line of consumer electronics products. The services agreement has a one year term initially, and the services agreement may be terminated by either party upon 10 days prior written notice. During the three months ended March 31, 2014, we made disbursements to TFG Radiant in the amount of $537,000, consisting of $200,000 for consulting fees and $337,000 for finished goods received and deposits for work-in-process. During the period from inception through March 31, 2014 , we recognized revenue in the amount of $555,000 and for products sold to TFG Radiant under the supply agreement. As of March 31, 2014 and December 31, 2013, we held $222,000 and $21,000, respectively, in receivables and deposits with TFG Radiant. Significant Trends, Uncertainties and Challenges 16-------------------------------------------------------------------------------- Table of Contents We believe that the significant trends, uncertainties and challenges that directly or indirectly affect our financial performance and results of operations include: • our ability to generate customer acceptance of and demand for our products; • successful ramping up of commercial production on the equipment installed; • successful and timely certification of our products for use in our target markets; • successful operating of production tools to achieve the efficiencies, throughput and yield necessary to reach our cost targets; • design resulting in products saleable at a prices sufficient to generate profits; • our strategic alliance with TFG Radiant resulting in the design, manufacture and sale of sufficient products to achieve profitability; • our ability to raise sufficient capital to enable us to reach a level of sales sufficient to achieve profitability on terms favorable to us; • our ability to successfully design, manufacture, market, distribute and sell our newly introduced line of consumer oriented products; • effective management of the planned ramp up of our domestic and international operations; • our ability to maintain the listing of our common stock on The NASDAQ Capital Market; • our ability to achieve projected operational performance and cost metrics; • our ability to successfully develop and maintain strategic relationships with key partners, including OEMs, system integrators, distributors, retailers and e-commerce companies, who deal directly with end users in our target markets; • our ability to enter into commercially viable licensing, joint venture, or other commercial arrangements; and • availability of raw materials. Critical Accounting Policies and Estimates Critical accounting policies used in reporting our financial results are reviewed by management on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Processes used to develop these estimates are evaluated on an ongoing basis. Estimates are based on historical experience and various other assumptions that are believed to be reasonable for making judgments about the carrying value of assets and liabilities. Actual results may differ as outcomes from assumptions may change. Our significant accounting policies were described in Note 3 to our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no changes to these policies that are of potential significance to us during the three months ended March 31, 2014. Recent Accounting Pronouncements See Note 3, "Summary of Significant Accounting Policies," in the Notes to Condensed Financial Statements. There are no new accounting pronouncements that are of significance or potential significance to us. Results of Operations Comparison of the Three Months Ended March 31, 2014 and 2013 Our activities to date have substantially consisted of raising capital, business and product development, research and development and the development of our production lines. Revenues. Our revenues were $753,000 for the three months ended March 31, 2014 compared to $235,000 for the three months ended March 31, 2013, an increase of $518,000. Revenues for the three months ended March 31, 2014 include $672,000 of product sales compared to $176,000 for the three months ended March 31, 2013, an increase of $496,000. Revenues earned on our government research and development contracts increased by $22,000 during the three months ended March 31, 2014 to $81,000. 17-------------------------------------------------------------------------------- Table of Contents Research, development and manufacturing operations. Research, development and manufacturing operations costs were $5,220,000 for the three months ended March 31, 2014 compared to $5,320,000 for the three months ended March 31, 2013, a decrease of $100,000. Research, development and manufacturing operations costs include costs incurred for product development, pre-production and production activities in our manufacturing facility. Research, development and manufacturing operations costs also include costs related to technology development and governmental contracts. Costs related to product development, pre-production and production activities decreased by $73,000. The production cost decrease was comprised of supplies and equipment related costs of $154,000, consulting and contract service costs of $119,000 and depreciation and amortization of $67,000, partially offset by increases in production materials costs of $116,000, facility related costs of $74,000, personnel related costs of $48,000 and stock option expense of $31,000. Technology development and government contract costs decreased by $27,000 in the three months ended March 31, 2014. This decrease was primarily the result of a decrease in personnel related costs of $23,000. Selling, general and administrative. Selling, general and administrative expenses were $3,111,000 for the three months ended March 31, 2014 compared to $1,243,000 for the three months ended March 31, 2013, an increase of $1,868,000. This increase is comprised of marketing related costs of $859,000, consulting and contract service costs related to the operation of our kiosks of $587,000, personnel related costs of $151,000, public company costs of $112,000 and legal costs of $70,000. Other Income / (Expense), net. Other Income / (Expense) was $456,000 net expense for the three months ended March 31, 2014 compared to $106,000 net expense for the three months ended March 31, 2013, an increase of $350,000. This increase was the result a loss on extinguishment of liabilities related to make-whole payments on Series A and Series B preferred stock conversions in the amount of $350,000. Change in fair value of make-whole dividend liability. Change in fair value of make-whole dividend liability was $736,000 for the three months ended March 31, 2013. This expense is the result of an increase in the fair value of make-whole