U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

            

FORM 10-Q

þ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 0-28413

              

SAN WEST, INC.

(formerly Human BioSystems)

(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)	77-0481056 (I.R.S. Employer Identification Number)
10350 Mission Gorge Road Santee, California (Address of principal executive offices)	92071 (Zip Code)
(619) 258-8770 (Registrant’s telephone number, including area code)

 

Indicate 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 requirement for the past 90 days.  Yes þ  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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o		Smaller reporting company	þ

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  At May 15, 2011 the registrant had outstanding 228,669,526 shares of common stock, no par value per share.

 

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SAN WEST, INC.

FORM 10-Q

TABLE OF CONTENTS

                                                                        

PAGE

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

Consolidated Balance Sheets as of March 31, 2011 (Unaudited)

and December 31, 2010

3

Consolidated Statements of Operations (Unaudited) For the

Three Months Ended March 31, 2011 and 2010

4

Consolidated Statement of Stockholders' Equity (Unaudited)

For the Three Months Ended March 31, 2011

5           

Consolidated Statements of Cash Flows (Unaudited) For the

Three Months Ended March 31, 2011 and 2010

6

Notes to Consolidated Financial Statements (Unaudited)

7-19

Item 2.

Management's Discussion and Analysis of Financial Condition and

               Results of Operations

20-24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

Item 4(T).  Controls and Procedures

24

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PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

26

Item 1A. Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

27

Item 4.

Submission of Matters to a Vote of Security Holders

27

Item 5.

Other Information

27

Item 6.

Exhibits

27

Signatures

28

Item 1.  Financial Statements.  

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San West, Inc.

Consolidated Statement of Stockholder's Deficit

For the Three Months Ended March 31, 2011 (Unaudited)

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-6-

 

SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE A – ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization

San West, Inc. (“San West”, the “Company”, or “we”) is a Nevada Corporation, established in July, 2001.  The Company sells and services off-road buggies and related after market performance products and accessories. Its products are sold both at a physical location and online while the buggy repair services are sold and fulfilled at the physical location. Its primary service outlet, “Letz Go Racing Off-Road Center” is located in Huntington Beach, California and provides customers with modification parts, accessories and repair services for off-road buggies built in China for the U.S. market.

 

In August 2008, the Company purchased 100% of the outstanding stock of Buggy World, Inc. With the acquisition of Buggy World, San West expanded their presence in the southern California retail market.  The accompanying financial statements reflect the activity of Buggy World since its acquisition.

 

On June 5, 2009, San West completed a reverse merger with Human BioSystems by merging with Human BioSystems Acquisition Company a wholly owned subsidiary of Human BioSystems  Upon becoming effective, 1) 100% of San West outstanding common stock was exchanged for 65,396,320 shares of Human BioSystems common stock, 2) Human BioSystems Acquisition Company became the surviving entity and assumed all San West assets and liabilities and 3) Human BioSystems Acquisition Company changed its name to San West, Inc.  The authorized capital stock of San West, Inc (formerly Human BioSystems Acquisition Company) is 400,000,000 shares of common stock no par value and 50,000,000 shares of preferred stock no par value.  The merger was accounted for as a “reverse merger”, wherein Human BioSystems Acquisition Company and Human BioSystems are treated as the acquiree for accounting purposes meaning the historical earnings, assets and liabilities of San West, Inc (pre merger) shall remain with the assets and liabilities of Human BioSystems Acquisition Company and Human BioSystems accounted for as a purchase by San West thus recapitalizing the previously reported financial position and statements of Human BioSystems.  Human BioSystems changed its name to San West, Inc. on July 31, 2009.  Herein, all references to “San West”, the “Company”, or “we” shall mean San West, Inc. and Human BioSystems, unless the context requires otherwise.  The Company is listed on the OTC Bulletin Board under the ticker symbol SNWT.

 

Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern.  The Company has sustained operating losses since inception and has an accumulated deficit of $3,423,320 and $3,197,353 at March 31, 2011 and December 31, 2010, respectively.  In addition, the Company had negative working capital of $1,162,338 and $1,103,001 at March 31, 2011 and December 31, 2010, respectively.

