UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X]	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, 2012
[  ]	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from to __________
	Commission File Number: 333-150692

 

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

 

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

 

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

(Address of principal executive offices)

 

(909) 598-0618

(Registrant’s telephone number)

_____________________________________________________________________

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

 

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

 

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

 

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

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

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,037,597 common shares as of November 19, 2012.

 

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

 

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

 

PART I - FINANCIAL INFORMATION

 

Item 1.      Financial Statements

 

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

 

F-1	Condensed Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011;
F-2	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited);
F-3	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited);
F-4	Notes to Condensed Consolidated Financial Statements.

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2012 are not necessarily indicative of the results that can be expected for the full year.

 

SUNVALLEY SOLAR, INC.

Consolidated Balance Sheets

 

	September 30, 2012				December 31, 2011
ASSETS	(unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	364,488			$	162,403
Restricted cash		25,000				25,000
Accounts receivable, net		5,342,596				4,512,198
Inventory		508,927				847,083
Costs in excess of billings on uncompleted contracts		140,651				168,493
Other receivables		4,000				1,700
Prepaid expenses and other current assets		9,824				14,289
Total current assets		6,395,486				5,731,166
PROPERTY AND EQUIPMENT, NET		84,316				224,375
OTHER ASSETS
Other assets		25,870				28,827
Total other assets		25,870				28,827
TOTAL ASSETS	$	6,505,672			$	5,984,368
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	4,006,402			$	4,135,229
Customer deposits		378,327				409,801
Accrued warranty		80,337				68,881
Current portion of long-term debt		14,622				14,073
Current portion of capital lease		2,655				2,278
Convertible debt, net		182,549				124,789
Related party notes payable		—				100,000
Factoring payable		532,045				325,652
Derivative liability		327,247				501,626
Total current liabilities		5,524,184				5,682,329
LONG-TERM LIABILITIES
Capital leases		11,640				13,299
Notes payable		64,273				60,220
Total long-term liabilities		75,913				73,519
TOTAL LIABILITIES		5,600,097				5,755,848
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 1,000,000 Class A shares authorized, 950,000 and -0- shares issued and outstanding, respectively		950				—
Common stock, $0.001 par value, 90,000,000 shares authorized, 11,702,432 and 1,772,080 shares issued and outstanding, respectively		11,702				1,772
Additional paid-in capital		2,976,470				1,584,538
Accumulated deficit		(2,083,547	)			(1,357,790	)
Total Stockholders' Equity		905,575				228,520
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	6,505,672			$	5,984,368

 

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

SUNVALLEY SOLAR, INC.

Consolidated Statements of Operations

(unaudited)

 

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2012				2011				2012				2011
REVENUES	$	2,262,720			$	202,030			$	3,204,428			$	2,940,413
COST OF SALES		1,449,672				200,704				2,002,856				2,380,531
GROSS PROFIT		813,048				1,326				1,201,572				559,882
OPERATING EXPENSES
Salary and wage expense		142,016				175,307				458,708				457,222
Professional fees		88,696				67,072				132,189				110,565
Selling, general and administrative expenses		120,898				74,932				374,528				291,127
Total operating expenses		351,610				317,311				965,425				858,914
LOSS FROM OPERATIONS		461,438				(315,985	)			236,147				(299,032	)
OTHER INCOME (EXPENSES)
Gain on sale of property		(300	)			—				9,181				—
Gain (loss)on derivative liability		(198,901	)			125,551				261,300				172,025
Loss on conversion of debt		(520,000	)			—				(703,634	)			—
Default penalty on convertible notes		89,125				—				(89,125	)			—
Interest income		879				2,374				1,532				11,965
Interest expense		(145,319	)			(5,221	)			(441,158	)			(13,837	)
Total other income (expenses)		(774,516	)			122,704				(961,904	)			170,153
LOSS BEFORE TAXES		(313,078	)			(193,281	)			(725,757	)			(128,879	)
Provision for income taxes		—				—				—				—
NET LOSS	$	(313,078	)		$	(193,281	)		$	(725,757	)		$	(128,879	)
BASIC AND DILUTED LOSS PER SHARE Basic and Diluted	$	(0.07	)		$	(0.12	)		$	(0.16	)		$	(0.08	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Basic and Diluted		4,467,112				1,650,687				4,467,112				1,623,304

 

 

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

SUNVALLEY SOLAR, INC.

