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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
[  ] TRANSITION REPORT UNDER SECTION 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) (I.R.S. Employer Identification No.)
 

398 Lemon Creek Dr., Suite A

Walnut, California

91789
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number: (909) 598-0618

 

Securities registered under Section 12(b) of the Exchange Act:

Title of each class Name of each exchange on which registered
none not applicable
   
Securities registered under Section 12(g) of the Exchange Act:
Title of class
none

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

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 [ ] Accelerated filer
[ ] Non-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 [ ] No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $9,816,544 as June 30, 2011.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 968,224,644 as of March 28, 2012.

 

 

TABLE OF CONTENTS

 

Page

 

PART I

 

Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Mine Safety Disclosures 10

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 11
Item 6. Selected Financial Data 12
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 20
Item 9A(T). Controls and Procedures 20
Item 9B. Other Information 20

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance 21
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 27
Item 13. Certain Relationships and Related Transactions, and Director Independence 28
Item 14. Principal Accountant Fees and Services 28

 

PART IV

Item 15. Exhibits, Financial Statement Schedules 28
2

PART I

 

Item 1. Business

 

We are a California-based solar power technology and system integration company founded in January of 2007. We are 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 our customers with a high quality, low cost and flexible solar power system solutions.

 

We are working to develop 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.

 

Principal Products and Services

 

Our philosophy is to “provide solar electricity directly from the sun in a technology innovation-centric and cost effective way”. Since inception, we have concentrated on serving the solar power needs of residential and commercial customers tied to the electric power grid.  Our business plans are focused in four specific areas:

 

- Solar Systems Design and Installation
- Solar Technology Research and Development
- Solar Equipment Manufacturing and Distribution
- Distributed Power Plant Projects

 

In 2007 and 2008, 100% of our revenues were generated from our Solar Systems Design and Installation business. In 2009, 87.9% ($3.879 million) of our revenues were generated from our Solar Equipment Distribution business and 12.1% ($0.534 million) were generated from our Solar Systems Design and Installation business. In 2010, 89.23% ($4.135 million) of our revenues were generated from our Solar Equipment Distribution business and 10.77% ($0.499 million) from our Solar Equipment Distribution business. In 2011, 25.06% ($1.460 million) of our revenues were generated from our Solar Equipment Distribution business and 74.94% ($4.366 million) were generated from our Solar Systems Design and Installation business. Our Solar Technology Research and Development and our Distributed Power Plant Projects businesses are in the development stage and have not yet generated revenue.

 

We are not currently dependent on one or a few major customers for our revenues. Instead, our total revenues for the last fiscal year were generated from over one hundred different customers.

 

Solar Systems Design and Installation

 

The scope of our solar systems design and installation business includes:

 

- Designing solar systems for commercial, residential, governmental and non-profit customers
- Installing solar power systems and related constructional systems for solar power end users
- Providing technical support and service to solar power end users
- Providing system performance monitoring services to solar power end users
- Providing government permit/incentives application services to solar power end users

 

3

Since our founding in 2007, we have focused on solar system design and installation.  Installation is our core business, and it also provides the company with a platform for solar product supply, new technology development, and other lines of business. Our gross revenues to date have come mostly from the solar systems installation business. Our installation business is focused primarily in Southern California.  We were the first Chinese-American owned solar installation technology company in Southern California and much of the early growth in our systems installation business came from customers in the Chinese-American community of Southern California.  


We are one of a few companies in California that has the permit and expertise to install large commercial solar systems (over 250K watts).  Design and installation of a solar power system, especially a large commercial solar power system, requires proper licenses, design capabilities in electrical systems and solar systems, and constructional (ground or roof) implementation ability, as well as experienced project management and an understanding of industry regulations. In addition, the ability to procure proper solar equipment is critical to large commercial solar system projects.

 

We have obtained a C-46 Solar License from CBCL (California Board of Contractor License). We have been focusing on developing our expertise and proprietary technology to install large commercial and governmental solar power systems since 2010. We are also able to procure the necessary equipment and supplies through our distribution partnerships. Some of large scale commercial solar power systems that we has designed and installed include large office buildings, manufacturing facilities, warehouses and hotels.

 

In 2008, we were positioned in the top twenty solar installation companies in terms of total installed solar system size in a list compiled by the California Energy Commission (CEC). Over 3,000 listed companies had installed solar power systems, and over 90% of these companies were doing residential or small size commercial solar systems installation. Only a few companies in the list, including Sunvalley, had designed or installed solar power system projects over 250,000 watts.

 

Our installation business generated all of our revenues in 2007 and 2008, and it remains a significant component of our total revenue structure. Our development efforts in this area focus on the installation of large commercial and governmental solar power systems, as well as residential solar power systems. Our customers in this line of business run the gamut from small private residences to large commercial solar power projects. Some of large scale commercial solar power systems that we have designed and installed include large office buildings, manufacturing facilities, warehouses, and hotels.

 

Our current systems installation resources, which consist of two installation worker teams, one engineer/design team, and certain installation equipment, provide us with the capacity to install solar systems totaling approximately 1 million watts to 1.5 million watts on an annual basis.

 

Solar Technology Research and Development

 

As a reusable and green energy source, the solar cell has been providing an increasing portion of consumed energies, including in household heating and electricity, in commercially available cars, and in centralized solar electricity plants. However, the current solar cell modules or panels suffer severe drawbacks compared to fossil fuel energy sources in terms of cost-per-watt as well as in the efficiency of energy storage. The cost issue is related to the poor energy conversion efficiency and the use of the costly semiconductors as the electricity generation unit, which primarily corresponds to the light absorption of the solar cell module.

 

To improve the efficiency of the solar cell without adding more cost to it, we are developing a new metallic sub-wavelength design to realize the combination of the electrodes as SPP generators.  A typical PV solar cell operates by receiving sun light on an electric conversion unit or active layer. Active layers have typically been a semi-conductor having a p-n junction to produce electron-hole pairs or excitions whenever illuminated with light. In operation, each electron and hole of produced excition pairs are pulled in opposite directions by the internal electric field of the p-n junction resulting in an electric current. The same effect in organic cells is accomplished via either a bi-layer of acceptor and donor materials or a bulk hetero-junction of an acceptor and donor material. The resultant electric current may be extracted by electrodes and delivered to an electric circuit to an electricity storage device.

 

4

Despite this successful development and implementation, PV solar cell technologies have not yet been completely satisfactory for their intended purpose since manufacturing costs are high and efficiencies are too low for PV solar technologies to compete with non-renewable energies in terms of costs per energy watt produced.

 

As one of potential solutions, it has been discovered that surface plasmon polariton (SPP) assisted solar technologies may be developed to result in enhanced electricity production due to surface resonant excitation or surface Plasmon resonance (SPR). SPP assisted PV cells have heretofore operated by using the enhanced electrical fields produced by the SPR to either be directly converted to electricity or concentrate the light onto an active layer. With this technology, the efficiency of the solar cell can be increased, therefore the cost of solar power per watt will be reduced also.

 

The innovative design will also consider the variant spectral and angles, to guarantee excitation of the SPP at any angle around the bang gap, or absorption region of the solar cell unit. With the successful development of our new PV cells, we are expecting the efficiency of the organic thin-film-based solar cells to be over 10%, which is close to double that of the current commercially available thin film solar cells.

 

A typical PV solar cell operates by receiving sun light on an electric conversion unit or active layer. Active layers have typically been a semiconductor having a p-n junction to produce an electric current. The efficiency of the conversion depends on purity of the semiconductor, structure of the solar cell, insight spectrum, angle, and power directly to the solar cell, as well as temperature and other environmental conditions.

 

Our patent-pending technology uses Surface Plasmon Polariton (SPP) assisted solar technologies to enhance electricity production due to surface resonant excitation or Surface Plasmon Resonance (SPR). It will provide an apparatus and related method for efficiently converting solar radiation into electricity wherein the conversion efficiency in thin film active layers is measurable increased.

 

We believe that deployment of our new technology to increase the panel efficiency will reduce solar panel cost per watt as well as the total system cost. As an example, in the current U.S. market, the cost of thin-film solar panel (a-Si) is approximately $1.0/w. The efficiency of the module is around 7% only. For instance, a-Si thin film solar module TW-SF 95W produced by the Tianwei Soalrfilm is rated 95 watts output power. The market price for this module is $95. With the commercialization and implementation of new solar technologies, such as our patent-pending technology, the efficiency of this module can be increased from 7% to 10%, which in turn will increase the module output power from 95W to 135W with the same module size. So the solar panel cost per watt will be reduced to $0.7/w compared to $1.0/w before. The customer could save $3,000 for a 10,000 watt solar power system based on reduced solar panel cost only. Plus, with higher efficiency solar panels, the racking and electrical accessory cost of the system will be also reduced because fewer panels will be used for the same system size. The total system cost could be reduced over 30%. We expect that implementation of our new technology will reduce the overall cost of the solar power system to a level that is less than or at least comparable with fossil fuel energy sources in the near future.

 

Though our patent-pending technology is able to increase the efficiency of thin-film-based solar cells to over 10%, commercializing this technology into mass production will involve a trade-off between manufacturing cost per-panel and increased per-panel efficiency. In addition, our new PV cell concept will also need to demonstrate that panels using the technology will have a productive life-span and a tolerance to environmental conditions such as humidity, temperature, wind load that are sufficient for the panels to be used in real life application. Accordingly, there is no guarantee that we will be able to commercially produce and market solar panels using our new PV technology.

 

We have not yet generated revenues from our patent-pending new technology. With additional capital, however, we hope to commercialize our R&D outputs to our PV panels and installation applications. By combining our research and development capability with our existing installation business and planned panel manufacturing operation, we hope to establish a vertically integrated entity that can grow to become a premier supplier of solar panels in the United States.

5

The main points of focus for our R&D operation are as follows:

 

- Keeping and developing a small but strong R&D team in San Diego
- Collaborating with universities in the U.S. and panel manufacturers in China
- Effectively use resources from research institutes and universities in China
- Developing new solar technology and parts, focusing on application technologies

 

We are working together with UCSD (University of California, San Diego) to develop Surface Plasmon Polariton (SPP) assisted solar technologies. The equipment and facilities needed to fabricate the device is accessed from University of California, San Diego. The nano- clean room facilities in the School of Engineering at UCSD are equipped with many state of the art micro and nano- fabrication equipment and facility. 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 special arrangement with the administration of the University of California, San Diego, as well as the Ultrafast and Nano- scale Optics lab in the Department of Electrical and Computer Engineering at UCSD. We are also working together with some panel manufacturers in China to get product line supports to commercialize the patented technology in the panel manufacturing. The panel manufacturers are also providing us some raw materials for lab testing. We are also collaborating with Haerbin Industrial University in China and Shenyang Mechanical Research Institute to develop and prototype a new solar micro-inverter.