 

The Company has and will continue to use significant capital to grow and acquire market share.    These factors raise substantial doubt about the ability of the Company to continue as a going concern.  In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of their common stock.  There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

 

Principles of consolidation

The consolidated financial statements include the accounts of San West (formerly Human BioSystems, Inc.) and its subsidiary, Buggy World which is 100% consolidated in the financial statements.  All material inter-company accounts and transactions have been eliminated.

 

Accounting estimates

The preparation of financial statements in conformity with accounting principles generally accepted 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 period.  Actual results could differ from those estimates.

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SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE A – ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Con't)

Cash and cash equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.  Cash and cash equivalents may at times exceed federally insured limits.  To minimize this risk, the Company places its cash and cash equivalents with high credit quality institutions.

Accounts Receivable

Accounts receivable are reported at the customers' outstanding balances.  The Company does not have a history of significant bad debt and has not recorded any allowance for doubtful accounts.  Interest is not accrued on overdue accounts receivable.  The Company evaluates receivables on a regular basis for potential reserve.

Inventory

The Company currently utilizes a “just-in-time” inventory system.  Inventories are valued at the lower of cost or market.  Cost is determined on an average cost basis.  Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value.  The Company’s inventory consists primarily of vehicle parts and complete vehicles.

Goodwill

Goodwill and other intangible assets with indefinite useful lives are no longer amortized, but are evaluated for impairment annually, or immediately if conditions indicate that impairment could exist.  The evaluation requires a two-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss.  The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss.  Both steps of the goodwill impairment testing involve significant estimates.

Property and Equipment

Property and equipment are stated at cost.  Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed.  At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts.  Gains or losses from retirements or sales are credited or charged to income.

The Company depreciates its property and equipment on a straight line basis at the following rates as applied to net depreciable value:

Computer equipment and software:

3 years

Furniture and fixtures:  

5 – 7 years

Machinery and equipment

 

5 – 7 years

Leasehold improvements:

       7 years

Long-Lived Assets

Accounting for the Impairment or Disposal of Long-Lived Assets requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may not be recovered.  The Company assesses recoverability of the carrying value of an asset by estimating the fair value of the asset.  If the fair value is less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value.

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SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE A – ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Con't)

Revenue

Revenue from the sale of parts, service and vehicles is recognized when the earning process is complete and the risk and rewards of ownership have transferred to the customer, which is generally considered to have occurred upon the delivery of the equipment and/or service to the customer.  Customer returns and exchanges for unused parts require a receipt, all sales on discounted items are final and the Company does not accept returns on special order or electrical items.  The Company does not provide warranties.  Warranties are generally provided by the manufacturer of the items we sell.

Cost of Goods Sold

Cost of goods sold is recognized with the associated parts, service and vehicle revenue and consists primarily of resale parts and vehicles.

Commissions

Commissions are recorded to different employees when they are earned by; selling parts, buggies and/or service.  Rates are different for each employee in different departments.

Advertising Costs

The Company expenses all advertising as incurred.  During the three months ended March 31, 2011 and 2010, the Company incurred approximately $21,503 and $27,659, respectively in marketing and advertising expense.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on differences between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax provisions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.  Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Stock-Based Compensation

The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  Stock issued for compensation is valued using the market price of the stock on the date of the related agreement.  We use the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both employees and non-employees.  In calculating this fair value, there are certain assumptions that we use consisting of the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate.  The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.

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SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE A – ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Con't)

Earnings (Loss) per common share

The Company reports both basic and diluted earnings (loss) per share.  Basic loss per share is calculated using the weighted average number of common shares outstanding in the period.  Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using the “treasury stock” method and convertible securities using the “if-converted” method.

Recent Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06 – “Fair Value Measurements and Disclosures—Improving Disclosures about Fair Value Measurements”, which requires new disclosures and reasons for transfers of financial assets and liabilities between Levels 1 and 2.  ASU 2010-06 also clarifies that fair value measurement disclosures are required for each class of financial asset and liability, which may be a subset of a caption in the consolidated balance sheets, and those disclosures should include a discussion of inputs and valuation techniques.  It further clarifies that the reconciliation of Level 3 measurements should separately present purchases, sales, issuances, and settlements instead of netting these changes.  With respect to matters other than Level 3 measurements, ASU 2010-

06 is effective for fiscal years and interim periods beginning on or after December 15, 2009.  New guidance related to Level 3 measurements is effective for fiscal years and interim periods beginning on or after December 15, 2010. Adoption of ASU 2010-06 did not result in any significant financial impact on the Company upon adoption.

