UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X]	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2011
[  ]	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from to __________
	Commission File Number: 333-150692

 

Sunvalley Solar, Inc.
(Exact name of registrant as specified in its charter)

 

Nevada	20-8415633
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

398 Lemon Creek Dr., Suite A, Walnut, CA 91789

(Address of principal executive offices)

 

(909) 598-0618

(Registrant’s telephone number)

______________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

[ ] Large accelerated filer [ ] Non-accelerated filer	[ ] Accelerated filer [X] Smaller reporting company

 

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

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 876,039,889 common shares as of November 14, 2011.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [X]

 

	TABLE OF CONTENTS
		Page
PART I – FINANCIAL INFORMATION
Item 1:	Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	10
Item 4:	Controls and Procedures	10
PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	11
Item 1A:	Risk Factors	11
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3:	Defaults Upon Senior Securities	11
Item 4:	Removed and Reserved	11
Item 5:	Other Information	12
Item 6:	Exhibits	12

PART I - FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

Our financial statements included in this Form 10-Q are as follows:

 

F-1	Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010;
F-2	Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (unaudited);
F-3	Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited);
F-4	Notes to Financial Statements.

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2011 are not necessarily indicative of the results that can be expected for the full year.

 

 

SUNVALLEY SOLAR, INC.

Consolidated Balance Sheets

 

ASSETS		September 30,				December 31,
		2011				2010
		(unaudited)
CURRENT ASSETS
Cash and cash equivalents		$	140,949			$	546,164
Restricted cash			12,500				12,500
Accounts receivable, net			1,812,950				546,388
Inventory			1,666,886				1,925,233
Construction in progress			374,690				56,003
Other receivables			13,309				7,481
Prepaid expenses and other current assets			133,977				15,793
Total current assets			4,155,261				3,109,562
PROPERTY AND EQUIPMENT, NET			231,886				71,208
OTHER ASSETS
Other assets			27,897				5,686
Total other assets			27,897				5,686
TOTAL ASSETS		$	4,415,044			$	3,186,456
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	3,821,666			$	2,883,316
Customer deposits			183,600				70,070
Accrued warranty			40,291				27,688
Current portion of long-term debt			16,107				13,256
Convertible debt			200,000				—
Derivative liability			144,365				—
Total current liabilities			4,406,029				2,994,330
LONG-TERM LIABILITIES
Notes payable			77,906				74,269
Total long-term liabilities			77,906				74,269
Total Liabilities			4,483,935				3,068,599
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value, 1,500,000,000 shares authorized, 834,669,376 and 800,068,420 shares issued and outstanding, respectively			834,669				800,068
Additional paid-in capital			184,243				276,713
Accumulated deficit			(1,087,803	)			(958,924	)
Total Stockholders' Equity (Deficit)			(68,891	)			117,857
STOCKHOLDERS' EQUITY		$	4,415,044			$	3,186,456

 

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

SUNVALLEY SOLAR, INC. 

Consolidated Statements of Operations

(unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
REVENUES		$	202,030			$	1,241,810			$	2,940,413			$	3,312,977
COST OF SALES			200,704				1,004,069				2,380,531				2,783,366
GROSS PROFIT			1,326				237,741				559,882				529,611
OPERATING EXPENSES
Salary and wage expense			175,307				169,242				457,222				421,278
Bad debt expense			—				—				5,000				37,320
Depreciation and amortization expense			8,610				3,641				22,241				10,190
General and administrative expenses			133,394				95,983				374,451				345,512
Total operating expenses			317,311				268,866				858,914				814,300
LOSS FROM OPERATIONS			(315,985	)			(31,125	)			(299,032	)			(284,689	)
OTHER INCOME (EXPENSES)
Interest income			2,374				624				11,965				2,324
Interest expense			(5,221	)			(4,905	)			(13,837	)			(14,082	)
Gain on derivative liability			125,551				—				172,025				—
Total other income (expenses)			122,704				(4,281	)			170,153				(11,758	)
LOSS BEFORE TAXES			(193,281	)			(35,406	)			(128,879	)			(296,447	)
Provision for income taxes			—				—				—				—
NET LOSS		$	(193,281	)		$	(35,406	)		$	(128,879	)		$	(296,447	)
LOSS PER SHARE
Basic and diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic and diluted			825,343,280				800,068,420				811,651,889				597,186,265

 

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

 

SUNVALLEY SOLAR, INC. 