 

Our key current R&D topics include:

 

- Developing new coating technology to increase the efficiency of PV panel
- Develop solar PV application technology to reduce system level cost and increase installation flexibility – racking and panel cleaning system
- Commercializing our patented advanced solar technology.

 

Solar Equipment Manufacturing and Distribution

 

In recent years, we have signed distribution agreements with three of the largest solar panel producers in the world and one large solar inverter suppliers. Our partnerships with these manufacturers in the solar power industry have allowed us to broaden our customer base and to provide our customers with more cost competitive and complete solar system solutions with multiple selective options on PV panels and inverters. In 2009 and 2010, our solar equipment distribution business has grown to constitute the majority of our revenues.

 

Although we have not yet generated revenue from the manufacture of our own solar panels, our R&D team has developed a new type of nano-structured solar cell and filed for patent protection in the U.S. as “New Solar Cell Structure with Increased Efficiency” on March 22, 2010, application number 12/729,201.  We are currently applying for a Phase-I grant from Department of Energy, entitled "Surface Plasmon Enhanced Solar Cells,” in order to fund additional development of its proprietary solar cell.  With proper funding, the new technology could be commercialized and implemented in solar panel manufacture starting from OEM manufactured panels from reputable solar panel manufacturers in China. The manufactured solar panels would use our brand name with its patented technology. We would be responsible for quality control, certification applying, marketing, technical support and services in the United States. Our unique technology, if successfully commercialized and brought to market, would provide the solar panel market with a higher efficiency, lower cost unit than competing panels currently on the market. Our ability to provide after-sale services such as system maintenance, technical support, training, etc. for its customers could add another selling point for promotion of the new panel.

6

Distributed Power Plant Projects

 

We are in the development stage for a new line of business based on the installation of distributed solar power plants.  Although we are not currently generating revenue from the installation of distributed solar power plants, this area is a focus of our ongoing business development. Currently, most proposed solar power plants are stand-alone large scale power plants. Currently, all completed or proposed stand-alone large scale solar power plants were proposed or implemented by large solar panel manufacturers (such as First Solar, Solar Power, etc.) as well as investment bankers, utility companies or large installation companies as a group. We do not have sufficient funds and resources to build stand-alone large scale solar power plant, and we do not intend to develop stand-alone large scale power plants in the near future. Such plants are either solar thermal power plants (using solar panels to generate heat and then using thermal electrical methods to generate electricity) or photovoltaic farms (using PV panels to generate electrical power directly). Stand-alone power plants need to deploy high-voltage transformers, high-voltage power transmission lines, etc. Also, the limiting factor of solar power is that it generates little electricity when skies are cloudy and none at night. Excess power must therefore be produced during sunny hours and stored for use during dark hours. Most energy storage systems such as batteries are expensive or inefficient. Pressurized caverns and hot salt technologies are commonly used right now for these solar power plants, but they will require larger storage room and more complex technology. Due to these reasons, stand-alone power plants naturally are large scale (generally more than 15M Watts), and most of them are built on open public land, such as in a hot desert, due to large installation physical space required and cost of the land.

 

Building larger solar power plants involves serious issues such as the need for large investments in land and infrastructure including power transmission line and electrical distribution network constructions. Other troublesome issues are customer management independent from current utility company billing systems, three years or even longer environmental impact assessment study (required by federal environmental protection laws), sophisticated application processing for land use permits, different safety and security requirements for open public space, etc. All of these difficulties add up to tremendous investments, efforts and long waiting times. The Bureau of Land Management has taken as long as two years in order to just complete required environmental reviews.

 

By comparison, the small size, tied-to-grid, Distributed Power Plants we are planning to launch would be quite different from stand-alone large scale power plants. Our planned projects won’t use public land.  Instead, our plan is to use free roofs on private commercial buildings or private lands. We plan to build the power plants on private property to avoid environmental issues and easily tie to the grid to avoid power transmission lines and electrical distribution networks construction. We would also use current utility company billing systems to manage the system.

Most of environmental issues involved in the use public lands involve costs related to the protection of certain plants and animals and to the maintenance of soil composition, as the public lands that are suitable for large power plants are generally preserved open lands. Private property suitable for smaller distributed power plants generally does not involve in such issues, however since the land is typically smaller tracts in private agricultural use or existing rooftop spaces.

 

The size of these types of roof-top solar power plants is much smaller than typical solar power plants (1M to 2M watts is typical for roof-top power plants, compared to over 15M watts for typical plants), but we would be able to build many smaller “power plants” on top of different buildings and tie them to utility grid to form a distributed power plant system.

 

Our planned distributed PV power plants are prompted by recent advances in solar technology that reduce the cost of installed photovoltaic generation and federal/state laws that ensure the “oversize to load” (no restriction on homeowners or businesses over-sizing their solar system when compared with their usage, or “load”) and provides greater fairness for consumers by requiring wholesale compensation for surplus power. Building smaller roof solar power plants would avoid most of the difficulties that currently face those who build larger solar power plants.

We are currently negotiating with some agricultural farmers who are our existing customers in the Palm Desert, California area to use their private lands to build our power plants. We are also in discussions with local utility companies about the possibility of selling excess solar power to be generated by the plants back to the utilities.

7

As an established solar system designer/installer, we have the requisite technical background, experience, licenses, and other capabilities necessary to build the roof-top distributed power plants. Because of our experience in larger scale commercial solar system design and installation, the planned distributed power plants would closely resemble some relatively larger commercial solar systems we are building today.

 

Competition and Market Overview

 

The solar power industry is at an early stage of its growth and is highly fragmented with many smaller companies. The prospect for long-term worldwide demand for solar power has attracted many new solar panel manufacturers, as well as a multitude of design/integration companies in our market segment, with no single competitor gaining market dominance. We expect the manufacturing segment of the industry to consolidate as more solar panel manufacturing capacity comes online. We also expect there to be consolidation in the design/integration segment of the industry based mostly on branding, development of new technology and business process improvements.

 

Distribution Methods and Marketing

 

The most important part in a solar power system is the solar panel (PV module). Photovoltaic (PV) devices generate electricity directly from sunlight via an electric process that occurs naturally in certain types of materials. Groups of PV cells are configured into modules and arrays, which can be used to power any number of electrical loads. Crystalline silicon - the same material commonly used by the semiconductor industry - is the material used in a large portion of all PV modules today. PV modules generate direct current (DC) electricity. For residential use, the current is then fed through an inverter to produce alternating current (AC) electricity that can be used to power home appliances.

 

The majority of PV systems today are installed for homes and businesses that remain connected to the electric grid. Consumers use their grid-connected PV system to supply some of the power they need and use utility-generated power when their power usage exceeds the PV system output (e.g., at night). When the owner of a grid connected PV system uses less power than their PV system creates, they can sell the electricity back to their local utility, watch their meter spinning backwards, and receive a credit on their electric bill - a process referred as net metering. The electric grid thus serves as a “storage device” for PV-generated power.

 

The initial market focus for our commercial installation business has been the Chinese-American and broader Asian-American community of Southern California, with special emphasis on the Asian-American commercial market. We have been able to attract the attention of news media serving this market segment. Several newspapers (Chinese Daily News and World Journal), TV stations (Phoenix Satellite Television and DongSen Satellite Television), and local radio stations (AM1300), have had special reports on our company. These reports have generated positive reactions from readers, viewers, and listeners and have driven customer traffic to our office.

 

We plan to continue to pursue our media-based marketing and sales strategy in Southern California.  In addition, we are working very closely with our solar panel suppliers and inverter supplier to bid on larger power plants, including government contracts.  

 

Principal Suppliers

 

We currently purchase solar panels primarily from two manufacturers, TianWei SolarFilms and JS Solar. We maintain good relationships with all of our suppliers, and especially with our primary and important suppliers. In addition, we are continuously adding new alternative suppliers to our supplier list. Due to the standardization of solar equipment, all materials we purchase from our suppliers are available from other sources and suppliers.

 

Our revenues currently derive from solar system design and installation as well as solar equipment distribution. In order to expand our installation business to states other than California, we will be required to comply with local license requirements by acquiring a local installer or by hiring locally-licensed contractors to serve as officers. For our solar equipment distribution business, no local licensures are required in California or other states.

8

As a result of continuing global development at all levels of solar equipment manufacturing, including in the area of raw materials supply, in 2009 and 2010, the risk of disruption in the supply of necessary raw materials for solar panels has been greatly reduced since 2011. In addition, we have established solid relationships with several large solar equipment suppliers, allowing us to access multiple sources. For the immediate future, we therefore believe that raw materials for our products will continue to be readily available.


Currently, we believe that the market for solar power in China is not yet mature, while, the European market is overcrowded. As a result, we believe that Chinese manufacturers are looking for business opportunities in the United States. As an established technology and system integration company, Sunvalley maintains a unique position to act as the bridge between Chinese manufacturers. The partnership with these manufacturers in the solar power industry allows Sunvalley to provide its customers with a cost competitive, complete solar system solution with multiple selective options on PV panels and inverters.

 

Intellectual Property

 

Our R&D team has developed a new type of nano-structured solar cell and filed for patent protection in the U.S. as “New Solar Cell Structure with Increased Efficiency” on March 22, 2010, application number 12/729,201. We also made a progress on our smart system of networked PV panels for improved provision of electricity to the power grid. We filed for patent protection in the U.S. for this invention, “Networked Solar Panels and Related Methods,” on August 4, 2011.

 

The specific patent applications info is as follows:

 

EFS ID 7261431
Application Number 12729201
Confirmation Number 6760
Title A Surface Plasmon Resonance Enhanced Solar Cell Structure with Broad Spectral and Angular Bandwidth and Polarization Insensitivity
Receipt Date 22-MAR-2010
Application Type Utility under 35 USC 111(a)

 

EFS ID 10667328
Application Number 13198076
Confirmation Number 7067
Title Networked Solar Panels and Related Methods
Receipt Date 04-AUG-2011
Application Type Utility under 35 USC 111(a)

 

Personnel

 

We have 20 employees, 16 of whom are full-time employees.  Our current internal departments include the Administration Department, the Engineering Department, the Sales/Marketing Department and the New Technology Development Department.  We are lead by a management team that includes a group of scientists, research/development engineers, a professional marketing/sales team, and an experienced supply chain management team. In addition, our team includes solar power system design engineers, solar power system installation engineers, electrical system design engineers and construction engineers.