Consolidated Statements of Cash Flows 

(unaudited)

 

	For the Nine Months Ended September 30,
	2012				2011
OPERATING ACTIVITIES:
Net loss	$	(725,757	)		$	(128,879	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		30,428				22,240
Amortization of discount		397,181				—
(Gain) loss on re-measurement of derivative		(261,300	)			(172,025	)
Loss on conversion of debt - related party		703,634				—
(Gain) loss on sale of property		(9,438	)			—
Stock-based compensation		68,400				50,700
Penalty for default on convertible note		99,218
Changes in operating assets and liabilities:
Accounts receivable		(830,398	)			(1,266,562	)
Inventory		338,156				258,346
Prepaid expenses and other assets		4,465				(118,184	)
Other receivables		(2,300	)			(5,828	)
Costs in excess of billings on uncompleted contracts		27,842				(318,687	)
Other assets		2,957				(22,211	)
Accounts payable		(107,597	)			954,954
Accrued warranty expenses		11,456				—
Factoring payable		124,345				—
Customer deposits		(31,474	)			113,530
Net Cash Provided by (Used) in Operating Activities		(160,182	)			(632,606	)
INVESTING ACTIVITIES:
Sale of property		119,069				—
Purchase in property and equipment		—				(136,307	)
Net Cash (Used) in Investing Activities		119,069				(136,307	)
FINANCING ACTIVITIES:
Proceeds from related party notes payable		71,308				—
Repayment of related party notes payable		(67,308	)
Repayments of long term debt		(10,398	)			(40,123	)
Proceeds from convertible debt		78,500				300,000
Repayment of capital lease		(1,282	)			—
Repayment of factoring line		(1,163,407	)			—
Proceeds from factoring line, net		1,245,455				—
Proceeds from sale of common stock		75,330				103,821
Proceeds from notes payable		15,000				—
Net Cash Provided by Financing Activities		243,198				363,698
NET INCREASE (DECREASE) IN CASH		202,085				(405,215	)
CASH AT BEGINNING OF PERIOD		187,403				546,165
CASH AT END OF PERIOD	$	389,488			$	140,950
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest	$	9,533			$	4,402
Income taxes	$	800			$	800
NON-CASH INVESTING AND FINANCING ACTIVITIES
Derivative liability	$	78,500			$	316,390
Common stock issued for debt	$	451,448			$	104,000
Notes payable for asset purchases	$	—			$	46,611
Stock issued for conversion of related party notes payable	$	104,000			$	—

 

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

SUNVALLEY SOLAR, INC.

Consolidated Notes to Condensed Consolidated Financial Statements

September 30, 2012 and December 31, 2011

 

NOTE 1 - CONDENSED FINANCIAL STATEMENTS

 

The accompanying financial statements have been prepared by the Company without audit.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2012, and for all periods presented herein, have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2011 audited financial statements.  The results of operations for the periods ended September 30, 2012 and 2011 are not necessarily indicative of the operating results for the full years.

 

NOTE 2 - GOING CONCERN

 

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

 

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

 

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

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES

 

Reclassification of Financial Statement Accounts
Certain amounts in the September 30, 2011 financial statements have been reclassified to conform to the presentation in the September 30, 2012 financial statements.

Use of Estimates

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

 

Recent Accounting Pronouncements

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

 

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.   

SUNVALLEY SOLAR, INC.