Consolidated Statements of Cash Flows

(unaudited)

 

		For the Nine Months Ended
		September 30,
		2011				2010
OPERATING ACTIVITIES:
Net loss		$	(128,879	)		$	(296,447	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization			22,240				10,192
Common stock issued for services			50,700				—
Gain on derivative liability			(172,025	)			—
Changes in operating assets and liabilities:
Accounts receivable			(1,266,562	)			(120,035	)
Inventory			258,346				2,229,963
Restricted cash			—				—
Prepaid expenses and other assets			(118,184	)			(9,082	)
Construction in progress			(318,687	)			—
Other receivables			(5,828	)			33,107
Other assets			(22,211	)			(1,750	)
Accounts payable and accrued warranty expenses			954,954				(1,359,526	)
Customer deposits			113,530				21,962
Net Cash Provided by (Used) in Operating Activities			(632,606	)			508,384
INVESTING ACTIVITIES:
Purchase in property and equipment			(136,307	)			(1,150	)
Net Cash (Used) in Investing Activities			(136,307	)			(1,150	)
FINANCING ACTIVITIES:
Repayments from related party notes payable			—				(9,283	)
Repayments of notes payable			(40,123	)			—
Proceeds from note payable			—
Proceeds from common stock			103,821				—
Proceeds from bank overdraft			—				16,824
Proceeds from convertible notes			300,000				—
Repurchase of common stock			—				(200,000	)
Net Cash Provided by Financing Activities			363,698				(192,459	)
NET INCREASE (DECREASE) IN CASH			(405,215	)			314,775
CASH AT BEGINNING OF PERIOD			546,164				309,453
CASH AT END OF PERIOD		$	140,949				624,228
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest		$	4,402			$	6,045
Income taxes		$	800			$	800
NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for conversion of note payable		$	104,000			$	—
Derivative liabilities		$	316,390			$	—
Note payables issued for asset purchases		$	46,611			$	—

 

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

 

SUNVALLEY SOLAR, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2011 (Unaudited)

 

NOTE 1 - CONDENSED FINANCIAL STATEMENTS

 

The accompanying financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2011, and for all periods presented herein, have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2010 audited financial statements.  The results of operations for the periods ended September 30, 2011 and 2010 are not necessarily indicative of the operating results for the full years.

 

NOTE 2 - GOING CONCERN

 

The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

 

Reclassification of Financial Statement Accounts
Certain amounts in the financial statements have been reclassified to conform to the presentation in the September 30, 2011 financial statements.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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.

 

Recent Accounting Pronouncements

Management has considered all recent accounting pronouncements issued since the last audit of our financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Inventory

Inventory is stated at the lower of cost or net realizable value. Cost is determined on an average cost basis; and the inventory is comprised of raw materials and finished goods. Raw materials consist of fittings and other components necessary to assemble the Company’s finished goods.  Finished goods consist of solar panels ready for installation and delivery to customers.   

 

The Company’s inventory consisted of the following at September 30, 2011 and December 31, 2010:

 

		2011				2010
Raw materials		$	459,972			$	8
Work in Progress			84,159				6,741
Finished goods			1,122,755				1,918,484
		$	1,666,886			$	1,925,233

 

NOTE 4 – CONSTRUCTION IN PROGRESS

 

The Company is currently involved in two major short-term solar panel installation projects. The Company is accounting for revenue and expenses associated with these two contracts under the completed contract method of accounting in accordance with ASC 605. Under ASC 605, income is recognized on when the contracts are completed or substantially completed and billings and others costs are accumulated on the balance sheet. Under the completed contract method, no profit or income is recorded before completion of substantial completion of the work.

 

As of September 30, 2011 and December 31, 2010, the Company has capitalized $374,690  and $56,003 of costs incurred in relation to installation projects. The company expects two major projects to be completed or substantially completed by December 31, 2011.

 

NOTE 5 – CAPITAL LEASE

 

In September 2011, the Company entered a lease to own sale agreement. The Company evaluated the lease at the time of purchase and determined that the agreement contained a beneficial by-out option wherein the Company has the option to buy the equipment for $1 at the end of the lease term. Under the guidance in ASC 840, the Company has classified the lease as a capital lease.   The Company used the discounted value of future payments as the fair value of this asset and has recorded the discounted value of the remaining payments as a liability.

As of September 30, 2011, the Company recognizes $16,336 in the remaining lease obligation. 