In February 2010, the FASB issued ASU No. 2010-09, which amends subsequent event disclosure requirements for SEC filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This ASU was effective upon issuance and adoption of this ASU did not result in a material impact to the Company’s financial statements.

In January 2010, the FASB issued ASU No. 2010-10 – Consolidation (Topic 810) that amends accounting and disclosure requirements for a decrease in ownership in a business under existing GAAP standards for consolidations. It also clarifies the types of businesses that are in the scope of these consolidations. As required by this guidance, we retroactively applied the amendments as of January 1, 2009, which did not have a material impact on our financial statements or footnote disclosures.

In December 2010, the FASB issued ASU No. 2010-29 – Business Combinations (Topic 805); disclosure of Supplementary Pro Forma Information for Business Combinations.  ASU No. 2010-29 requires a public entity that presents comparative financial statements to disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business.  The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.  adoption of this ASU did not have a material impact on our financial statements or footnote disclosures.

NOTE B – INVENTORY

Inventory is comprised of buggy vehicles and parts and stated at the lower of cost or market.  The following table represents the major components of inventory at March 31, 2011 and December 31, 2010:

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SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE C – OTHER CURRENT ASSETS

Other current assets of $126,590 and $113,406 as of March 31, 2011 and December 31, 2010, respectively are comprised solely of sale proceeds held in reserve by our credit card processors as a buffer against potential customer chargebacks.    

 

 

NOTE D – FIXED ASSETS

Furniture and equipment are depreciated on a straight line basis over their estimated useful life from 3 – 7 years.  A majority of the fixed assets listed were acquired in the purchase of Buggy World in August of 2008.    Fixed assets consisted of the following at March 31, 2011 and December 31, 2010:

			March 31,		December 31,
			2011		2010
	Computers		$8,419		$8,419
	Furniture & fixtures		50,000		50,000
	Machinery & equipment		62,891		62,891
	Leasehold improvements		8,916		8,916
			130,226		130,226
	Accumulated depreciation		(59,129)		(53,726)
	Fixed assets, net		$71,097		$76,500

 

Depreciation expense for the three months ended March 31, 2011 and 2010 was $5,403 and $5,460, respectively.  

NOTE E – GOODWILL

 

On August 20, 2008, the Company executed an Asset Purchase and Stock Transfer Agreement for 100% of the outstanding ownership interests in Buggy World, Inc.  The total purchase price was $613,202 paid with $350,000 cash and $263,202 of promissory notes to Cambio Enterprises (See Note I, Subsidiary Purchase Loan).  Identifiable tangible assets acquired were valued at $394,102 leaving $219,100 recorded as goodwill.

 

On September 5, 2008, the Company purchased certain rights, title and interest to Johnson’s Bug Machine for $15,000 which was recorded to goodwill.  Payments were due $5,000 after completion of the first referred job was complete and $1,000 per month thereafter.  This obligation was non-interest bearing.  In October 2009, the Company settled this debt for a $5,000 cash payment and full release netting the Company a $10,000 gain on the forgiveness of debt recorded as other income in our 2009 Statement of Operations.

 

As of March 31, 2011, we have recorded goodwill of $234,100 in connection with our acquisition of Buggy World, Inc. on August 20, 2008 ($219,100) and Johnson’s Bug Machine ($15,000) on September 5, 2008.  Goodwill represents the excess of the purchase price over the fair value of current financial assets, property and equipment, and separately reportable intangible assets.  The tangible assets, intangible assets, and goodwill acquired are then assigned to reporting units.  Goodwill is then tested for impairment at least annually for each reporting unit.  Step one of the goodwill impairment test involves comparing the fair value of the reporting unit to its carrying value.  If the fair value significantly exceeds the carrying value, no further testing is required.  If the carrying value exceeds the fair value, a step two test must be performed.  Step two includes estimating the fair value of all tangible and intangible assets.  The fair value of goodwill is then estimated by subtracting the fair value of tangible and intangible assets from the fair value of total assets determined in step one.  The goodwill impairment is the excess of the recorded goodwill over the estimated fair value of goodwill.