Consolidated Notes to Condensed Consolidated Financial Statements

September 30, 2012 and December 31, 2011

 

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The Company’s inventory consisted of the following at September 30, 2012 and December 31, 2011:

 

	2012				2011
Raw materials	$	468			$	585
Work in Progress		12,411				12,361
Finished goods		496,048				834,137
	$	508,927			$	847,083

 

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. Dilutive instruments include 950,000 shares to be issued upon the conversion of the Series A Convertible Preferred Stock. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 4,467,112  and 1,655,910 such potentially dilutive shares excluded as of September 30, 2012 and December 31, 2011, respectively. 

 

NOTE 4 – COSTS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS

 

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

 

As of September 30, 2012 and December 31, 2011, the Company has capitalized $140,651 and $168,493 of costs incurred in relation to installation projects. The Company expects four major projects to be completed or substantially completed by December 31, 2012.

 

NOTE 5 – CAPITAL LEASE

 

The Company leased equipment in September 2011 and such lease has been classified as a capital lease because it contained a beneficial by-out option at the end of the lease.   The Company has used the discounted value of future payments as the fair value of this asset and has recorded the discounted value of the remaining payments as a liability.

As of September 30, 2012 the net book value of this leased asset is $12,791 as the Company recognizes $14,295 in remaining lease obligations. 

NOTE 6– RELATED PARTY TRANSACTIONS

 

During the nine months ended September 30, 2012, the Company borrowed an additional $71,308 from two of the officers of the Company. These notes accrues interest at 6.5 percent per annum, are unsecured and due on demand. As of December 31, 2011, the Company owed $100,000 for short-term related party loans with maturity dates of less than 1 year bearing an interest rate of 6.5%; per annum. During the nine month period, the Company paid $67,308 in reduction of the notes. On May 22, 2012 the holders converted $104,000 of their debt into 821,812 shares of common stock of the Company. The Company then immediately repurchased the shares as treasury stock and assumed the $104,000 notes from the related parties. On July 3, 2012 the Company cancelled the 821,812 shares of its treasury stock which bought back from the two officers of the Company. The Company recognized a loss of $183,634 from the May 22, 2012 conversion.

SUNVALLEY SOLAR, INC.

Consolidated Notes to Condensed Consolidated Financial Statements

September 30, 2012 and December 31, 2011

 

NOTE 6– RELATED PARTY TRANSACTIONS (CONTINUED)

 

On July 20, 2012 the holders of the notes converted the $104,000 notes payable again for 4,160,000 shares of common stock. The Company recognized a loss from conversion in the amount of $520,000, totaling a loss of $703,634 for the nine month period end for related party debt conversions. The interest expense incurred on the related party payables was $5,070 and $178, for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. As of September 30, 2012, the Company has accrued interest of $1,214 compared to $178 as of December 31, 2011.

 

NOTE 7– DERIVATIVE LIABILITY

 

Effective July 31, 2009, the Company adopted ASC Topic No. 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. These debts 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 debts are 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.

 

The exercise price of these warrants 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 conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced.  As a result, the Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as another income or expense item.  The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the above convertible debts.  At September 30, 2012, the Company revalued the conversion features using the following assumptions: stock price of $0.045, exercise price of $0.0258 to $0.0215, dividend yield of zero, years to maturity vary according to convertible note, risk free rate of 0.14 percent, and an annualized volatility ranging from 119 to 460 percent  and determined that, during the nine months ended September 30, 2012, the Company’s derivative liability decreased by $174,3479 to $327,247.  The Company recognized a corresponding gain on derivative liability in conjunction with this revaluation.

 

NOTE 8 – CONVERTIBLE DEBT

 

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 was due on April 17, 2012, is unsecured, and bears an interest rate of 8%. As of September 30, 2012, the full amount of the note was converted to the Company’s common stock along with $4,280 of accrued interest.