dividends payable to the holders of Series A and Series B preferred stock. Net Loss. Our Net Loss was $8,770,000 for the three months ended March 31, 2014 compared to a Net Loss of $6,434,000 for the three months ended March 31, 2013, an increase of $2,336,000. The increase in Net Loss can be summarized in variances in significant account activity as follows: Decrease (increase) to Net Loss For the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013 Revenues Products $ 496,000 Government Contracts 22,000Research, development and manufacturing operations Product development, pre-production and production 104,000 Technology and government contracts 34,000 Non-cash stock based compensation (38,000 ) Selling, general and administrative expenses Corporate selling, general and administrative (1,858,000 ) Non-cash stock based compensation (10,000 ) Other Income / (Expense) Other Income / (Expense), net (350,000 ) Change in fair value of make-whole dividend liability (736,000 ) Increase to Net Loss $ (2,336,000 ) Liquidity and Capital Resources As of March 31, 2014, we had approximately $1.6 million in cash and cash equivalents. We are in the development stage and are currently incurring significant losses from operations as we work toward further commercialization. In February 2014, we completed the sale of 500 shares of Series B-1 preferred stock in a private placement for gross proceeds of $5.0 million. In April 2014, we completed the sale of 300 shares of Series C preferred stock in a private placement for gross proceeds of $3.0 million. 18-------------------------------------------------------------------------------- Table of Contents We have commenced production at our manufacturing facility. We do not expect that sales revenue and cash flows will be sufficient to support operations and cash requirements until we have fully implemented our new consumer products strategy. During the first quarter of 2014, we used $6.5 million in cash for operations. For the remainder of 2014, we expect to incur a base level of maintenance capital expenditures and relatively minor improvements to the existing asset base. Our primary significant long term obligation consists of a note payable of $6.3 million to a financial institution secured by a mortgage on our headquarters and manufacturing building in Thornton, Colorado. Total payments of $0.5 million, including principal and interest, will come due in the remainder of 2014. We owe $2.0 million related to a litigation settlement reached in April 2014, which will be paid in equal installments over 40 months beginning in April 2014. Additional projected product revenues are not anticipated to result in a positive cash flow position for the year 2014 overall. As such, cash liquidity sufficient for the year ending December 31, 2014 will require additional financing. We continue to accelerate sales and marketing efforts related to our consumer products strategy through increased hiring and expansion of our sales channel. We have begun activities related to securing additional financing through strategic or financial investors, but there is no assurance we will be able to raise additional capital on acceptable terms or at all. Changes in the level of expected operating losses, the timing of planned capital expenditures or other factors may negatively impact cash flows and reduce current cash and investments faster than anticipated. If revenues do not increase rapidly, and/or additional financing is not obtained, we will be required to significantly curtail operations to reduce costs and/or sell assets. Such actions would likely have an adverse impact on our future operations. We are currently not in compliance with the NASDAQ minimum $1.00 bid price requirement. On March 27, 2014, we received approval to transfer our listing from the NASDAQ Global Market tier to the NASDAQ Capital Market tier, effective with opening of the market on March 28, 2014. Our common stock will continue to trade under the symbol "ASTI". The NASDAQ Capital Market is a continuous trading market that operates in substantially the same manner as the NASDAQ Global Market.Transfer of our listing to the NASDAQ Capital Market resulted in an additional 180-day period within which to regain compliance with the $1.00 minimum bid price requirement, through September 15, 2014 (the "Compliance Date"). We intend to continue to monitor the bid price of our common stock. If the our common stock does not trade at a level that is likely to regain compliance with the NASDAQ requirements, our Board of Directors may consider other options that may be available to achieve compliance. One option to regain compliance is a reverse stock split, however a reverse stock split could have negative implications. If at any time before the Compliance Date, the closing bid price of our common stock is at least $1.00 per share for at least ten consecutive business days, we will regain compliance with the price requirement. There is no assurance that we can demonstrate compliance by the Compliance Date or comply with the terms of the extension granted by NASDAQ, and tour common stock may then be subject to delisting. Statements of Cash Flows Comparison of the Three Months Ended March 31, 2014 and 2013 For the three months ended March 31, 2014, our cash used in operations was $6.5 million compared to $5.1 million for the three months ended March 31, 2013, an increase of $1.4 million, which is primarily the result of an increase in net loss. For the three months ended March 31, 2014, our cash used in investing activities was $0.2 million compared to $0.5 million for the three months ended March 31, 2013, a decrease of $0.3 million, resulting from a decrease in purchases of property, plant and equipment. During three months ended March 31, 2014, negative operating cash flows of $6.5 million was funded through $5.0 million of net funding received from issuances of preferred stock and the use of cash and cash equivalents held at December 31, 2013. Contractual Obligations The following table presents our contractual obligations as of March 31, 2014. Our long-term debt obligation is related to our building loan reflecting both principal and interest. Our purchase obligations include orders for equipment, inventory and operating expenses. Payments Due by Year (in thousands) Less Than 1 More Than 5 Contractual Obligations Total Year 1-3 Years 3-5 Years Years Long-term debt obligations $ 11,595 $ 1,293 $ 3,481 $ 2,081 $ 4,740 Operating lease obligations 187 187 - - - Purchase obligations 1,447 1,447 - - - Total $ 13,229 $ 2,927 $ 3,481 $ 2,081 $ 4,740 Off Balance Sheet Transactions As of March 31, 2014, we did not have any off balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. |