 

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SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE E – GOODWILL (Continued)

We performed a goodwill impairment test on March 31, 2011 and December 31, 2010.  Pursuant to ASC 350-20-35-22 quoted market prices in an active market are the best evidence of fair value and should be used as the basis for measurement, if available.  There are active markets for our reporting units which are comprised of our company as a whole given that the goodwill balance relates directly to our existing business.  We determined the fair value as

of March 31, 2011 to be $3,539,246 (221,202,859 shares outstanding x $0.016 3/31/2011 closing stock price) which exceeded the carrying value of our goodwill balance by 1,512%.  We determined the fair value as of December 31, 2010 to be $2,505,657 (192,742,859 shares outstanding x $0.013 12/31/2010 closing stock price) which exceeded the carrying value of our goodwill balance by 1,070%.  Accordingly, we determined our goodwill balance passed step one of the goodwill impairment test.  Thus, no impairment of goodwill existed as of or has been recorded for the year ended December 31, 2010 or 2009.

We acknowledge the uncertainty surrounding the key assumptions that drive the estimated fair value.  Any material negative change in the fundamental outlook of our business, our industry or the capital market environment could cause the business unit to fail step one.  Accordingly, we will be monitoring events and circumstances each quarter (prior to the annual testing date) to determine whether an additional goodwill impairment test should be performed. 

NOTE F – ACCOUNTS PAYABLE

Accounts payable at March 31, 2011 consisted of $637,042 of assumed Human BioSystems accounts, $6,561 of sales tax payable, $45,134 related to professional fees and $234,815 of trade payables.

 

Accounts payable at December 31, 2010 consisted of $637,042 of assumed Human BioSystems accounts, $7,437 of sales tax payable, $99,664 related to professional fees and $147,037 of trade payables.

NOTE G – FLOORPLAN NOTES PAYABLE

During 2010, we sold or disposed of all our flooring inventory.  The balance of $4,721 represents the interest and fees due to the flooring company as of December 31, 2010.  The interest charged by our flooring company was 12% per year.  

When we have vehicle inventory we evaluate our vehicles at the lower of cost or market value approach.  If the book value of our vehicles is more than fair value, we could experience losses on our vehicles in future periods.  All new vehicles are pledged to collateralize floorplan notes payable to floorplan providers.  The floorplan notes payable bear interest, payable monthly on the outstanding balance, at a rate of interest that typically varies by provider.  Vehicle floorplan notes are typically payable on demand and are typically paid upon the sale of the related vehicle.  As such, our floorplan notes payable are shown as current liabilities in the accompanying balance sheets with related cash flows accounted for as Operating Activities.  

NOTE H – CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE

Gemini

In connection with a Securities purchase Agreement dated February 12, 2010, the Company issued a convertible promissory note (the “Note”) dated February 4, 2010 generating gross proceeds to the Company of $150,000.  Issuance fees totaled $3,485, which were paid in cash.  The Note bears interest of ten percent (10%) per annum that accrues daily and matures on February 1, 2011 with no payment due before the maturity date.  On January 12, 2011, the Note’s maturity date was extended one year to February 12, 2012.   

 

At any time after the issuance date on February 4, 2010, and prior to maturity, the Note is convertible into the Company's restricted common stock at a conversion price equal to the lesser of (i) $0.04, or (ii) 80% of the lowest closing bid price of the Company’s Common Stock during the 10 trading days immediately preceding the applicable conversion date.  Common stock issued pursuant to a conversion carries piggyback registration rights.

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SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE H – CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE (Continued)

Gemini (Continued)

The Note provides that the holder may only convert the debenture if the number of shares held by the lender or its affiliates after conversion would not exceed 4.99% of the outstanding shares of the Company's common stock following such conversion.

The issuance costs related to the Note of $3,485 in cash were capitalized to current assets on the balance sheet and are being amortized over the original term of the Note based upon the effective interest method.  For the year ended December 31, 2010, the Company recognized $3,485 as other expense related to the amortization of the issuance costs.