9

Government Regulation

 

The market for solar energy systems is heavily influenced by foreign, federal, state and local government regulations and policies concerning the electric utility industry, as well as policies adopted by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. For example, there currently exist metering caps in certain jurisdictions, which limit the aggregate amount of power that may be sold by solar power generators into the electric grid. These regulations and policies have been modified in the past and may be modified in the future in ways that could deter purchases of solar energy systems and investment in the research and development of solar energy technology. For example, without a mandated regulatory exception for solar energy systems, utility customers are often charged interconnection or standby fees for putting distributed power generation on the electric utility grid. Such fees could increase the cost to our customers of using solar energy systems and make them less desirable, thereby harming our business, operating results and financial condition. Changes in net metering policies could also deter the purchase and use of solar energy systems. In addition, electricity generated by solar energy systems competes primarily with expensive peak hour electricity rates rather than with the less expensive average price of electricity. Modifications to the peak hour pricing policies of utilities, such as to a flat rate, would require solar energy systems to achieve lower prices in order to compete with the price of electricity.

 

The importation of a part of the products we sell is subject to tariffs, duties and quotas imposed by the United States.  In addition, other restrictions on the importation of our products are periodically considered by the United States Congress, and may again be considered to protect against “Asian” deflation.  No assurances can be given that tariffs or duties on such goods may not be raised, resulting in higher costs to us or that import quotas with respect to such goods will not be lowered.  Deliveries of products from our foreign suppliers could be restricted or delayed by the imposition of lower quotas or increased tariffs.  We may be unable to obtain similar quality products at equally favorable prices from domestic suppliers or from other foreign suppliers whose quotas have not been exceeded by the supply of goods to existing customers.

 

Item 2. Properties

 

We lease approximately 2,193 sq ft of office space in the Walnut Tech Business Center located at 398 Lemon Creek Drive, Suite A, Walnut CA 91789 for $2,961 per month.  This lease will terminate on November 30, 2012. The property is sufficient for our current business size. We plan to extend our lease for another year after November 30, 2012.

 

Item 3. Legal Proceedings

 

We are not currently a party to any material pending legal proceedings.

 

Our agent for service of process in Nevada is Cane Clark Agency, LLC, 3273 East Warm Springs Rd., Las Vegas, NV 89120.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock is quoted under the symbol “SSOL” on the OTCBB operated by the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the OTCQB operated by OTC Markets Group, Inc.  Few market makers continue to participate in the OTCBB system because of high fees charged by FINRA.  Consequently, market makers that once quoted our shares on the OTCBB system may no longer be posting a quotation for our shares. As of the date of this report, however, our shares are quoted by several market makers on the OTCQB. The criteria for listing on either the OTCBB or OTCQB are similar and include that we remain current in our SEC reporting. Our reporting is presently current and, since inception, we have filed our SEC reports on time.

 

The following tables set forth the range of high and low prices for our common stock for the each of the periods indicated as reported by the OTCQB. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

Fiscal Year Ended December 31, 2011
Quarter Ended    High $     Low $   
December 31, 2011   $0.0079   $0.0040 
September 30, 2011   $0.0135   $0.0050 
June 30, 2011   $0.0158   $0.0083 
March 31, 2011   $0.0259   $0.0033 
            
Fiscal Year Ending December 31, 2010
Quarter Ended   High $    Low $ 
December 31, 2010   $0.0479   $0.0044 
September 30, 2010   $0.0802   $0.0310 
June 30, 2010   $0.0016   $0.0016 
March 31, 2010    n/a    n/a 

 

On March 28, 2012, the last sales price per share of our common stock was $0.0030.

 

Penny Stock

 

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

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

 

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

 

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

 

Holders of Our Common Stock

 

As of March 28, 2012, we had 968,224,644 shares of our common stock issued and outstanding, held by sixty (60) shareholders of record.

 

Dividends

 

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

 

1. we would not be able to pay our debts as they become due in the usual course of business, or;
2. our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

 

We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.

 

Recent Sales of Unregistered Securities

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Item 6. Selected Financial Data

 

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

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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.

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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.

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The estimated OEM panel cost is less than $0.70 per watt. As a reference, currently, the 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

 

14

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.

 

Results of Operations for the Years Ended December 31, 2011 and 2010

 

During the year ended December 31, 2011, we generated gross revenues of $5,826,490. Total cost of sales was $4,502,257, resulting in gross profit of $1,324,233. Total operating expenses were $1,427,914, and consisted of salary and wage expenses of $603,229, selling, general and administrative expenses of $404,136, professional fees of $322,102 and bad debt expense of $98,447. We experienced a net interest expense of $529,528, a gain of $220,279 due to the change in value of a derivative liability, and other income of $14,064. Our net loss for the year ended December 31, 2011 was therefore $398,866.

 

By comparison, during the year ended December 31, 2010, we generated gross revenues of $4,634,140. Total cost of sales was $3,924,330, resulting in gross profit of $709,180 Total operating expenses were $1,080,905, and consisted of salary and wage expenses of $547,738, selling, general and administrative expenses of $442,069, professional fees of $55,778 and bad debt expense of $35,320. We experienced a net interest expense of $15,891 and other income of $11,147. Our net loss for the year ended December 31, 2010 was therefore $375,839.

 

Our gross revenues increased significantly in 2011 compared to 2010 because we completed three large installation projects in 2011. These three major projects generated installation revenue of approximately $3.7 million in 2011. We incurred higher operating costs and higher consulting and other fees in 2011. These were mostly related to convertible notes, factoring of accounts receivable, and audit and legal services. In addition, we experienced higher bad debt expenses in 2011 due to a few of our vendors declaring bankruptcy or going out of business and their accounts receivable becoming uncollectible.

We use the Black-Scholes option pricing model to value our derivative liabilities and the subsequent remeasurement of our convertible notes. Due to these accounting procedures relating to our convertible notes, we recognized $523,466 as interest expenses and gain on derivative liabilities of $220,279.

 

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 fiscal year 2011.

15

During 2011, due to the incentives provided by utility companies’ rebate programs and the Federal Recovery Act’s cash grant program, we were able to obtain more large commercial installation projects than we did in 2010. We implemented over 1M watts in solar installation projects in year 2011, We have signed installation contracts for over 1.5M watts in solar systems for 2012 and they are currently under implementation.. We expect these projects to be completed before the end of Q4, 2012.

 

Liquidity and Capital Resources

 

As of December 31, 2011, we had current assets in the amount of 5,731,166, consisting of cash in the amount of $162,403, accounts receivable of $4,512,198, inventory in the amount of $847,083, costs in excess of billings on uncompleted contracts of $168,493, prepaid expenses and other current assets of $14,289, other receivables of $1,700, and restricted cash of $25,000. As of December 31, 2011, we had current liabilities in the amount of $5,682,329. These consisted of accounts payable and accrued expenses in the amount of $4,135,229, a derivative liability of $501,626, customer deposits of $409,801, a factoring payable of $325,652, convertible debt of $124,789, a related party note payable of $100,000, accrued warranty of $68,881, the current portion of long term debt in the amount of $14,073, and the current portion of a capital lease in the amount of $2,278. Our working capital as of December 31, 2011 was therefore $48,837.

 

Our accounts receivable increased by $3,965,810 as of December 31, 2011 compared to December 31, 2010, largely as the result of our completion of large installation projects in late 2011.  Primarily for the same reason, our inventory decreased by $1,078,150 as of December 31, 2011 compared to December 31, 2010. Our costs in excess of billings on uncompleted contracts increased by $112,490 as of December 31, 2011 compared to December 31, 2010. This increase is due to our current involvement in three major short-term solar panel installation projects. Our derivative liability in the amount of $501,626 on December 31, 2011 represents a category of liability which did not exist as of December 31, 2010.  Our derivative liabilities are related to promissory notes convertible to common stock which were issued in 2011.  Also, our related party payables in the amount of $100,000 as of December 31, 2011 represent a category of liability which did not exist as of December 31, 2010.  These liabilities relate to promissory notes for money borrowed from our officers and directors in 2011. In addition, our factoring payable in the amount of $325,652 as of December 31, 2011 represents a category of liability which did not exist as of December 31, 2010.  This liability is the result of our factoring of certain invoices under a new factoring agreement signed in 2011.  Finally, our accounts payable and accrued expenses increased by $1,251,913 as of December 31, 2011 compared to December 31, 2010.

 

Our accounts payable and accrued expenses as of December 31, 2011 consisted of the following:

 

Accounts Payable  $3,622,479 
Credit Card payable   241,751 
Accrued vacation   22,703 
Other accrued expense   125,538 
Payroll liabilities                         17,008 
Sales tax payable   105,750 
Total  $4,135,229 

 

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Operating activities used $1,414,814 in cash during 2011, compared to $252,700 in cash provided by operating activities during 2010.  The main factors causing this change were an increase in accounts receivable of $3,965,810 combined with an increase in accounts payable of $1,260,318, amortization of discount in the amount of $506,096, and a gain on the re-measurement of derivatives in the amount of $220,279.  Financing activities provided $1,202,513 in cash during 2011, compared to $12,525 in 2012. These included proceeds from convertible debt (discussed in more detail below) in the amount of $650,000, proceeds from our factoring line in the amount of $325,652, proceeds from related party notes payable in the amount of $100,000, and a repayment of long term debt in the amount of $14,160.  Investing activities used $171,460 in cash for the purchase of property and equipment.  We experienced a net decrease in cash of $383,761 for 2011, compared to a net increase of $236,711 for 2010.

 

As of December 31, 2011, our long-term liabilities were $73,519, which consisted of a loan owing to East West Bank with a balance of $60,220 and the remaining obligations of a capital lease in the amount of $13,299. The current portion of East West Bank loan due within the next year is $14,073 and the principal amount outstanding accrues annual interest at the bank's variable index rate. The East West Bank loan is collateralized by all business assets.