NOTE 6 – CONVERTIBLE DEBT

 

On January 7, 2011, the Company borrowed $100,000 of convertible debt. The debt is convertible at the holder’s option at 61% of the average of the lowest three trading prices during the 10 trading days prior to conversion. As of September 30, 2011, the Company issued 15,652,625  shares   of the Company’s common stock upon conversion of $100,000 of its debt issued on January 7, 2011.

 

On April 6, 2011, the Company borrowed $100,000 of convertible debt. The debt is convertible at the holder’s option at 61% of the average of the lowest three trading prices during the 10 trading days prior to conversion. The convertible debt is due on January 4, 2012, and it is unsecured and bears an interest rate of 8%. 

 

On July 21, 2011, the Company borrowed $100,000 of convertible debt. The debt is convertible at the holder’s option at 61% of the average of the lowest three trading prices during the 10 trading days prior to conversion. The convertible debt is due on April 17, 2012, and it is unsecured and bears an interest rate of 8%.

NOTE 7 – DERIVATIVE LIABILITY 

 

Effective July 31, 2009, the Company adopted ASC 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. The Company borrowed $100,000 on January 7, 2011, $100,000 on April 6, 2011 and $100,000 on July 21, 2011. These notes are convertible at the holder’s option at 61% of the average of the lowest three trading prices during the 10 days prior to conversion. The number of shares issuable upon conversion of these notes is limited so that the holder’s total beneficial ownership of the Company’s common stock may not exceed 4.99% of the total issued and outstanding shares.

 

The exercise price of both conversion options are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than effective conversion price of the conversion option. If these provisions are triggered, the exercise price of all their warrants will be reduced. As a result, the conversion options are not considered to be solely indexed to the Company’s own stock and are not afforded equity treatment.

 

The total fair value of the conversion option of the January 7, 2011 note ($65,581), the April 6, 2011 notes ($165,952), and the July 21, 2011 note ($84,857) has been recognized as a derivative liability on the dates of issuance with all future changes in the fair value of these conversion options being recognized in earnings in the Company’s statement of operations under the caption “Other income (expense) – Gain (loss) on warrant derivative liability” until such time as the warrants are exercised or expire.

 

During July 2011, the Company issued 15,652,625 shares of the Company’s common stock to convert the January 7, 2011 note in full. Accordingly, the remaining value of the associated derivative liability was recognized in earnings at conversion.

 

ASC 815 requires the Company to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value of the derivatives as gain (loss) on the income statements.   As of September 30, 2011, the Company has recognized a gain of $172,025.

 

NOTE 8 – COMMON STOCK

 

During the year ended December 31, 2010, the Company entered into agreements to repurchase a total of 5,110,353 (200,000 pre-split) common stock shares from shareholders at a price of $0.04 per share. As of December 31, 2010, the Company had received all of the stock certificates and had paid the investors in full.

 

On January 11, 2011, the Company issued 3,000,000 shares of its common stock for financing services valued at $0.0044 per share. On January 20, 2011, the Company issued 2,000,000 shares of its common stock for consulting services valued at $0.015 per share. The Company is amortizing the value of the services over the 1 year term of the consulting agreement.

NOTE 8 – COMMON STOCK (CONTINUED)

 

On December 31, 2010, the Company entered into a Drawdown Equity Financing Agreement (the “DEFA”) and an accompanying Registration Rights Agreement (the “RRA”) with Auctus Private Equity Fund, LLC, a Massachusetts limited liability company (“Auctus”).  Under the DEFA, the Company has agreed to issue and sell up to $10,000,000 worth of the Company’s common stock, par value $0.001 per share, over a three year period. The DEFA entitles the Company to request “Advances,” or draw-downs, under the agreement at our election from time to time.  By delivery of a Drawdown Notice under the agreement, the Company can affect the sale of common stock to Auctus valued at a maximum of either (i) $500,000 or (ii) 200% of the average daily volume of the common stock based on the ten (10) trading days preceding the Drawdown Notice Date (as defined in the DEFA), whichever is larger. The purchase price of the common stock for an Advance shall be set at ninety-three percent (93%) of the lowest closing bid price of the common stock during the Pricing Period, which is defined as the five (5) consecutive trading days immediately after the Drawdown Notice Date.  There must be a minimum of five (5) trading days between each Drawdown Notice Date. Under the DEFA, Auctus shall immediately cease selling any shares of the Company’s common stock during a Pricing Period if a) the market price of the Company’s common stock falls below a fixed-price floor that the Company provide per Drawdown or b) the market price of the Company’s common stock falls below seventy-five percent (75%) of the average closing bid price of the common stock over the preceding ten (10) trading days prior to the Drawdown Notice Date (the "Floor"). In the Company’s sole discretion, the Company may waive its right with respect to the Floor and allow Auctus to sell any shares below the Floor Price.  The floor price restriction only applies to the five (5) consecutive trading days immediately after the Drawdown Notice Date.