The Company determined that the Note was issued with a beneficial conversion feature (“BCF”) due to the conversion price ($0.04) being less than the closing stock price ($0.095) on the date of issuance, and the conversion feature being in-the-money.  Thus, the BCF was been determined based on the gross debenture amount, and recorded as a discount to reduce the carry value of the Note and increase additional-paid-in-capital.  The Company calculated the initial BCF on the closing date of the transaction to be $206,250 using the intrinsic value method.  Since this amount is greater than the $150,000 value of the Note, the Company reduced the initial carry value of the Note to zero effectively recording a BCF of $150,000 as additional-paid-in-capital.  The BCF discount was expensed when the note became convertible which was on the date of issuance.  On October 14, 2010, the note was further modified to provide for a conversion price of $0.005 per share.  The Company calculated the BCF on the closing date of the modification to be $83,528 using the intrinsic value method.  

On January 12, 2011, Gemini purchased $24,000 of the Dutchess debt (See “Other Convertible Promissory Notes” below) subject to the same terms as the original Dutchess debt.

During the three months ended March 31, 2011 and 2010, related to the notes above, the Company:

 

1.

Recognized interest expense during the three months ended March 31, 2011 and 2010 of $3,482 and $2,277, respectively;

2.

Converted $22,300, including $20,000 of principle and $2,300 of accrued interest into 4,460,000 shares of common stock;

3.

Had a current principle balance and accrued interest balance of $214,000 and $13,365, respectively.

On January 12, 2011, The Company issued $80,000 of convertible notes to Gemini Master Fund, Ltd. and received $61,000 due to a $19,000 original issue discount.  The note bears interest of ten percent (10%) per annum with an effective interest rate of 35.6%, matures on February 1, 2012 and is convertible at the option of the note holder at any time at a conversion price equal to the lesser of (i) $0.005 and (ii) 80% of the lowest closing bid price of the Company’s common stock during the 10 trading days immediately preceding the applicable conversion date.  The Notes provide that the holder may only convert the debenture if the number of shares held by the lender or its affiliates after conversion would not exceed 4.99% of the outstanding shares of the Company's common stock following such conversion.  In the event of default the interest rate on the notes shall increase to the lesser of 24% or the maximum rate permitted under applicable law.  The Company determined that the Note was issued with a beneficial conversion feature (“BCF”) due to the conversion price ($0.005) being less than the closing stock price ($0.015) on the date of issuance, and the conversion feature being in-the-money.  Thus, the BCF was been determined based on the gross Note amount, and recorded as a discount to reduce the carry value of the Note and increase additional-paid-in-capital.  The Company calculated the initial BCF on the closing date of the transaction to be $160,000 using the intrinsic value method.  Since this amount is greater than the $80,000 value of the Note, the Company reduced the initial carry value of the Note to zero effectively recording a BCF of $80,000 as additional-paid-in-capital.  The BCF discount was expensed when the note became convertible which was on the date of issuance.  

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SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE H – CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE (Continued)

Gemini (Continued)

During the three months ended March 31, 2011, related to the note above, the Company:

1.

Recognized $80,000 in non-cash amortization expense attributable to the amortization of the beneficial conversion feature;

2.

Recognized $4,563 of interest expense during the three months ended March 31, 2011 of which $3,170 was accreted to the note balance;

3.

Had a current principle balance and accrued interest balance of $64,170 and $1,393, respectively.

Seacoast Advisors, Inc.