 

In September 2011, we entered a lease-to-own purchase 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 have recorded the discounted value of the remaining payments as a liability. As of December 31, 2011 the capital lease payable outstanding was $15,577, with $5,376 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  01/07/11  10/7/11  15,652,625  July 8-25, 2011  $0 
$100,000  04/06/11  1/4/12  41,370,513  Oct. 7-25, 2011  $0 
$100,000  07/21/11  4/17/12  52,184,755  Jan. 10 – Feb. 2, 2012  $0 
$75,000  10/03/11  6/27/12  —    —    $75,000 
$75,000  10/26/11  7/20/12  —    —    $75,000 
$78,500  02/15/12  11/21/12  —    —    $78,500 

17

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 ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability. As of December 31, 2011 the value of the derivative liability was $501,626 and we recognized a gain on the derivative of $220,279 for the year ended December 31, 2011.

 

In addition, we have 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  10/28/11  7/18/12  —    —    $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.

 

On November 10, 2011, we entered into a Factoring and Security Agreement (the “Agreement”) with CapFlow Funding Group Managers LLC (“CapFlow”). The Agreement is a credit facility for the purpose of factoring our accounts receivable. The cost of this funding is a discount of 1.85% of the gross amount of each receivable factored for the first 30 days, and an additional 0.95% for each additional 15 day period thereafter until the factored account receivable is closed. Under the Agreement, 20% to 25% of the amount of the purchased invoices is reserved. Our obligations to CapFlow under the Agreement are secured by substantially all of our assets. The total available credit line under the Agreement is $1,000,000. As of April 11, 2012, we had received total advances under the Agreement of $1,041,381.33 on factored invoices totaling $1,321,838.40. Currently, we have outstanding invoices factored to CapFlow of $928,538.40, for which $726,741.33 has been advanced. Our current available credit under the Agreement is $243,576.29. To date, discount rates for invoices factored to CapFlow under the Agreement have ranged from 1.85% to 7.55%.

 

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.

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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 an existing 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 December 31, 2011, there were no off balance sheet arrangements.

 

Going Concern

 

We have experienced recurring losses from operations and had an accumulated deficit of $1,357,790 as of December 31, 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 7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 8. Financial Statements and Supplementary Data

 

Index to Financial Statements Required by Article 8 of Regulation S-X:

 

Audited Financial Statements:

 

F-1 Report of Independent Registered Public Accounting Firm
F-2 Balance Sheets as of December 31, 2011 and 2010;
F-3 Statements of Operations for the years ended December 31, 2011 and 2010;
F-4 Statement of Stockholders’ Equity for the years ended December 31, 2011 and 2010;
F-5 Statements of Cash Flows for the years ended December 31, 2011 and 2010;
F-6 Notes to Financial Statements
19

SADLER, GIBB & ASSOCIATES, L.L.C.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Sunvalley Solar, Inc.

 

We have audited the accompanying consolidated balance sheets of Sunvalley Solar, Inc., as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunvalley Solar, Inc., as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company had losses from operations of $103,681 and accumulated deficit of $1,357,790, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Sadler, Gibb & Associates, LLC

 

Sadler, Gibb & Associates, LLC

Salt Lake City, UT

April 13, 2012

 

F-1

  SUNVALLEY SOLAR, INC.

Consolidated Balance Sheets

 

ASSETS
   December 31,  December 31,
   2011  2010
       
CURRENT ASSETS          
Cash and cash equivalents  $162,403   $546,164 
Restricted cash   25,000    12,500 
Accounts receivable, net   4,512,198    546,388 
Inventory   847,083    1,925,233 
Costs in excess of billings on uncompleted contracts   168,493    56,003 
Other receivables   1,700    7,481 
Prepaid expenses and other current assets   14,289    15,793 
           
Total current assets   5,731,166    3,109,562 
           
PROPERTY AND EQUIPMENT, NET   224,375    71,208 
           
OTHER ASSETS          
Other assets   28,827    5,686 
           
Total other assets   28,827    5,686 
           
TOTAL ASSETS  $5,984,368   $3,186,456 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $4,135,229   $2,883,316 
Customer deposits   409,801    70,070 
Accrued warranty   68,881    27,688 
Current portion of long-term debt   14,073    13,256 
Current portion of capital lease   2,278    —   
Convertible debt, net   124,789    —   
Related party notes payable   100,000    —   
Factoring payable   325,652    —   
Derivative liability   501,626    —   
           
Total current liabilities   5,682,329    2,994,330 
           
LONG-TERM LIABILITIES          
Capital leases   13,299    —   
Notes payable   60,220    74,269 
           
Total long-term liabilities   73,519    74,269 
           
TOTAL LIABILITIES   5,755,848    3,068,599 
           
STOCKHOLDERS' EQUITY          
           
Common stock, $0.001 par value, 1,500,000,000 shares authorized, 886,039,889 and 800,068,420 shares issued and outstanding, respectively   886,040    800,068 
Additional paid-in capital   700,270    276,713 
Accumulated deficit   (1,357,790)   (958,924)
           
Total Stockholders' Equity   228,520    117,857 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $5,984,368   $3,186,456 

 

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

F-2

SUNVALLEY SOLAR, INC.

Consolidated Statements of Operations

 

   For the Years Ended
   December 31,
   2011  2010
       
REVENUES  $5,826,490   $4,634,140 
COST OF SALES   4,502,257    3,924,330 
           
GROSS PROFIT   1,324,233    709,810 
           
OPERATING EXPENSES          
Salary and wage expense   603,229    547,738 
Bad debt expense   98,447    35,320 
Professional fees   322,102    55,778 
Selling, general and administrative expenses   404,136    442,069 
           
     Total operating expenses   1,427,914    1,080,905 
           
LOSS FROM OPERATIONS   (103,681)   (371,095)
           
OTHER INCOME (EXPENSES)          
Gain on derivative liability   220,279    —   
Other income   14,064    11,147 
Interest income (expense), net   (529,528)   (15,891)
           
     Total other income (expenses)   (295,185)   (4,744)
           
LOSS BEFORE TAXES   (398,866)   (375,839)
           
Provision for income taxes   —      —   
           
NET LOSS  $(398,866)  $(375,839)
           
BASIC AND DILUTED LOSS PER SHARE          
Basic and diluted  $(0.00)  $(0.00)
           
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING          
Basic and diluted   827,955,114    648,323,685 

 

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

F-3

SUNVALLEY SOLAR, INC.

Consolidated Statements of Stockholders' Equity

 

   Common Stock     Additional   Accumulated      
   Shares    Amount   Paid-In Capital   Deficit  Total
                         
Balance at February 28, 2007  25,150,896   $25,151   $6,106,916   $(6,422,232)  $(290,165)
                         
Contributed executive services  —      —      10,000    —      10,000 
                         
Issuance of common stock for compensation  83,500    84    24,545    —      24,629 
                         
Issuance of common stock as partial payment of accounts payable  389,274    389    125,783    —      126,172 
                         
Warrants issued as payment of accrued interest due to related party  —      —      60,509    —      60,509 
                         
Warrants issued for services  —      —      32,422    —      32,422 
                         
Buy back of common stock  (10,000)   (10)   (37,490)   —      (37,500)
                         
Net loss for the year ended February 29, 2008  —      —      —      (263,462)   (263,462)
                         
Balance at January 1, 2008  14,264,000   $792,754   $—     $(166,220)  $626,534 
                         
Issuance of common stock for consulting services  3,246,000    55,247    —      —      55,247 
                         
Issuance of common stock for placement agent services  3,450,000    58,719    —      —      58,719 
                         
Repurchase and retirement of common stock  (2,510,000)   (452,000)   —      —      (452,000)
                         
Issuance of common stock for cash, net of issuance costs  687,000    588,281    —      —      588,281 
                         
Reclassification of S Corporation accumulated deficit  —      (166,220)   —      166,220    —   
                         
Net income for the year ended December 31, 2008  —      —      —      4,774    4,774 
                         
Balance at December 31, 2008  488,984,171   $488,984   $387,797   $4,774   $881,555 
                         
Retirement of common stock  (3,832,765)   (3,833)   3,833           
                         
Net income for the year ended December 31, 2009  —      —      —      (587,859)   (587,859)
                         
Balance at December 31, 2009  485,151,406   $485,151   $391,630   $(583,085)  $293,696 
                         
Repurchase of common stock  (5,110,353)   (5,110)   (194,890)   —      (200,000)
                         
Recapiltalization  320,027,367    320,027    (320,027)   —      —   
                         
Contributed capital  —      —      400,000    —      400,000 
                         
Net income for the year ended December 31, 2010  —      —      —      (375,839)   (375,839)
                         
Balance at December 31, 2010  800,068,420    800,068    276,713    (958,924)   117,857 
                         
Issuance of common stock for services  5,625,000    5,625    45,076    —      50,701 
                         
Issuance of common stock for cash  23,323,331    23,323    117,698    —      141,021 
                         
Issuance of common stock for debt  57,023,138    57,024    260,783    —      317,807 
                         
Net income for the year ended December 31, 2011  —      —      —      (398,866)   (398,866)
                         
Balance at December 31, 2011  886,039,889   $886,040   $700,270   $(1,357,790)  $228,520 

 

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

F-4

SUNVALLEY SOLAR, INC.