 

During the nine months ended September 30, 2011, the Company issued 13,323,331 shares of its common stock to Auctus for net cash proceeds of $103,822.

 

On August 1, 2011, the Board of Directors approved the issuance of 625,000 new shares of common stock to a consultant for services provided to the Company over a period of three months from June 2011 to August 2011. The shares were valued at $0.012 per share based on the value of the shares at close of market on April 28, 2011 which was the date of the agreement signed between the consultant and the Company.

 

During July 2011, the Company issued 15,652,625  shares   of common stock upon conversion of $100,000 of its convertible debt issued on January 7, 2011.

 

NOTE 9 – SIGNIFICANT EVENTS

 

On June 24, 2010, in accordance with the Exchange Agreement dated June 24, 2010 Western Ridge Minerals acquired all of the issued and outstanding shares of Sunvalley, which resulted in Sunvalley becoming a wholly-owned subsidiary.  In exchange for all of the issued and outstanding shares of Sunvalley, the shareholders of Sunvalley received a total of 480,041,053 (2,514,600 pre-split) shares of Western Ridge Mineral’s common stock, which represented approximately 60% of the Company’s outstanding common stock following the Acquisition. There were 1,049,271,312 (5,496,400 pre-split) shares of our common stock outstanding before giving effect to the stock issuances in the Acquisition and the cancellation of 729,243,944 (3,820,000 pre-split) shares by the shareholders which resulted in there being 800,068,420 (4,191,000 pre-split) shares outstanding post acquisition. As a result, the shareholders of the Company became the controlling shareholders of the combined entity.

 

Accordingly, the transaction is accounted for as a recapitalization with Sunvalley deemed to be the accounting acquirer and Western Ridge Mineral the legal acquirer in the reverse acquisition. Consequently, the assets and liabilities and the historical operations of Sunvalley prior to the Merger are reflected in the financial statements and are recorded at the historical cost basis of Sunvalley. The Company’s consolidated financial statements after completion of the Acquisition include the assets and liabilities of both companies. Following the Acquisition our fiscal year-end has been changed from March 31 to December 31.

 

On July 20, 2010 the Company’s board of directors approved a 19.0885235 for 1 forward stock split of the Company’s common stock. On August 23, 2010 the Company’s board of directors approved a 10 for 1 forward stock split of the Company’s common stock. The Company’s authorized common stock was increased to 1,500,000,000. This forward splits have been retroactively applied and is reflected in the financial statements.

NOTE 10 – SUBSEQUENT EVENTS

 

During October 2011, the Company issued 41,370,513  shares of common stock upon conversion of $100,000 of its convertible debt issued on April 6, 2011.

 

The Company entered into two additional convertible notes of $75,000 each. One of these notes was dated September 23, 2011 and the funding was received in October 3, 2011. The other note was dated October 18, 2011 and the funding was received in October 26, 2011.  The Company also entered into a convertible note of $200,000 dated October 18, 2011 and the funding was received in October 28, 2011. 

 

In accordance with ASC 855, Company management reviewed all material events through the date of this report and there are no additional material subsequent events to report  other than the events noted above.

Item 2.     Management’s Discussion and Analysis or Plan of Operation

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

Company Overview and Plan of Operation

 

We are a California-based solar power technology and system integration company. Since the inception of our business in 2007, we have focused on developing our expertise and proprietary technology to install residential, commercial and governmental solar power systems. We offer turnkey solar system solutions for owners, builders and architecture firms that include designing, building, operating, monitoring and maintaining solar power systems. Our customers range from small private residences to large commercial solar power users. We have the necessary licenses and expertise to design and install large scale solar power systems. We hold a C-46 Solar License from CBCL (California Board of Contractor License). Some of the large scale commercial solar power systems that we have designed and installed include large office buildings, manufacturing facilities and warehouses. Our proprietary technologies in solar installation provide its customers with a high quality, low cost and flexible solar power system solutions.

 

We seek to continue our development as an end-to-end solar energy solution provider by providing system solution, post-sale service, customer technical support, solar system design and field installation.