On February 13, 2009, the Company cancelled and reissued the Seacoast Advisors, Inc. $80,000 note originally dated August 10, 2008, maturing on August 12, 2009 and carrying eight percent (8%) interest per annum.  The new $80,000 note dated February 13, 2009 matured on August 12, 2009, carried interest of eight percent (8%) per annum with no prepayments required and converted into shares of the Company upon default at a conversion price of $.05.  Per ASC 470-20-25-12, no portion of the proceeds from this note were attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount and the conversion price was greater than the perceived market value of the stock.  Additionally, this note was issued pior to the merger with Human BioSystems and there was no active market for the Company’s stock at that time.  In March of 2009 $6,000 was paid against this note.  In February and March of 2010, Seacoast converted $74,000 of this note into 7,400,000 shares of common stock at an exercise price of $.01 reflecting the decrease in the conversion price due to the 5:1 forward stock split affected on November 3, 2009.  $9,596 remained due under this note and was converted in full into 959,649 shares of common stock at a conversion price of $.01 on August 30, 2010.  On September 30, 2009, an addendum was added to this note increasing the face amount to $54,000 for additional funds loaned to the Company.  The addendum increased the maturity date for these funds to September 30, 2010 and increased the conversion price to $0.35 per share, or $.07 per share after giving effect to the 5:1 forward stock split.  Per ASC 470-20-25-12, no portion of the proceeds from this adendum were attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount and the conversion price was greater than the market price of the stock.  On August 16, 2010, this addendum was modified reducing the exercise price to $.01 per share exerciseable at the option of Seacoast at any time.  The balance of principle and interest under this note at modification was $57,723.  The market price of common stock on the date of this modification was $0.02 resulting in a beneficial conversion feature of $57,356.  On August 19, 2010 and August 30, 2010, Seacoast converted $50,395 into 5,039,489 shares of common stock leaving a balance due of $7,581.  Then, on September 1, 2010, the note was further modified to decrease the conversion price to $0.005.  The balance of principle and interest under this note at modification was $7,581.  The market price of common stock on the date of this modification was $0.01 resulting in a beneficial conversion feature of $7,581.  On October 22, 2010, Seacoast converted $4,750 into 950,000 shares of common stock leaving a balance due of $2,791.11 which was converted into 579,871 shares on December 22, 2010 leaving no balance due under the aforementioned note(s) as of December 31, 2010. As of December 31, 2009, the balance under the above loan activity was $128,000.

In addition to the above, during the year ended December 31, 2010, the Company borrowed $133,000 from Seacoast Advisors, Inc. in various tranches for which separate promissory notes were issued.  The notes have the same terms and conditions, including interest at eight percent (8%) per annum and only one principal and interest payment due upon maturity on January 1, 2012.  On October 14, 2010, The Company and Seacoast canceled the previous notes and issued a single note in the amount of $121,631 ($119,000 principle and $2,631 accrued interest).  Also, on October 14, 2010, Seacoast loaned and additional $9,000 and on November 2, 2010, Seacoast loaned an additional $5,000.  The terms of the $121,631, $9,000 and $5,000 notes provide for interest at eight percent (8%) per annum, and only one principal and interest payment due upon maturity with maturity being six (6) months from the date each tranche was first received by the Company.  In the event of default, the notes become convertible at the option of the holder into common stock of the Company at a conversion price of $0.005 per share.  The Notes contain a provision limiting the conversion thereof by any party to not more that 4.99% ownership of the stock of the Company at any time after taking into account all of the holdings of the converting party.  Per ASC 470-20-25-12,

-14-

SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

 

NOTE H – CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE (Continued)

Seacoast Advisors, Inc. (Continued)

no portion of the proceeds from this note are attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount, the interest rate is lower than the Company would pay for non-convertible debt and the conversion price was greater than the perceived market value of the stock.  In addition, the restrictions on the conversion prevent the holders from fully exercising the conversion, the Company has experienced significant operating losses and shareholder dilution, in the event of a conversion an attempt to sell converted shares would most likely result in a lower stock price due to the thin trading volume of the Company’s stock on the secondary markets, and the perceived market value of the stock was less than the conversion price due to the above and due to the significant decrease in the stated trading values of the Company’s stock which has decreased 97.4% from $0.308 one year prior to these notes leaving significant uncertainty about the future trading price of the stock and the ability of Seacoast to recover the face amount of the debt.

During the three months ended March 31, 2011, Seacoast purchased $50,637 of the Dutchess debt (See “Other Convertible Promissory Notes” below) subject to the same terms as the original Dutchess debt.

During the three months ended March 31, 2011 and 2010, related to the notes above, the Company:

1.

Recognized $1,899 and $2,133 in interest expense during 2011 and 2010, respectively.

2.

Converted $95,000, including $91,747 of principle and $3,253 of accrued interest into 19,000,000 shares of common stock;

3.