Consolidated Statements of Cash Flows

 

  For the Years Ended 
  December 31, 
  2011  2010
      
OPERATING ACTIVITIES:         
          
Net loss $(398,866)  $(375,839)
Adjustments to reconcile net loss to net cash         
provided by operating activities:         
Depreciation and amortization  34,798    14,159 
Amortization of discount  506,096    —   
Gain on re-measurement of derivative  (220,279)   —   
Stock issued for services  50,701    —   
Changes in operating assets and liabilities:         
Accounts receivable  (3,965,810)   (251,110)
Inventory  1,078,150    1,419,633 
Prepaid expenses and other assets  1,504    (14,265)
Other receivables  5,781    57,897 
Costs in excess of billings on uncompleted contracts  (112,490)   (56,004)
Restricted cash  (12,500)   —   
Other assets  (23,141)   (1,250)
Accounts payable  1,260,318    (521,891)
Accrued warranty expenses  41,193    4,855 
Customer deposits  339,731    (23,485)
          
Net Cash Provided by (Used) in Operating Activities  (1,414,814)   252,700 
          
INVESTING ACTIVITIES:         
          
Purchase in property and equipment  (171,460)   (28,514)
          
Net Cash Used in Investing Activities  (171,460)   (28,514)
          
FINANCING ACTIVITIES:         
          
Proceeds from related party notes payable  100,000    —   
Repayment of related party notes payable  —      (175,000)
Repayments of long term debt  (14,160)   (12,475)
Cash acquired in recapiltalization  —      400,000 
Repurchase of common stock  —      (200,000)
Proceeds from factoring line  325,652    —   
Proceeds from sale of common stock  141,021    —   
Proceeds from convertible debt  650,000    —   
          
Net Cash Provided by Financing Activities  1,202,513    12,525 
          
NET INCREASE (DECREASE) IN CASH  (383,761)   236,711 
CASH AT BEGINNING OF YEAR    546,164    309,453
          
CASH AT END OF YEAR $162,403   $546,164 
          
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:         
          
CASH PAID FOR:         
Interest $2,938   $24,808 
Income taxes $—     $—   
          
NON-CASH INVESTING AND FINANCING ACTIVITIES         
Derivative liability $605,313   $—   
Common stock issued for debt $317,807   $—   
Equipment purchased under capital lease $16,505   $—   

 

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

 

F-5

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Organization

Sunvalley Solar, Inc. (the Company) was incorporated on August 16, 2007 under the laws of the State of Nevada as Western Ridge Minerals, Inc., Sunvalley Solar Inc. (the "Subsidiary"), formerly known as West Coast Solar Technologies Corporation, a California corporation, was incorporated on January 30, 2007.

 

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 the 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 the 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 the Company’s 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 Mr. Marco Bastidas and certain other shareholders resulted in there being 800,068,420 (4,191,000 pre-split) shares outstanding post acquisition. As a result, the shareholders of the Subsidiary became the controlling shareholders of the combined entity. In connection with the acquisition, $400,000 was contributed to the Company from a Company shareholder.

 

Accordingly, the transaction is accounted for as a recapitalization with the Subsidiary deemed to be the accounting acquirer and the Company the legal acquirer in the reverse acquisition. Consequently, the assets and liabilities and the historical operations of the Subsidiary prior to the Merger are reflected in the financial statements and are recorded at the historical cost basis of the Subsidiary. The Company’s consolidated financial statements after completion of the Acquisition include the assets and liabilities of both companies. Following the Acquisition the Company’s 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.

 

Description of Business

The Company markets, sells, designs and installs solar panels for residential and commercial customers. The Company’s primary market is in the state of California, however the Company may sell anywhere in the United States.

 

NOTE 2:   SIGNIFICANT ACCOUNTING POLICIES

 

Going Concern

As reflected in the accompanying financial statements, the Company has experienced recurring losses from operations through December 31, 2011 and has an accumulated deficit of $1,357,790 as of December 31, 2011. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

Management plans to raise additional operating capital through a private placement of the Company’s common stock. Management believes that with sufficient working capital the Company can produce sufficient sales to become cash flow positive and profitable which will allow it to continue as a going concern. There is no assurance that the Company will be successful in its plans.

 

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

F-6

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States 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 periods. Significant estimates made in preparing the financial statements include the allowance for doubtful accounts, accrued warranty, convertible debt derivative liabilities and discount expenses. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

 

Reclassification of Financial Statement Accounts

Certain amounts in the December 31, 2010 financial statements have been reclassified to conform to the presentation in the December 31, 2011 financial statements.

 

Operating Segments

The Company operates in one operating segment.

 

Cash and Cash Equivalents

Cash equivalents are comprised of certain highly liquid investments with original maturities of three months or less when purchased.  The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits.  The Company has not experienced any losses related to this concentration of risk.

 

Accounts Receivable

The Company’s trade accounts receivable consist primarily of accounts due from wholesale customers, and accounts due from installation customers, with the most significant amounts arising from installation contracts. Trade receivables are generally due within 30 days on wholesale contracts, while receivables on installation contracts are due in installments over terms ranging from five to seven years. The Company performs periodic credit evaluations of its customers’ respective financial conditions and does not require collateral. Credit losses have consistently been within management’s expectations. An allowance for doubtful accounts is recorded when it is probable that all or a portion of a trade receivables balance will not be collected. The Company’s allowance for doubtful accounts totals $178,447 and $80,000, as of December 31, 2011 and 2010, respectively.

 

Customer Deposits

Customer deposits represent advance payments received for installation projects. Typically the Company will receive five percent of a contract total at the commencement of the installation project. These amounts are recorded as liabilities until such time that the Company has performed the majority of its contractually agreed-upon work, at which time the deposits are recognized as revenue in accordance with the Company’s revenue recognition policy.

 

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.   

 

At each balance sheet date, the Company evaluates its ending inventory for excess quantities and obsolescence.  This evaluation includes an analysis of sales levels by product type.  Among other factors, the Company considers current product configurations, historical and forecasted demand, market conditions and product life cycles when determining the net realizable value of the inventory.  Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values.  Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventory.  The Company’s reserve for excess and obsolete inventory amounted to $-0- and $-0- as of December 31, 2011 and 2010.

F-7

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

Property and Equipment

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets.   Management evaluates useful lives regularly in order to determine recoverability taking into consideration current technological conditions.

 

Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed, and any resulting gain or loss is recorded. Fully depreciated assets are not removed from the accounts until physical disposition. The estimated useful lives are as follows:

 

Useful Life
Automobile 5 Years
Furniture 7 Years
Software 5 Years
Office Equipment 5 Years
Machinery 5 Years

 

Long-Lived Assets

In accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.

 

Based on this analysis, the Company believes that no impairment of the carrying value on its long-lived assets existed at December 31, 2011 and 2010.

 

Fair Value of Financial Instruments

For certain financial instruments, including accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities. In the case of the Notes Payable, the interest rate on the notes approximates the market rate of interest for similar borrowings. Consequently the carrying value of the Notes Payable also approximates the fair value. It is not practicable to estimate the fair value of the Notes Payable to Related Party due to the relationship of the counterparty.

 

Revenue Recognition

The completion of a solar installation project ranges from one to nine months; therefore, the Company recognizes revenue from a system installation under the completed contract method of accounting, pursuant to ASC 605. Revenue from system installations and sales of solar panels is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable and (4) collection of the related receivable is reasonably assured. The Company defines its services as having been substantially completed upon passing inspection by the Fire Department and obtaining the City’s Building Department’s approval after its final inspection of the installed system. Wholesale revenues are recognized pursuant to the same criteria; however, with wholesale arrangements the Company defines its delivery as having been completed at such time the customer takes possession of the Company’s product.

F-8

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

Cost of Sales

Cost of sales is comprised primarily of the cost of purchased product, as well as direct labor, inbound freight costs and other material costs required to complete products and installation projects. For installation projects, the direct labor costs are recorded as work-in-progress inventory and other installation project costs incurred by the Company are recorded as costs in excess of billings on uncompleted contracts before the project’s revenue is recognized.

 

Product Warranties

The Company warrants its products for various periods against defects in material or installation workmanship. The manufacturers of the solar panels and the inverters provide a warranty period of generally 25 years and l0 years, respectively. The Company will assist its customers in the event that the manufacturers’ warranty needs to be used to replace a defective solar panel or inverter. The Company provides for a l0-year warranty on the installation of a system and all equipment and incidental supplies other than solar panels and inverters that are recovered under the manufacturers’ warranty. Maintenance services such as cleaning the solar panels and checking the systems are offered to customers twice a year without a separate service charge.

 

The Company records a provision for the installation warranty, an expense included in cost of sales, based on management's best estimate of the probable cost to be incurred in honoring its warranty commitment. The Company's accrued warranty provision was $68,881 and $27,688 at December 31, 2011 and 2010, respectively.

 

Advertising Expenses

Advertising expenses are expensed as incurred.  Total advertising expenses amounted to $3,021 and $27,210 for the years ended December 31, 2011 and 2010, respectively.

 

Research and Development

Research and development costs are expensed as incurred and amounted to approximately $-0- and $-0- for the years ended December 31, 2011 and 2010, respectively. These costs are included in selling, general and administrative expenses in the accompanying statements of operations.

 

Income Taxes

The Company applies ASC 740, which requires the asset and liability method of accounting for income taxes.  The asset and liability method requires that the current or deferred tax consequences of all events recognized in the financial statements are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years. Deferred tax assets are reviewed for recoverability and the Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that all or some portion of the deferred tax assets will not be recovered.

 

The Company adopted ASC 740, at the beginning of fiscal year 2008. This interpretation requires recognition and measurement of uncertain tax positions using a “more-likely-than-not” approach, requiring the recognition and measurement of uncertain tax positions. The adoption of ASC 740 had no material impact on the Company’s financial statements. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will to be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

F-9

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted average number of outstanding common shares (restricted and free trading) during the periods presented. Basic loss per share and diluted loss per share are the same amount because the impact of additional common shares that might have been issued under the Company’s outstanding and exercisable warrants would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 191,235,412 and $-0- such potentially dilutive shares excluded as of December 31, 2011 and 2010, respectively.

 

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:   RESTRICTED CASH

 

In order to comply with the State of California's licensing requirement or contract bonds as of December 31, 2011 and 2010 the Company maintains a certificate of deposit in the amount of $25,000 and $12,500, respectively, with a financial institution.

 

NOTE 4:   INVENTORY

 

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

 

   2011  2010
Raw materials  $585   $8 
Work in Progress   12,361    6,741 
Finished goods   834,137    1,918,484 
Total Inventory  $847,083   $1,925,233 

 

NOTE 5:   PROPERTY AND EQUIPMENT

 

The following is a summary of property and equipment at December 31, 2011 and 2010:

 

   2011  2010
Computer equipment  $57,706   $32,407 
Buildings   113,874    —   
Furniture   16,655    16,065 
Software   2,368    2,368 
Vehicles   110,286    62,094 
Gross Property and Equipment   300,889    112,934 
Less: accumulated depreciation   (76,514)   (41,726)
Net Property and Equipment  $224,375   $71,208 

 

Depreciation expense for the years ended December 31, 2011 and 2010 was $34,798 and $14,159, respectively.

 

NOTE 6:   RELATED PARTY TRANSACTIONS

 

The Company owes $100,000 and $-0- for short-term related party loans with maturity dates of less than 1 year bearing an interest rate of 6.5%; per annum to its stockholders as of December 31, 2011 and 2010, respectively. The interest expense incurred for these short-term loans was $178 and $-0-, for the years ended December 31, 2011 and 2010, respectively.