 

Business Development Plan

 

The primary components of our growth strategy are as follows:

 

-	Developing and commercializing our proprietary solar technologies including our coating and focusing technologies, racking and panel cleaning system. By deploying these new technologies into our PV panels and solar installation business, we hope to enhance the value provided to our customers and increase our profitability.
-	Promoting and enhancing our company’s brand and reputation in solar design and integration and expanding our installation business.
-	Developing a PV panel manufacturing capability to provide high efficiency and low cost solar panels to US market. This will complement our installation business and provide an implementation platform for our R&D.
-	Getting involved in the private power providing business (Distributed Power Plants).  Developing this line of business will lead to higher profit margins and income to our business. In the future, this line of business could become one of our main income sources.

 

Expansion of Installation Business

 

We are planning to expand its installation business. We will continue to execute our marketing and sales strategy in Southern California and, with additional capital, will be able to expand our business to cover Northern California, Arizona or other states.  The planned expansion is expected to occur through acquiring smaller installation companies in these regions and/or through the establishment of subsidiaries in these states and boost our installation profits. Our current intention is to establish two new offices located in Northern California or other states and in San Diego. The estimated start-up cost for each new branch would be approximately $500,000.

 

If we are able to expand our installation business, it will assist us in gaining favorable terms from OEM international manufacturers of our planned solar panel manufacturing operation.  In addition, an expanded installation business would allow us to accelerate the introduction of our new technologies and solar parts and would generate additional revenue to fund initial investment in our planned Distributed Power Plant business and to further fund our investments in R&D.

 

Commercialization of Research and Development

 

Prior to initiating our planned OEM manufacturing of Sunvalley-branded solar panels, we will need to commercialize our advanced panel technology through the design, fabrication, and characterization of a prototype solar cell.  The total expense for planned commercialization of our research and development will be approximately $500,000. The necessary equipment and facilities will be accessed from University of California, San Diego. The Nano3 clean room facilities in the school of Engineering at UCSD are equipped with state-of-the-art micro and nano fabrication equipment and facilities, and can be accessed by outside users with a $107 hourly fee.

 

The interference pattern that will be recorded in the solar cells will be obtained using an Argon laser operating at 362nm. This laser and its associated equipment is available to us through a special arrangement with the administration office in the University of California, San Diego, as well as the Ultrafast and Nano-scale Optics lab in the Department of Electrical and Computer Engineering in UCSD.

 

Other equipment will also be required, including coating machine for PV panel testing.

 

Initiate OEM Manufacturing of Solar Panels

 

By leveraging our solar panel installation business and R&D, we plan to procure OEM solar panels from selected Chinese manufacturers and to market them in the U.S. under our brand name. We will be responsible for R&D, quality control, customer service, sales and marketing activities, as well as panel certification in U.S.

 

The estimated OEM panel cost is less than $0.70 per watt. As a reference, currently, the lowest panel price is around $1.00 per watt (Mono-crystalline, Polycrystalline). We can use our own sales and installation platform to showcase the new panels and drive sales of the new panels in the U.S market. Meanwhile, we will continue our R&D effort on panel coating and other advanced technologies and apply the results to its panel manufacturing business. The goal will be to further improve the efficiency, lower the cost of solar panels with our proprietary technologies, and to grow our market share.

 

Our marketing strategy for its planned OEM solar panels is as follows:

 

Set-up a platform to showcase our innovative solar panel technologies and make Sunvalley solar panels a household name.

 

Unlike other merchandise, solar panel is very unique in that it requires very high level of quality assurance and customer satisfaction. Providing satisfactory customer service and technical support is absolutely vital in solar panel sales. As the first step, we will strive to make its brand a household name. The Sunvalley solar panel will be used by our installation business as well as several other installation companies which have partnerships with us. We do not currently have partnerships with other solar installation companies, but we plan to pursue them after introducing the panels to the market through our own installation business. A marketing campaign aimed at other solar installation companies will help to achieve this goal. We will use our own installation business as the platform to showcase the product quality and build up consumer awareness of its brand.

 

Penetrate into the main stream distribution network

 

By leveraging early successes and customer trust earned from our initial installations, we plan to penetrate into the mainstream distribution network with our OEM solar panels.

 

Further sale activities

 

Once our brand name solar panels become well known, our sales team will begin an aggressive marketing campaign to connect the individual sales points (distributors and venders) to form a distribution network. The marketing campaigns will also include attending trade shows, advertising in the media (TV commercials and newspaper advertisement) and designating local representatives to boost the market share and brand awareness.