Had a current principle balance and accrued interest balance of $14,550 and $472, respectively.

Other Convertible Promissory Notes

In November 2006, Human BioSystems entered into a loan transaction with Dutchess Private Equities, LP (“Dutchess”), and issued to Dutchess a Promissory Note with a face value of $1,200,000, net proceeds to the Company of $1,000,000 and an imputed annual rate of interest of 43.278%.  The November 2006 Dutchess Note matured on August 31, 2007.   Repayment of the face value was to be made monthly in the amount of $120,000, plus 50% of any proceeds raised over $120,000 per month from Puts, issued by the Company as collateral.  In May 2007, the Company entered into a loan transaction with Dutchess and issued a Promissory Note with a face value of $462,000, net proceeds to the Company of $350,000 and an imputed annual rate of interest of 63.108%.  The May 2007 Dutchess Note matured on April 15, 2008.  Repayment of the face value was to be made monthly in an amount of the greater of 1) 100% of the proceeds raised from Puts given to Dutchess by the Company exceeding $120,000 per month or 2) $51,333 per month.  If both Dutchess Note’s face value was not paid off by maturity, the Company would be required to pay an additional 10% on the face value of the First Dutchess Note, plus 2.5% per month until paid off.  Any beneficial conversion feature that may have been recognized would not be relevant to the financial statements for the post-merger reporting which occurred on June 5, 2009 as these transactions occurred prior to the merger.  Both notes were in default at the time of the merger on June 5, 2009.  As a result of the default, Dutchess had the right to increase the face amount of the debentures by 10% of the face amount as an initial penalty and 2.5% of the face amount per month as liquidated damages.  As of March 31, 2009, Dutchess had not elected this right.  On June 5, 2009 Dutchess elected to exercise their right to impose penalties under the original notes and agreed to a $327,526 increase in the face amount of the debentures to $650,000.  Both notes contain a conversion feature that became exerciseable only upon default.  As a result of the default status of the notes, Ducthess currently has the right to convert the notes at a conversion price equal to 80% of the closing bid price of our common stock on the day prior to the conversion date.  All conversions of Dutchess debentures are performed according to the methodology contained in the original notes.

During the year ended December 31, 2010, $202,363 was converted into 6,582,911 shares of common stock.  Of the 6,582,911 shares issued, $182,500 was converted into 5,650,000 shares and $19,863 was repaid through the Company’s exercise of PUTS into 932,911 shares (See Note L, Investment Agreements below).  As of December 31, 2010 and 2009, the balance of these notes was $74,637 and $282,000, respectfully.

During the three months ended March 31, 2011, the entire balance of $74,637 of the Dutchess debt was purchased by two outside parties.  The terms of the debt did not change.

-15-

SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE H – CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE (Continued)

Other Convertible Promissory Notes (Continued)

On December 17, 2010 the Company issued $13,500 face value note that carries interest of eight percent (8%) per annum with no prepayments required and converts into shares of the Company upon default at a conversion price of $0.005.  Per ASC 470-20-25-12, no portion of the proceeds from this note were attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount, the interest rate is lower than the Company would pay for non-convertible debt and the conversion price was greater than the perceived market value of the stock.  Additionally, the Company has experienced significant operating losses and shareholder dilution, in the event of a conversion an attempt to sell converted shares would most likely result in a lower stock price due to the thin trading volume of the Company’s stock on the secondary markets, and the perceived market value of the stock was less than the conversion price due to the above and due to the significant decrease in the stated trading values of the Company’s stock which has decreased 97% from $0.308 one year prior to this note leaving significant uncertainty about the future trading price of the stock and the ability to recover the face amount of the debt.  During the three months ended March 31, 2011, the Company recognized $289 of interest expense on this note.

NOTE I – SUBSIDIARY PURCHASE LOAN

Secured Promissory Note to Cambio Enterprises in the amount of $263,202 dated August 12th 2008.  The note bears interest of eight percent (8.0%) per annum, requires monthly principal and interest payments of $4,102, matures seven years from the date of the note or August 12, 2015 and is secured by certain assets of the Company.  