F-10

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

NOTE 7: COSTS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS

 

The Company is currently involved in three major short-term solar panel installation projects. The Company is accounting for revenue and expenses associated with these three 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 December 31, 2011 and 2010, the Company has capitalized $168,493 and $56,003 of costs incurred in relation to installation projects. One of the major projects is estimated to be substantially completed by March 31, 2012 and the other two projects are estimated to be substantially completed by June 30, 2012.

 

NOTE 8:    NOTES PAYABLE

 

Notes payable outstanding as of December 31, 2011 and 2010 consisted of the following:

 

   2011  2010
Notes payable (1)          
  Current portion  $14,073   $13,256 
  Long-term portion   60,220    74,269 
Total Notes Payable  $74,293   $87,525 

 

(1)Arrangement with a bank having a maximum borrowing of $100,000; is collateralized by all business assets. Any principal amounts outstanding accrue interest at the bank's variable index rate (currently 6.00% as of December 31, 2011) plus 2% per annum.

 

Future maturities of notes payable are as follows:

 

2012   $14,073 
2013    14,940 
2014    15,861 
2015    16,839 
2016    12,580 
Thereafter    —   
Total   $74,293 

 

NOTE 9: CAPITAL LEASE

 

In September 2011, the Company entered a lease-to-own purchase 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.

Capital leases payable outstanding as of December 31, 2011 and 2010 consisted of the following:

 

   2011  2010
Forklift lease  $15,577   $—   
Total Capital Leases  $15,577   $—   

 

F-11

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

Future maturities of capital leases are as follows:

 

2012   $5,376 
2013    5,376 
2014    5,376 
2015    5,376 
2016    3,585 
       
Total minimum lease payments    25,089 
Less executory costs    1,348 
Net minimum lease payments    23,741 
Less amount representing interest    8,164 
       
Present value of minimum lease payments   $15,577 

 

NOTE 10: CONVERTIBLE DEBT

 

On January 7, 2011, the Company borrowed $100,000 in the form of a convertible note payable. The note 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. Pursuant to this conversion feature, the Company recorded a discount on debt in the amount of $100,000 on the note date. As of December 31, 2011, the Company had issued 15,652,625 shares of common stock upon conversion of the $100,000 note, along with $4,155 in accrued interest payable. As of December 31, 2011 the entire $100,000 debt discount had been amortized to interest expense.

 

On April 6, 2011, the Company borrowed $100,000 in the form of a convertible note payable. The note 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. Pursuant to this conversion feature, the Company recorded a discount on debt in the amount of $100,000 on the note date. As of December 31, 2011 the Company had issued 41,370,513 shares of common stock upon conversion of the $100,000 note, along with $4,250 in accrued interest payable. As of December 31, 2011 the entire $100,000 debt discount had been amortized to interest expense.

 

On July 21, 2011, the Company borrowed $100,000 in the form of a convertible note payable. The note 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. Pursuant to this conversion feature, the Company recorded a discount on debt in the amount of $100,000 on the note date. The note is due on April 17, 2012, is unsecured, and bears an interest rate of 8%. As of December 31, 2011 the Company has recorded $3,573 in accrued interest on the note. As of December 31, 2011 the Company had amortized $51,253 of the debt discount to interest expense, leaving $48,747 in unamortized debt discount at December 31, 2011.

 

On October 3, 2011, the Company borrowed $75,000 in the form of a convertible note payable. The note 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. Pursuant to this conversion feature, the Company recorded a discount on debt in the amount of $30,313 on the note date. The note is due on June 27, 2012, is unsecured and bears an interest rate of 8%. As of December 31, 2011 the Company had recorded $1,463 in accrued interest on the note. As of December 31, 2011 the Company had amortized $10,066 of the debt discount to interest expense, leaving $20,247 in unamortized debt discount at December 31, 2011.

F-12

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

On October 26, 2011, the Company borrowed $75,000 in the form of a convertible note payable. The note 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. Pursuant to this conversion feature, the Company recorded a discount on debt in the amount of $75,000 on the note date. The note is due on July 20, 2012, is unsecured and bears an interest rate of 8%. As of December 31, 2011 the Company had recorded $1,085 in accrued interest on the note. As of December 31, 2011 the Company had amortized $18,470 of the debt discount to interest expense, leaving $56,530 in unamortized debt discount at December 31, 2011.

 

On October 28, 2011, the Company borrowed $200,000 in the form of a convertible note. The note 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. Pursuant to this conversion feature, the Company recorded a discount on debt in the amount of $200,000 on the note date. The convertible debt is due on July 18, 2012, is unsecured and bears an interest rate of 8%. As of December 31, 2011 the Company had recorded $2,844 in interest on the note. As of December 31, 2011 the Company had amortized $313 of the debt discount to interest expense, leaving $199,687 in unamortized debt discount at December 31, 2011.

 

NOTE 11: 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 values of the conversion option of the January 7, 2011 note ($166,852), the April 6, 2011 note ($166,402), the July 21, 2011 note ($163,861), the October 3, 2011 note (30,313), the October 26, 2011 note (91,954), and the October 28, 2011 note (211,930) have 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 on derivative liability” until such time as the warrants are exercised or expire.

 

The Company uses the Black-Scholes option pricing model to value the derivative liabilities and subsequent remeasurement. Included in the models are the following assumptions: risk free rates ranging from 0.01% to 0.29%, and annual volatility ranging from 140% to 913%.

 

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.

 

During October 2011, the Company issued 41,370,513 shares of the Company’s common stock to convert the April 6, 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 December 31, 2011 and 2010, the Company has recognized a gain of $220,279 and $-0-, respectively.

F-13

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

NOTE 12:   EQUITY TRANSACTIONS

 

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.

 

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 and $4,155 in accrued interest.

 

During October 2011, the Company issued 41,370,513 shares of common stock upon conversion of $100,000 of its convertible debt and $4,250 in accrued interest.

 

Drawdown Equity Financing Agreement - On December 31, 2010, the Company entered into a Drawdown Equity Financing Agreement (the “DEFA”) and an accompanying Registration Rights Agreement (the “RRA”).  Under the DEFA, the Company agreed to issue and sell up to $10,000,000 worth of the Company’s common stock over a three year period. The DEFA entitles the Company to request advances, or “draw-downs,” periodically over the term of the agreement.  Upon delivery of a drawdown notice the Company can affect the sale of common stock, which can be 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 is 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 consecutive trading days immediately after the drawdown notice date.  There must be a minimum of five trading days between each drawdown notice date. Under the DEFA, the lender shall 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 of the average closing bid price of the common stock over the preceding ten trading days prior to the drawdown notice date (the "floor"). At the Company’s sole discretion, the Company may waive its right with respect to the floor and allow the lender to sell any shares below the floor price.  The floor price restriction only applies to the five consecutive trading days immediately after the drawdown notice date.

 

During the year ended December 31, 2011, the Company issued 23,323,331 shares of its common stock pursuant to the Equity Drawdown, resulting in net cash proceeds of $141,021.

 

NOTE 13: FACTORING LINE PAYABLE

 

During the year ended December 31, 2011, the Company borrowed a total of $314,640 from a factoring company against its accounts receivable. The factoring line charges a discount of approximately 0.95% for each 15 day period of the amount of the receivable remains unpaid. As of December 31, 2011, accrued interest and fees on this factoring line totaled $11,012. The Company has a credit facility of up to $600,000.

F-14

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

NOTE 14:   INCOME TAXES

 

The FASB has issued FASB ASC 740-10 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position.  If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.  As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740-10.  

 

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Deferred tax assets and the valuation account are as follows:

 

   2011  2010
Deferred tax assets:          
NOL carryover  $50,520   $127,786 
Valuation allowance   (50,520)   (127,786)
Net deferred tax asset  $—     $—   

 

The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 34% to pretax income from continuing operations for the years ended December 31, 2011 and 2010. The components of income tax expense are as follows:

 

   2011  2010
Operating loss carry forwards  $401,540   $327,658 
Gain on derivative liability   74,895    —   
Valuation allowance   (476,435)   (327,658)
   $—     $—   

 

The Company currently has no issues creating timing differences that would mandate deferred tax expense. Net operating losses would create possible tax assets in future years. Due to the uncertainty of the utilization of net operating loss carry forwards, an evaluation allowance has been made to the extent of any tax benefit that net operating losses may generate. A provision for income taxes has not been made due to net operating loss carry-forwards of $1,112,286 and $963,699 as of December 31, 2011 and 2010, respectively, which may be offset against future taxable income through 2031. No tax benefit has been reported in the financial statements.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

   2011  2010
Federal statutory rate (34%)  $(135,614)  $(127,786)
Non-deductable expenses   —      —   
State tax benefit, net of federal tax effect   (13,163)   (12,403)
Change in valuation allowance   148,777    140,188 
 Provision for income taxes  $—     $—   

 

F-15

 SUNVALLEY SOLAR, INC.

Notes to the Consolidated Financial Statements

December 31, 2011 and 2010

 

The Company did not have any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months. The Company includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision for income taxes.  As of December 31, 2011 and 2010, the Company had no accrued interest or penalties related to uncertain tax positions. The tax years that remain subject to examination by major taxing jurisdictions are for the years ended December 31, 2011, 2010, 2009, and 2008.

 

NOTE 15:    COMMITMENTS AND CONTINGENCIES

 

Office Lease - The Company leases an office under an operating lease that expires on May 31, 2011.  Total rent expense amounted to $39,300 and $38,000 for the fiscal years ended December 31, 2011 and 2010, respectively.

 

Minimum base lease payments required to be made during 2012 total $34,978.

 

Legal Proceedings - From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

 

NOTE 16:   CONCENTRATIONS OF RISK

 

Supplier Concentrations

The Company purchases solar panels from one manufacturer during the years ended December 31, 2011 and 2010, respectively. For the years ended December 31, 2011 and 2010, these vendors accounted for approximately 47% and 97%, respectively, of total inventory purchases.

 

Customer Concentrations

For the years ended December 31, 2011 and 2010, one and two customers, respectively, represented more than 10% of the Company’s sales. This translates to approximately 64% and 19%, respectively, of the Company's annual net revenues.

 

NOTE 17:   SUBSEQUENT EVENTS

 

Subsequent to the year ended December 31, 2011 through March 19, 2012 the Company executed several issuances of common stock totaling 30,000,000 shares to a third party and received net cash proceeds of $75,330.

The Company entered into a convertible note of $78,500 dated February 15, 2012 for which the funding was received on February 22, 2012. 