 

On October 3, 2011, the Company borrowed $75,000 in the form of a convertible note payable. The note is convertible at the hold’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 was due on June 27, 2012, is unsecured and bears an interest rate of 8%. As of September 30, 2012 the full amount of the note was converted to the Company’s common stock along with $3,426 of accrued interest.

 

On October 26, 2011, the Company borrowed $75,000 in the form of a convertible note payable. The note was due on July 20, 2012 and the Company defaulted on the loan. The Company obtained an extension on the due date to February 24, 2013 and the amended terms changed the holder’s option of conversion at 61% of the average of the lowest three trading prices during the 10 trading days prior to conversion to 40%.

SUNVALLEY SOLAR, INC.

Consolidated Notes to Condensed Consolidated Financial Statements

September 30, 2012 and December 31, 2011

 

NOTE 8 – CONVERTIBLE DEBT (CONTINUED)

 

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 unsecured and bears an interest rate of 8%. As of September 30, 2012 the Company had recorded $3,129 in accrued interest on the note and $5,400 as the remaining balance. As of September 30, 2012 the Company had amortized the discount in full of 75,000  as interest expense.

 

On October 28, 2011, the Company borrowed $200,000 in the form of a convertible note. The note was due on July 18, 2012 and the Company defaulted on the note. The Company obtained an extension on the note and the terms were changed from the creditor’s option of conversion from 61% of the average of the lowest three trading prices during the 10 trading days prior to conversion to 50%. 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 note is due on March 13, 2013, is unsecured and bears an interest rate of 8% which is added onto the principle of the note. As of September 30, 2012 the Company had amortized the full discount of the note of $200,000 as  interest expense, leaving $-0- in unamortized debt discount at September 30, 2012. The Company recognized a default penalty fee of $89,125 which added to the outstanding balance of the note.

 

On February 22, 2012, the Company borrowed $78,500 of convertible debt. On May 24, 2012 the Company and the lender amended the agreement wherein the debt was 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 to 40% 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 $78,500 on the note date. The convertible debt is due on November 21, 2012, is unsecured and bears an interest rate of 8%. As of September 30, 2012 the Company had recorded $3,803 in accrued interest on the note. As of September 30, 2012 the Company had amortized $63,548 of the debt discount to interest expense, leaving $14,952 in unamortized debt discount at September 30, 2012.

 

NOTE 9 - FACTORING LINE PAYABLE

 

During the nine months ended September 30 2012, the Company paid $1,163,407 to its factoring provider, inclusive of accrued fees, and the Company borrowed a total of $1,245,455 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. As of September 30, 2012, accrued interest and fees on this factoring line totaled $532,045. The Company’s credit facility with the factoring company was increased to one million in June 2012. This agreement was extended to the later of November 10, 2013 or the date in which all the outstanding obligations owed to CapFlow are paid by the Company.

 

NOTE 10– COMMON STOCK

 

On January 27, 2012, the Company issued 12,000 shares of its common stock for $19,530. On February 9, 2012, the Company issued 8,000 shares of its common stock for $11,160. On March 19, 2012, the Company issued 40,000 shares of its common stock for $45,000 of cash.

 

During the nine months ended September 30, 2012 the Company issued 5,710,353 shares of the Company’s common stock upon conversion of $451,449 of its debt.  On June 25, 2012 the Company purchased 821,812 shares of its common stock for notes payable to related parties of $104,000 owed to two Company officers. On July 3, 2012 the Company cancelled the 821,812 shares of treasury stock which were bought back from the two Company officers. On July 24, 2012, the Company issued 4,160,000 shares of common stock in exchange for converting the $104,000 of the outstanding notes payable related parties to these same officers.

 

On July 20, 2012 the Company effected an 1 to 500 reverse stock split accordingly all the share amounts were restated to reflect the reverse stock split on a retro-active basis.

 

On August 29, 2012, the Company’s shareholders and board of directors approved an amendment to the Articles of Incorporation to decrease the total authorized common stock from 7,500,000,000 shares to 90,000,000 shares.