 

Offer a low cost, high efficiency solar panel derived from advanced research

 

To boost our solar panel market share, our R&D team will work with our OEM partner to apply selective coating technique and other cutting edge technologies to further reduce the manufacturing cost and improve the panel efficiency.

 

The total capital required to initiate our planned panel manufacturing business would be approximately $2,000,000 which can be categorized into three parts:

 

Registration and Certification of OEM panels with our brand – $300,000, including UL certification fees, CEC registration fees, and lab testing fees.

 

Initial Inventory – $1,500,000.  We will need to keep 4-5 containers of PV panels in the warehouse in order to support sales of 5~10M watts per year, which means we will need to have over $1,000,000 in inventory for PV panels only. An additional $300,000 in inventory would be needed in order to keep the requisite amount of inverters and racking and panel cleaning systems. In addition, we anticipate providing variable payment terms to different customers based on their creditworthiness; this will add additional cash flow pressure.

 

OEM Management costs – $200,000

 

Develop Distributed Power Plant Business

 

With our resources and experience gained from large scale solar power system designs, installation and other related business, we believe we have unique advantages in the design and installation of large roof-top power plant systems. We are aggressively proposing our Distributed Power Plant solution to utility companies in Southern California. We believe that by collaborating with us on this approach, utility companies will benefit in the form of free installation, field space, and our expertise on large commercial solar system designs, installation and maintenance services, as well as our technical and management experience. By collaborating with us, utility companies can help to achieve their alternative energy requirements under California law.

We are among the few companies in California that has the permit and expertise to install large-scale commercial and/or government solar power systems, together with roof constructional design and building interior/exterior electrical designs. We believe additional advantages are provided by our experience in filing solar power system permit applications and rebate applications and our expertise gained through our experience with governments and utility companies.

 

Expected Changes In Number of Employees, Plant, and Equipment

 

We do not currently plan to purchase specific additional physical plant and significant equipment within the immediate future. We do not currently have specific plans to change the number of our employees during the next twelve months.

 

Results of Operations for the three and six months ended September 30, 2011 and 2010

 

During the three months ended September 30, 2011, we generated gross revenues of $202,030. Total cost of sales was $200,704, resulting in gross profit of $1,326. Total operating expenses were $317,311, and consisted of salary and wage expenses of $175,307, general and administrative expenses of $133,394, and depreciation and amortization of $8,610. We experienced interest income of $2,374, interest expense of $5,221 and a gain of $125,551 due to the change in value of a derivative liability. Our net loss for the three months ended September 30, 2011 was therefore $193,281. By comparison, during the three months ended September 30, 2010, we generated gross revenues of $1,241,810. Total cost of sales was $1,004,069 resulting in gross profit of $237,741. Total operating expenses were $268,866, and consisted of salary and wage expenses of $169,242, general and administrative expenses of $95,983, and depreciation and amortization of $3,641. We experienced interest income of $624 and interest expense of $4,905. The net loss for the three months ended September 30, 2010 was therefore $35,406.

 

During the nine months ended September 30, 2011, we generated gross revenues of $2,940,413. Total cost of sales was $2,380,531, resulting in gross profit of $559,882. Total operating expenses were $858,914, and consisted of salary and wage expenses of $457,222, general and administrative expenses of $374,451, depreciation and amortization of $22,241, and bad debt expense of $5,000. We experienced interest income of $11,965, interest expense of $13,387 and a gain of $172,025 due to the change in value of a derivative liability. Our net loss for the nine months ended September 30, 2011 was therefore $128,879. By comparison, during the nine months ended September 30, 2010, we generated gross revenues of $3,312,977. Total cost of sales was $2,783,366, resulting in gross profit of $529,611. Total operating expenses were $814,300, and consisted of salary and wage expenses of $421,278, general and administrative expenses of $345,512, bad debt expense of $37,320, and depreciation and amortization of $10,190. We experienced interest income of $2,324 and interest expense of $14,082. The net loss for the nine months ended September 30, 2010 was therefore $296,447.

 

Our revenues decreased significantly for the three months ended September 30, 2011 compared to the third quarter of last year. This fluctuation is due to the fact that we have been implementing several large commercial solar systems during the third quarter which are scheduled to be completed in the fourth quarter of 2011. Under the completed contract method of accounting, no profit or income is recorded before substantial completion of the work. The revenue for these projects will therefore be recognized after their completion. Due to the implementation periods for large projects, revenue fluctuations like the one experienced during the third quarter are a normal occurrence for construction companies, including solar system integration companies.