 

During January and February 2012, the Company issued 52,184,755 shares of common stock upon conversion of $100,000 of its convertible debt issued during 2011, and $4,000 in accrued interest.

 

On February 24, 2012 the Company borrowed $21,308 from one of its stockholders. The Note has a maturity date of less than one year and bears interest at a rate of 6.5% per annum.

 

During March 2012, the Company paid $344,334 to its factoring provider, inclusive of accrued fees, and the Company borrowed a total of $726,741 from the factoring provider against its accounts receivable with a discount fee of approximately 0.95% for each 15-day period the accounts receivable remain unpaid. The Company’s credit facility with the factoring company was increased to one million in March 2012.

 

In accordance with ASC 855-10 Company management reviewed all material events through the date of this report and there are no additional material subsequent events to report.

 

F-16

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

No events occurred requiring disclosure under Item 307 and 308 of Regulation S-K during the fiscal year ending December 31, 2011.

 

Item 9A(T). Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal year ended December 31, 2011. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.

 

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 Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Based upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this annual report.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2011 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2011, our internal control over financial reporting was not effective. Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.

 

We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the following changes during our fiscal year ending December 31, 2011: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) and (ii)_are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

Item 9B. Other Information

 

None

20

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The following information sets forth the names, ages, and positions of our current directors and executive officers as of December 31, 2011.

 

Name Age Office(s) held
Zhijian (James) Zhang 45 President, CEO, Director
Mandy Chung 44 Chief Financial Officer, Secretary, Treasurer
Hangbo (Henry) Yu 58 General Manager, Director
Fang Xu 46 Chief Technology Officer
Shirley Liao 43 Director of Administration
Anyork Lee 62 Director

 

Set forth below is a brief description of the background and business experience of each of our current executive officers and directors.

 

Zhijian (James) Zhang – Dr. Zhang is our President, CEO, and a member of our board of directors. He has held these positions since January of 2007. Dr. Zhang graduated from Tsinghua University with a Ph.D. in opto-electronics. He has over 15 years of experience in opto-electronics and the semiconductor industry. From 2006 to 2008, he held the position of senior manager at Motorola, a leading telecommunication equipment provider. From 2004 to 2006, he held the position of Director at ZTE San Diego, also a leading telecommunication equipment provider.

 

Dr.Zhang has a strong reputation as an executive in the opto-electronics/semiconductor industry, including the solar energy field. Dr. Zhang has quality leadership experience in business operations, especially in product and program development, product development procedures, and milestone setting and enforcement, and R&D team building.

 

Mandy Chung – Ms. Chung is our Chief Financial Officer, Secretary, and Treasurer.  She has held these positions since August of 2008. Ms. Chung co-founded Chung & Chung Accountancy Corporation, CPAs (CCAC) in 2004 and she is licensed as a Certified Public Accountant in California. Ms. Chung is one of the partners in CCAC and she provides audit, review, compilation, consulting, tax services and financial planning to various clients. Ms. Chung has been working for CCAC for the past five years since its establishment.

 

Ms. Chung graduated from Texas A&M University (College Station) with a Master’s degree in Finance and a Bachelor’s degree in Accounting. Ms. Chung has over 15 years of public accounting experience in providing auditing, accounting, business consulting and tax services to a wide range of industries. She has extensive experience in performing reviews and audits for various organizations, including publicly reporting companies. In addition, Ms. Chung helped the former founder of Dietrich Coffee to prepare a ten-year business and financial plan to establish a new series of coffee stores. Ms. Chung also conducted various incurred costs audits for MGM Mirage, Los Angeles County Metropolitan Transportation Authority and Caltrans. On a daily basis, Ms. Chung is responsible for the accounting operations and record keeping of Sunvalley Solar Inc.  Her duties include customer deposits and check payments recording, accounts receivable, accounts payable and inventory recording, customers’ credit evaluation, employees hiring and termination issues, sales tax filing, payroll tax filing, monthly bank reconciliation, preparing financial statements, performing preparation for annual audit, quarterly review and income tax return filing.  Approximately 50% of Ms.Chung’s time is used to perform her job as the CFO of Sunvalley Solar Inc.

21

Hangbo (Henry) Yu – Mr. Yu is our General Manager and a member of our Board of Directors. He has served in these positions since January of 2007 and was the founder of our business. From 2004 through 2006, Mr. Yu was the General Manager and a board member of International Transportation Corp., Canada. He graduated from Beijing University of Aeronautics and Astronautics with a Bachelor’s degree in Structure Design. He has run several startup companies in China and Canada, respectively. Over the past 12 months, Mr. Yu has been working to establish relationships with major solar power equipment manufacturers in China. Mr. Yu is an experienced business and operations manager. He has over 20 years of experience in import-export, logistics, international transportation, solar business operation and solar power system project planning and field managing.

 

Fang Xu – Dr. Xu is our Chief Technology Officer.  He has served in this position since July of 2008. From 2005 through June of 2008, he was a staff design engineer at Via Telecom, Inc. He graduated from the Electrical Department of Beijing University in China, has a Masters Degree in Electronics from the University of Alabama, and a PhD in Photonics from the University of California, San Diego. Dr. Xu is currently in charge of our research and development efforts . Dr. Xu has over 13 years of experience in both in academic and industrial environments. Dr. Xu has extensive knowledge in photonics, and optics, as well as micro and nano-scale device processing technologies. In addition, Dr. Xu has hands on experience in making the nano-scale structure that modifies the effective dielectric properties of optical materials. Dr. Xu has been a pioneer in the use polarization selective materials to construction micro and nanoscale diffractive optical elements.

 

Shirley Liao – Mrs. Liao is our Director of Administration.  She has served Sunvalley Solar, Inc. in this position since January of 2007. She graduated from Guangxi University in Art and Financial Management. Before moving to the United States, Shirley Liao worked in an international trading company (Audio & Video Company of Guangxi) as an executive management member. While working there, Mrs. Liao acquired experience in international trade as well as general sales management. From 1997 through 1998, she worked at Trust Bank as a Loan Officer. She has also worked at Coldwell Banker George Realty since 2000 as a real estate broker. Through the real estate sales business, she established good relationships with local societies, business owners, banks, builders and government agencies. Her excellent market and sales experiences as well as connections to customers bring an exceptional value to the company. Currently, Mrs. Liao does not spend working hours at Coldwell Banker George Realty. She is a full time employee devoting forty hours per week to Sunvalley Solar, Inc.

 

Anyork Lee – Mr. Lee is a member of our Board of Directors.  He graduated from National Taiwan University, Taiwan and got his MBA from California State University, Stanislaus, in 1979. Mr. Lee has extensive connections to various Chinese-American and other organizations and societies. Mr. Lee has been a Director of the Board of Alhambra Medical University since 2005 and served as a Governing Board Member of Walnut Valley from 1997 to 2005. He is the president of CAAM (California Alliance of Acupuncture Medicine), Chairman of Southern California Chapter of APIAPAA (Asian Pacific Island American Public Affair Association), a Planning Committee Member of Susan Samueli Center for Integrative Medicine at University of California, Irvine, a Board Member of the Chinese American Association of Diamond Bar, and a member of the Board of Trustees of Walnut Valley Unified School District. Mr. Lee’s other affiliations include:

 

Jan. 2008 – present Council of Acupuncture & Oriental Medical Association, President

April 2007 – present Asian Pacific Island American Public Affair Association-

Southern California Chapter, Chair

Jan. 2007 – present Ca. Alliance of Acupuncture Medicine, President Emeritus

Aug. 2005 – present University of California, Irvine, Susan Samueli Center for Integrative Medicine, Planning Committee Member

Oct. 2004 – present DB 4Youth, member Asian American Acupuncture College, San Diego

 

For the past five years, Mr. Lee has worked as a licensed health practitioner at two private clinics, Dr. Lee Acupuncture and Alhambra Medical University.

 

Term of Office

 

Our Directors are appointed for a one year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.

22

Family Relationships

 

There are no family relationships between or among the directors, executive officers or persons nominated or chosen by the Company to become directors or executive officers other than Shirley Liao and Hangbo (Henry) Yu who are wife and husband.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

 

Committees of the Board

 

We do not currently have a compensation committee, executive committee, or stock plan committee.

 

Audit Committee

 

We do not have a separately-designated standing audit committee. The entire Board of Directors performs the functions of an audit committee, but no written charter governs the actions of the Board when performing the functions of what would generally be performed by an audit committee. The Board approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor. Our Board of Directors, which performs the functions of an audit committee, does not have a member who would qualify as an “audit committee financial expert” within the definition of Item 407(d)(5)(ii) of Regulation S-K. Mandy Chung, our CFO, Secretary, and Treasurer, attends all meetings of the Board of Directors, including those meetings at which the board is performing those functions which would generally be performed by an audit committee. Mrs. Chung is licensed as a Certified Public Accountant in California. Mrs. Chung has over 15 years of public accounting experience in providing auditing, accounting, business consulting and tax services to a wide range of industries. She has extensive experience in performing reviews and audits for various organizations including publicly reporting companies. She also had prior audit experience in the filing process for a start-up company that filed with SEC to become a publicly reporting company. We believe that Mrs. Chung’s accounting expertise and audit experience allows her to provide satisfactory counsel to the Board and that, at our current size and stage of development, the addition of a special audit committee financial expert to the Board is not necessary.

 

 Nomination Committee

 

Our Board of Directors does not maintain a nominating committee. As a result, no written charter governs the director nomination process. Our size and the size of our Board, at this time, do not require a separate nominating committee.

23

When evaluating director nominees, our directors consider the following factors:

 

- The appropriate size of our Board of Directors;
- Our needs with respect to the particular talents and experience of our directors;
- The knowledge, skills and experience of nominees, including experience in finance, administration or public service, in light of prevailing business conditions and the knowledge, skills and experience already possessed by other members of the Board;
- Experience in political affairs;
- Experience with accounting rules and practices; and
- The desire to balance the benefit of continuity with the periodic injection of the fresh perspective provided by new Board members.

 

Our goal is to assemble a Board that brings together a variety of perspectives and skills derived from high quality business and professional experience. In doing so, the Board will also consider candidates with appropriate non-business backgrounds.