SUNVALLEY SOLAR, INC.

Consolidated Notes to Condensed Consolidated Financial Statements

September 30, 2012 and December 31, 2011

 

NOTE 11– PREFERRED STOCK

 

On August 28, 2012, the Company’s Board of Directors voted to designate a class of preferred stock entitled Class A Convertible Preferred Stock, consisting of up to one million (1,000,000) shares, par value $0.001. The rights of the holders of Class A Convertible Preferred will participate on an equal basis per-share with holders of the Company’s common stock in any distribution upon winding up, dissolution, or liquidation.

 

Holders of Class A Convertible Preferred Stock are entitled to vote together with the holders of the Company’s common stock on all matters submitted to shareholders at a rate of one hundred (100) votes for each share held. Holders of Class A Convertible Preferred Stock are also entitled, at their option, to convert their shares into shares of the Company’s common stock on a 1 for 1 basis. The Class A Convertible Preferred shares were valued at the trading price of the common shares into which they are convertible.

 

During the nine month period end, the Board of Directors approved the incentive issuance of 950,000 shares of the Company’s Class A Converible Preferred shares to its executives and key employees and Restricted Stock Award Agreements were signed with such individuals for their shares will vest in full after two years from the date of grant with curtain restrictions.  The issuance of such preferred shares were valued as stock-based compensation of $68,400 based on the fair market value of the Company’s common stock on August 28, 2012.

 

NOTE 12– SUBSEQUENT EVENTS

 

Subsequent to September 30, 2012 the Company issued 4,495,165 shares of its common stock upon the conversion of $51,023 of convertible debt. On October 17, 2012 the Company repurchased 4,160,000 shares of its common stock for $104,000 from two Company officers and such shares were canceled afterward.

 

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

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

 

Forward-Looking Statements

 

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

 

Company Overview and Plan of Operation

 

We are a California-based solar power technology and system integration company 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.

 

Business Development Plan

 

The primary components of our growth strategy are as follows:

 

•

Developing and commercializing our proprietary solar technologies including our coating and focusing technologies, racking and panel cleaning system. By deploying these new technologies into our PV panels and solar installation business, we hope to enhance the value provided to our customers and increase our profitability.

 

•	Promoting and enhancing our company’s brand and reputation in solar design and integration and expanding our installation business.

 

•	Developing a PV panel manufacturing capability to provide high efficiency and low cost solar panels to US market. This will complement our installation business and provide an implementation platform for our R&D.

 

•	Getting involved in the private power providing business (Distributed Power Plants).  Developing this line of business will lead to higher profit margins and income to our business. In the future, this line of business could become one of our main income sources.

 

Expansion of Installation Business

 

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

 

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

 

Commercialization of Research and Development

 

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

 

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

 

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

 

Initiate OEM Manufacturing of Solar Panels

 

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

 

The estimated OEM panel cost is less than $0.60 per watt. As a reference, currently, the lowest panel price is around $1.00 per watt (Mono-crystalline, Polycrystalline). We can use our own sales and installation platform to showcase the new panels and drive sales of the new panels in the U.S market. Meanwhile, we will continue our R&D effort on panel coating and other advanced technologies and apply the results to its panel manufacturing business. The goal will be to further improve the efficiency, lower the cost of solar panels with our proprietary technologies, and to grow our market share.