 

Although we had expected to see an increase of over 150% in our solar installation business in 2009, our solar installation business and the solar industry as a whole was badly affected by the global economic crisis started in late 2008. During 2009 and 2010, because banks and investment institutes were very reluctant to loan money to solar customers, many potential solar power system customers suspended their plans to invest in new solar power systems. This development, in turn, had a negative impact on our solar installation business in 2009 and 2010. In order to reduce the risk to our business presented by these developments, we expanded our operations to include a new solar equipment distribution business beginning in November of 2008. We established distribution partnerships with some large PV panel manufacturers, such as Tainwei Solarfilms and PV Powered Inc., to distribute solar panels, solar inverters and other solar equipments to their clients in the U.S. Although the gross margin for our distribution business is less than 10%, this line of business contributed to the majority of our gross revenues in 2009, 2010, and during the first half of current year.

 

During 2011, due to the incentives provided by utility companies’ rebate programs and the Federal Recovery Act’s cash grant program, we have been able to obtain more large commercial installation projects than we did in 2010. We are currently involved in two major solar panel installation projects. We expect these projects to be completed before the end of Q4, 2011.

 

Liquidity and Capital Resources

 

As of September 30, 2011, we had current assets in the amount of 4,155,261, consisting of cash in the amount of $140,949, accounts receivable of $1,812,950, inventory in the amount of $1,666,886, construction in progress of $374,690, prepaid expenses and other current assets of $133,977, other receivables of $13,309, and restricted cash of $12,500. As of September 30, 2011, we had current liabilities in the amount of $4,406,029. These consisted of accounts payable and accrued expenses in the amount of $3,821,666, convertible debt of $200,000, a derivative liability of $144,365, customer deposits of $183,600, accrued warranty in the amount of $40,291, and the current portion of long term debt in the amount of $16,107. Our working capital deficit as of September 30, 2011 was therefore $250,768.

 

Our accounts payable and accrued expenses as of September 30, 2011 consisted of the following:

 

Accounts Payable	$3,616,677
Credit Card payable	113,074
Accrued vacation	22,491
Other accrued expense	28,777
Payroll liabilities	38,714
Sales tax payable	1,933
Total	$3,821,666

 

As of September 30, 2011, our long-term liabilities were $77,906, which consisted of a loan owing to East West Bank with a balance of $63,814 and the remaining obligations of a capital lease in the amount of $14,092. The current portion of East West Bank loan due within the next year is $13,863 and the principal amount outstanding accrues annual interest at the bank's variable index rate (approx. 6.00% as of September 30, 2011). The East West Bank loan is collateralized by all business assets.

 

In September 2011, we entered a lease to own sale agreement. We evaluated the lease at the time of purchase and determined that the agreement contained a beneficial by-out option wherein we have the option to buy the equipment for $1 at the end of the lease term. Under the guidance in ASC 840, we have classified the lease as a capital lease.   We used the discounted value of future payments as the fair value of this asset and has recorded the discounted value of the remaining payments as a liability. As of September 30, 2011, we recognize $16,336 in remaining lease obligations, with $2,244 due within the next year. 

 

In addition, we have received debt financing from Asher Enterprises, Inc. under a series of Convertible Promissory Notes. The notes, both converted and currently outstanding, are as follows:

 

Convertible Notes Issued To Asher Enterprises, Inc.
Amount	Issue date	Due date	Shares issued upon conversion	Conversion date(s)	Principal amount outstanding
$100,000	1/7/11	10/7/11	15,652,625	July 8-25, 2011	$0
$100,000	4/6/11	1/4/12	41,370,513	Oct. 7-25, 2011	$0
$100,000	7/21/11	4/17/12	-	-	$100,000
$75,000	10/6/11	6/27/12	-	-	$75,000
$75,000	10/18/11	7/20/12	-	-	$75,000

 

All Notes issued to Asher Enterprises, Inc. bear interest at a rate of 8% per year and are convertible at a conversion price equal to 61% of the Market Price of our common stock on the conversion date.  For purposes of the Notes, “Market Price” is defined as the average of the 3 lowest closing prices for our common stock on the 10 trading days immediately preceding the conversion date.  The number of shares issuable upon conversion of the Notes is limited so that the holder’s total beneficial ownership of our common stock may not exceed 4.99% of the total issued and outstanding shares. This condition may be waived at the option of the holder upon not less than 61 days notice.