 

Other than the foregoing, there are no stated minimum criteria for director nominees, although the Board may also consider such other factors as it may deem are in our best interests as well as our stockholders. In addition, the Board identifies nominees by first evaluating the current members of the Board willing to continue in service. Current members of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Board then identifies the desired skills and experience of a new nominee in light of the criteria above. Current members of the Board are polled for suggestions as to individuals meeting the criteria described above. The Board may also engage in research to identify qualified individuals. To date, we have not engaged third parties to identify or evaluate or assist in identifying potential nominees, although we reserve the right in the future to retain a third party search firm, if necessary. The Board does not typically consider shareholder nominees because it believes that its current nomination process is sufficient to identify directors who serve our best interests.

 

Code of Ethics

 

As of December 31, 2011, we had not adopted a Code of Ethics for Financial Executives, which would include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

 

Item 11. Executive Compensation

 

Compensation Discussion and Analysis

 

We presently do not have employment or compensation agreements with any of our named executive officers and have not established any overall system of executive compensation or any fixed policies regarding compensation of executive officers.  Currently, our executive officers receive fixed cash compensation as set forth below.

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Summary Compensation Table

 

The table below summarizes all compensation awarded to, earned by, or paid to our former or current executive officers for the fiscal years ended December 31, 2011 and 2010.

 

SUMMARY COMPENSATION TABLE

Name and

principal position

Year

Salary

($)

Bonus

($)

Stock Awards

($)

Option

Awards

($)

Non-Equity

Incentive Plan

Compensation

($)

Nonqualified

Deferred

Compensation

Earnings ($)

All Other

Compensation

($)

Total

($)

Zhijian (James) Zhang, President, CEO, and Director

2011

2010

101,977

98,500

46,353

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

148,330

98,500

Mandy Chung, CFO, Secretary, and Treasurer

2011

2010

50,134

37,500

22,795

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

72,979

37,500

Hangbo (Henry) Yu, General Manager and Director

2011

2010

110,754

100,000

46,603

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

157,357

100,000

Fang Xu, CTO

2011

2010

8,856

9,300

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

8,856

9,300 

Shirley Liao, Director of Administration

2011

2010

62,961

61,502

22,895

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

85,856

61,502

 

Narrative Disclosure to the Summary Compensation Table

 

Currently, our executive officers receive fixed cash compensation as set forth in the Summary Compensation Table. We presently do not have employment or compensation agreements with any of our named executive officers and have not established any overall system of executive compensation or any fixed policies regarding compensation of executive officers.

 

Stock Option Grants

 

We have not granted any stock options to the executive officers or directors since our inception.

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Outstanding Equity Awards at Fiscal Year-End

 

The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of December 31, 2011.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS

Name

Number of Securities Underlying Unexercised Options (#) Exercisable

Number of Securities Underlying Unexercised Options  (#) Unexercisable

Equity Incentive  Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)

Option Exercise  Price  ($)

Option Expiration Date  

Number Of Shares or Shares of Stock That Have Not Vested (#)

Market

Value of Shares or Shares of Stock That Have Not Vested

($)

 

Equity Incentive Plan Awards:  Number of Unearned  Shares, Shares or Other Rights That Have

 Not Vested (#)

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Shares or Other Rights That Have Not Vested (#)
Zhijian (James) Zhang, President, CEO, and Director - - - - - - - - -
Mandy Chung, CFO, Secretary, and reasurer - - - - - - - - -
Hangbo (Henry) Yu, General Manager and Director - - - - - - - - -
Fang Xu, CTO - - - - - - - - -
Shirley Liao, Director of Administration - - - - - - - - -

 

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Director Compensation

 

The table below summarizes all compensation of our directors for our last completed fiscal year.

 

DIRECTOR COMPENSATION
Name Fees Earned or Paid in Cash ($) Stock Awards ($)

 Option Awards ($)

Non-Equity Incentive Plan Compensation ($) Non-Qualified Deferred Compensation Earnings ($)

 

All Other Compensation ($)

 

 

 

Total ($)

Zhijian (James) Zhang 0 -0 -0 -0 -0 -0 -0
Hangbo (Henry) Yu 0 -0 -0 -0 -0 -0 -0
Anyork Lee 1,770 -0 -0 -0 -0 -0 1,770

 

Narrative Disclosure to the Director Compensation Table

 

We do not currently provide any set compensation to directors for their service as directors.

 

Employment Agreements with Current Management

 

We do not currently have any employment agreements in place with any of our executive officers.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth the beneficial ownership of our capital stock by each executive officer and director, by each person known by us to beneficially own more than 5% of any class of stock and by the executive officers and directors as a group. Except as otherwise indicated, all Shares are owned directly and the percentage shown is based on 968,224,644 shares common stock issued and outstanding as of March 28, 2012.

 

Title of class Name and address of beneficial owner (1)

Amount of

beneficial ownership

Percent of class
Current Executive Officers & Directors:
Common Stock

Zhijian (James) Zhang

12161 Salix Way

San Diego CA 92129

88,075,400 shares 9.10%
Common Stock

Hangbo (Henry) Yu

3309 S. Gauntlet Dr.

West Covina, CA 91792

63,558,945 shares 6.57%
Common Stock

Anyork Lee

1050 Yorba Linda Blvd.

Placentia, CA 92870

30,664,190 shares 3.17%
Common Stock

Shirley Liao

3309 S Gauntlet Dr.

West Covina, CA 91792

8,973,602 shares 2.21%
Common Stock

Mandy Chung

1059 Moreno Way

Placentia, CA 92870

6,899,360 shares 0.71%
Common Stock

Fang Xu

11239 Vandemen Way

San Diego, CA 92131

127,700 shares 0.01%
Total of All Current Directors and Officers:
Common Stock 198,299,197 shares 21.77%
More than 5% Beneficial Owners
Common Stock

Haibo Yu

38499 Berkeley Common

Fremont  CA  94536

53,899,668 shares 5.57%

 

(1)

As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after such date.

 

27

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Except as set forth below, none of our directors or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to all of our outstanding shares, nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct or indirect, in any transaction since our incorporation or in any presently proposed transaction which, in either case, has or will materially affect us:

 

1. We previously borrowed the sum of $100,000 from our President, James Zhang. This loan bore interest at a rate of 6.5% per annum. The principal of $100,000, plus interest of $9,941.44, was repaid in 2010.

 

2. We previously borrowed the sum of $75,000 from our General Manager, Hangbo (Henry) Yu. This loan also bore interest at a rate of 6.5% per annum. The principal of $75,000, plus interest of $9,205.68, was repaid in 2010.

 

3. On December 21, 2011, we borrowed the sum of $50,000 from James Zhang, our President, under the terms of a Private Loan Agreement. The loan is due within a year and bears interest at a rate of 6.50% per year.

 

4. On December 21, 2011, we borrowed the sum of $50,000 from Hangbo (Henry) Yu, our General Manager, under the terms of a Private Loan Agreement. The loan is due within a year and bears interest at a rate of 6.50% per year.

 

5. On February 24, 2012, we borrowed the sum of $21,307.90 from Hangbo (Henry) Yu, our General Manager, under the terms of a Private Loan Agreement. The loan is due within a year and bears interest at a rate of 6.50% per year.

 

Director Independence

 

We are not a “listed issuer” within the meaning of Item 407 of Regulation S-K and there are no applicable listing standards for determining the independence of our directors. Applying the definition of independence set forth in Rule 4200(a)(15) of The Nasdaq Stock Market, Inc., we believe that Anyork Lee is our only independent director.

 

Item 14. Principal Accounting Fees and Services

 

Below is the table of Audit Fees (amounts in US$) billed by our auditor in connection with the audit of the Company’s annual financial statements for the years ended:

 

Financial Statements for the Year Ended:  Audit Services  Audit Related Fees  Tax Fees  Other Fees
December 31, 2011  $28,500   $0   $0   $0 
December 31, 2010  $18,000   $0   $0   $0 

 

PART IV

 

Item 15. Exhibits, Financial Statements Schedules

 

(a) Financial Statements and Schedules

 

The following financial statements and schedules listed below are included in this Form 10-K.

 

Financial Statements (See Item 8)

28

 


(b)
Exhibits

 

Exhibit Number Description
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 Drawdown Equity Financing Agreement (2)
10.2 Registration Rights Agreement (2)
10.3 Securities Purchase Agreement with Asher Enterprises, Inc. dated February 15, 2012
10.4 Convertible Promissory Note issued to Asher Enterprises, Inc. dated February 15, 2012
10.5 Securities Purchase Agreement with Asher Enterprises, Inc. dated October 18, 2011 (4)
10.6 Convertible Promissory Note issued to Asher Enterprises, Inc. dated October 18, 2011 (4)
10.7 Securities Purchase Agreement with Asher Enterprises, Inc. dated September 23, 2011 (3)
10.8 Convertible Promissory Note issued to Asher Enterprises, Inc. dated September 23, 2011 (3)
10.9 Securities Purchase Agreement with Tonaquint, Inc. dated October 18, 2011 (4)
10.10 Convertible Promissory Note issued to Tonaquint, Inc. dated October 18, 2011 (4)
10.11 Factoring and Security Agreement with CapFlow Funding Group Managers LLC dated November 10, 2011
10.12 Premises Lease (2)
10.13 First Amendment to Premises Lease
10.14 Distribution Contract – TianWei SolarFilms Co. (2)
10.15 Private Loan Agreement with James Zhang dated December 21, 2011
10.16 Private Loan Agreement with Henry Yu dated December 21, 2011
10.17 Private Loan Agreement with Henry Yu dated February 24, 2012
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), 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

 

(1) Incorporated by reference to Annual Report on Form 10-K filed on March 31, 2011.
(2) Incorporated by reference to Annual Report on Form 10-K/A filed on May 12, 2011.
(3) Incorporated by reference to Current Report on Form 8-K filed on October 18, 2011.
(4) Incorporated by reference to Current Report on Form 8-K filed on October 24, 2011.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the 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.
 
By: /s/ James Zhang

James Zhang

President, Chief Executive Officer,

and Director

 

April 16, 2012

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By: /s/ James Zhang

James Zhang

President, Chief Executive Officer,

and Director

 

April 16, 2012

 

By: /s/ Mandy Chung

Mandy Chung

Chief Financial Officer, Principal Accounting Officer, Secretary, and Treasurer

 

April 16, 2012

 

By: /s/ Hangbo (Henry) Yu

Hangbo (Henry) Yu

General Manager, Director

 

April 16, 2012

 

By: /s/ Anyork Lee

Anyork Lee

Director

 

April 16, 2012

 

 

30