 

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

 

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

 

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

 

•	Penetrate into the main stream distribution network

 

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

 

•	Further sale activities

 

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

 

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

 

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

 

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

 

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

 

•

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

 

•	OEM Management costs – $200,000

 

Develop Distributed Power Plant Business

 

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

 

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

 

Expected Changes In Number of Employees, Plant, and Equipment

 

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

 

Results of Operations for the three and nine months ended September 30, 2012 and 2011

 

During the three months ended September 30, 2012, we generated gross revenues of $2,262,720. Total cost of sales was $1,449,672, resulting in gross profit of $813,048. Total operating expenses were $351,610, and consisted of salary and wage expenses of $142,016, selling, general and administrative expenses of $120,898, and professional fees of $88,696. We experienced interest expense of $145,319, interest income of $879, a loss on sale of property of $300, a loss of $198,901 due to the change in value of a derivative liability, a loss on conversion of debt in the amount of $520,000, and a default penalty on convertible notes in the amount of $89,125. Our net loss for the three months ended September 30, 2012 was therefore $313,078.

 

By comparison, during the three months ended September 30, 2011, we generated gross revenues of $202,030. Total cost of sales was $200,704, resulting in gross profit of $1,326. Total operating expenses were $317,311, and consisted of salary and wage expenses of $175,307, selling, general and administrative expenses of $74,932, and professional fees of $67,072. We experienced interest expense of $5,221, interest income of $2,374, and a gain of $125,551 due to the change in value of a derivative liability. Our net loss for the three months ended September 30, 2011 was therefore $193,281.

 

During the nine months ended September 30, 2012, we generated gross revenues of $3,204,428. Total cost of sales was $2,002,856, resulting in gross profit of $1,201,572. Total operating expenses were $965,425, and consisted of salary and wage expenses of $458,708, selling, general and administrative expenses of $374,528, and professional fees of $132,189. We experienced interest expense of $441,158, interest income of $1,532, a gain on sale of property of $9,181, a gain of $261,300 due to the change in value of a derivative liability, a loss on conversion of debt in the amount of $703,634, and a default penalty on convertible notes of $89,125. Our net loss for the nine months ended September 30, 2012 was therefore $725,757.

 

By comparison, during the nine months ended September 30, 2011, we generated gross revenues of $2,940,413. Total cost of sales was $2,380,531 resulting in gross profit of $559,882. Total operating expenses were $858,914, and consisted of salary and wage expenses of $457,222, selling, general and administrative expenses of $291,127, and professional fees of $110,565. We experienced interest expense of $13,837, interest income of $11,965, and a loss due to the change in value of a derivative liability of $172,025. The net loss for the nine months ended September 30, 2011 was therefore $128,879.

 

Our revenues increased significantly for the three months ended September 30, 2012 compared to the same period last year and compared to the first and second quarter of this year. This change is due to the fact that we have been implementing several large commercial solar systems which have begun to reach completion in the later part of this year. Under the completed contract method of accounting, no profit or income is recorded before substantial completion of the work. The revenue for these projects is therefore be recognized after their completion. Due to the implementation periods for different size of projects, revenue fluctuations like the one experienced during this quarter are a normal occurrence for construction companies, including solar system integration companies.

 

We use the Black-Scholes option pricing model to value our derivative liabilities upon issuing convertible notes with derivatives and the subsequent remeasurement of our convertible notes at each reporting report. Due to these accounting procedures relating to our convertible notes, we recognized $430,272 as interest expenses, a gain on derivative liabilities of $261,300, and a loss on conversion of debt in the amount of $703,634 during the nine months ended September 30, 2012.

 

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 2011, We have signed installation contracts for over 1.5M watts in solar systems for 2012 and they are currently under implementation. We expect most of these projects to be completed before the end of Q4, 2012.

 

Liquidity and Capital Resources

 

As of September 30, 2012, we had current assets in the amount of $6,395,486, consisting of cash in the amount of $364,488, accounts receivable of $5,342,596, inventory in the amount of $508,927, costs in excess of billings on uncompleted contracts of $140,651, prepaid expenses and other current assets of $9,824, other receivables of $4,000, and restricted cash of $25,000. As of September 30, 2012, we had current liabilities in the amount of $5,524,184. These consisted of accounts payable and accrued expenses in the amount of $4,006,402, a derivative liability of $327,247, customer deposits of $378,327, a factoring payable of $532,045, convertible debt of $182,549, accrued warranty of $80,337, the current portion of long term debt in the amount of $14,622, and the current portion of a capital lease in the amount of $2,655. Our working capital as of September 30, 2012 was therefore $871,302.