 

The Company has determined that the conversion feature of these notes is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability. As of September 30, 2011 the value of the derivative liability was $144,365 and we recognized a gain on the change in the value of the derivative of $125,551 during the three months ended September 30, 2011.

 

In addition, we also recently received debt financing from Tonaquint, Inc. in the amount of $200,000 under a Convertible Promissory Note as follows:

 

Convertible Notes Issued To Tonaquint, Inc.
Amount	Issue date	Due date	Shares issued upon conversion	Conversion date(s)	Principal amount outstanding
$200,000	10/18/11	7/18/11	-	-	$200,000

 

The note issued to Tonaquint, Inc. bears interest at a rate of 8% per year and is convertible at a conversion price equal to 61% of the Market Price of our common stock on the conversion date.  For purposes of the Note, “Market Price” is defined as the average of the 3 lowest closing prices for our common stock on the 10 trading days immediately preceding the conversion date.  The number of shares issuable upon conversion of the Note is limited so that the holder’s total beneficial ownership of our common stock may not exceed 9.99% of the total issued and outstanding shares. This condition may be waived at the option of the holder upon not less than 61 days notice.

 

In order to move forward with our business development plan set forth above, we will require additional financing in the approximate amount of $4,500,000, to be allocated as follows:

 

Initiate OEM Manufacturing	$	2,000,000
R&D Commercialization Costs	$	500,000
Expansion of Installation Business (3 new branches)	$	1,500,000
Additional working capital and general corporate	$	500,000
Total capital needs	$	4,500,000

 

We will require substantial additional financing in the approximate amount of $4,500,000 in order to execute our business expansion and development plans and we may require additional financing in order to sustain substantial future business operations for an extended period of time.  We currently do not have any firm arrangements for financing and we may not be able to obtain financing when required, in the amounts necessary to execute on our plans in full, or on terms which are economically feasible.

 

We are currently seeking additional financing through the sale of common equity, including the sale of common equity to Auctus Private Equity Fund, LLC through a Draw-Down Equity Financing Agreement, and/or the issuance of short-term debt convertible to common equity as discussed above. If we are unable to obtain the necessary capital to pursue our strategic plan, we may have to reduce the planned future growth of our operations.

 

Off Balance Sheet Arrangements

 

As of September 30, 2011, there were no off balance sheet arrangements.

 

Going Concern

 

We have experienced recurring losses from operations and had an accumulated deficit of $1,087,803 as of September 30, 2011. To date, we have not been able to produce sufficient sales to become cash flow positive and profitable on an ongoing basis. The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our costs of operations and/or upon obtaining additional financing. For these reasons, our auditor has raised substantial doubt about our ability to continue as a going concern.

 

Critical Accounting Policies

 

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We do not believe that any accounting policies currently fit this definition.

 

Recently Issued Accounting Pronouncements

 

Our management has considered all recent accounting pronouncements issued since the last audit of our financial statements. Our management believes that these recent pronouncements will not have a material effect on our financial statements.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4.     Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2010. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Zhijian (James) Zhang and our Chief Financial Officer, Mandy Chung. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2011, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2011.

 

Management determined that the material weaknesses that resulted in controls being ineffective are primarily due to lack of resources and number of employees. Material weaknesses exist in the segregation of duties required for effective controls and various reconciliation and control procedures not regularly performed due to the lack of staff and resources.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Internal Controls

 

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error.   Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

PART II – OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.

 

Item 1A. Risk Factors

 

A smaller reporting company is not required to provide the information required by this Item.

 

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

 

None.

 

Item 3.     Defaults upon Senior Securities

 

None

 

Item 4.     Submission of Matters to a Vote of Security Holders

 

No matters have been submitted to our security holders for a vote, through the solicitation of proxies or otherwise, during the quarterly period ended September 30, 2011.

 

Item 5.     Other Information

 

None

 

Item 6.      Exhibits

 

Exhibit Number	Description of Exhibit
31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

SIGNATURES

 

In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Sunvalley Solar, Inc.
Date:	November 15, 2011
	By:       /s/ Zhijian (James) Zhang              Zhijian (James) Zhang Title:    Chief Executive Officer and Director
Date:	November 15, 2011
	By:       /s/ Mandy Chung              Mandy Chung Title:    Chief Financial Officer