 

Our accounts payable and accrued expenses as of September 30, 2012 consisted of the following:

 

Accounts Payable	$	3,535,675
Credit Card payable		162,402
Accrued vacation		20,015
Other accrued expense		157,548
Payroll liabilities		24,968
Sales tax payable		105,794
Total	$	4,006,402

 

As of September 30, 2012, our long-term liabilities were $75,913, which consisted of a notes payable of $64,273 and the remaining long term obligations of a capital lease in the amount of $11,640.

 

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 September 30, 2012 the capital lease payable outstanding was $14,295. 

 

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:

 

Amount				Issue date		Due date		Shares issued upon conversion				Conversion date(s)				Principal amount outstanding
$	75,000			10/26/11		2/24/13			1,949,176				May 29 – August 8, 2012			$	5,400
$	78,500			02/15/12		11/21/12			—				—			$	78,500

 

As currently amended, 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 40% of the Market Price of our common stock on the conversion date according to different note agreements.  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.

 

We have determined that the conversion feature of these notes is not considered to be solely indexed to our own stock and is therefore not afforded equity treatment. In accordance with ASC 815, we have bifurcated the conversion feature of the notes and recorded a derivative liability.

 

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

 

Amount

Issue date

Due date

Shares issued upon conversion

Conversion date(s)

Principal amount outstanding

$

200,000

10/28/11

7/18/12

432,480,117

April 30 – August 6, 2012

$

113,601

 

 

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. During August 2012, the note was defaulted with a penalty fee of $89,125 added to the outstanding balance and the maturity date of the note was extended to March 14, 2013 and the note’s conversion price was amended to equal 50% of the Market Price of our common stock on the conversion date. “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.

 

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. During the nine months ended September 30, 2012, we received total advances under the Agreement of $1,245,455 on factored invoices totaling $1,620,855. As of September 30, 2012, accrued interest and fees on this factoring line totaled $532,045. Our current available credit under the Agreement is $1,000,000. To date, discount rates for invoices factored to CapFlow under the Agreement have ranged from 1.85% to 8.50%. This agreement was extended to the later of November 10, 2013 or the date in which all the outstanding obligations owed to CapFlow are paid by the company.

 

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

 

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

 

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

 

We are currently seeking additional financing through the sale of common equity, including the sale of common equity to Auctus Private Equity Fund, LLC through 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 September 30, 2012, there were no off balance sheet arrangements.

 

Going Concern

 

We have experienced recurring losses from operations and had an accumulated deficit of $2,083,547 as of September 30, 2012. To date, we have not been able to produce sufficient sales to become cash flow positive and profitable on a consistent basis. The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our costs of operations and/or upon obtaining additional financing. For these reasons, our auditor has raised substantial doubt about our ability to continue as a going concern.

 

Critical Accounting Policies

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.     Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2012. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Zhijian (James) Zhang and our Chief Financial Officer, Mandy Chung. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2012, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2012.

 

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

 

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

 

Limitations on the Effectiveness of Internal Controls

 

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

PART II – OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

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

 

None.

 

Item 3.     Defaults upon Senior Securities

 

None

 

Item 4.     Mine Safety Disclosures

 

Not applicable.

 

Item 5.     Other Information

 

None.

 

Item 6.      Exhibits

 

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

 

SIGNATURES

 

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

 

	Sunvalley Solar, Inc.
Date:	November 19, 2012
	By:       /s/ Zhijian (James) Zhang              Zhijian (James) Zhang Title:    Chief Executive Officer and Director
Date:	November 19, 2012
	By:       /s/ Mandy Chung              Mandy Chung Title:    Chief Financial Officer