In addition, the note is personally guaranteed by Frank J. Drechsler, CEO and General Manager, of San West, Inc.  As of December 31, 2010, the total principle due under this note was $222,456, and includes $39,176 and $183,280 recorded as current and non-current notes payable, respectively.  During the year ended December 31, 2010 and 2009, the Company recorded interest expense of $17,633 and $24,334, respectively related to this note.  During the year ended December 31, 2010, the Company made payments totaling $59,859 ($33,656 of principle and $26,203 of interest).

  

As of March 31, 2011, the total principle due under this note was $211,248, and includes $37,141 and $174,107 recorded as current and non-current notes payable, respectively.  During the three months ended March 31, 2011 and 2010, the Company recorded interest expense of $3,182 and $4,996, respectively related to this note.  During the three months ended March 31, 2011 and 2010, the Company made payments totaling $14,390 ($11,209 of principle and $3,182 of interest) and $12,717 ($12,717 of interest), respectively.

 

NOTE J – SHAREHOLDER LOANS

From time to time, the Company’s CEO, Frank J. Drechsler has deposited funds and made payments to vendors on behalf of the Company.  On April 1, 2009, the Company and Mr. Drechsler entered into a promissory note for the principal balance then due or $216,950.  The note accrues interest at four percent (4%) per annum, is due in three years or April 1, 2012 and requires only one principal and interest payment upon maturity.  During the three months ended March 31, 2011 and 2010, the Company recognized $2,140 and $2,140, respectively of interest expense related to this note.  

NOTE K – CAPITAL STOCK

Preferred Stock

During the three months ended March 31, 2011 and year ended December 31, 2010, the Company issued 10,000 and 77,100 shares of non cumulative Series A Preferred Stock, respectively at a price of $1.00 per share (See SAN WEST, INC. CERTIFICATE OF DESIGNATION FOR THE SERIES A PREFERRED STOCK filed with the Securities and Exchange Commission on Form 8-K on September 13, 2010).

-16-

SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

 NOTE K – CAPITAL STOCK (Continued)

Common Stock

During the three months ended March 31, 2011, our Company recognized the following common stock related activity:

1.

The Company received services valued at $73,100 in exchange for 5,000,000 shares of common stock valued at the market price of our common stock on the date of issuance or $0.0146 per share.  

2.

The Company issued 23,460 upon the conversion of $117,300 of debt and accrued interest.

During the year ended December 31, 2010, our Company recognized the following common stock related activity:

1.

Towards the end of 2009, the Company received $67,500 in exchange for 964,286 shares of common stock that was issued in 2010.

2.

The Company issued 5,275,000 shares of common stock at various times and prices ranging from $0.005 to $0.035 per share with a weighted average price of $0.0084 per share for proceeds of $44,500.

3.

The Company issued 5,000,000 shares to Jesse Gonzales for director services valued on the date of issuance at $552,925.

4.

As of December 31, 2009, the Company had recorded $372,325 of service related expense related to 6,000,000 shares that were owed but unissued.  During 2010, all 6,000,000 shares were issued, including 1,300,000 shares on March 17, 2010, 4,500,000 on October 22, 2010, and 200,000 on December 23, 2010.

5.

The Company issued 6,000,000 shares of common stock for services valued on the date of issuance at $202,951.

6.

The Company PUT 2,167,000 shares of common stock to Dutchess in exchange for $37,852 of which the Company received $17,989 and $19,863 was applied to reduce our debt due to Dutchess (See Note L below).

7.

The Company issued 2,093,145 to Dutchess as a finder’s fee related to the Investment Agreement and recorded stock compensation expense of $75,353 (See Note L and Note P below).

8.

Dutchess canceled 4,087,270 shares originally received in connection with the merger between Human BioSystems and San West in 2009.  The shares were originally recorded as expense in the amount of $122,618.   Pursuant to ASC 505-30-30-7, the cost of treasury shares shall be reflected in capital.  Since the stock has no par value and the cancellation did not require any cash outlays by the Company, no value has been assigned to these shares and the cancellation only affected the calculation of weighted average shares outstanding used in the calculation of earnings per share (See Note P below)..

9.

The Company issued 44,369,871 upon the conversion of $503,660 of debt and accrued interest.

Common stock issued in a period subsequent to our reporting dates is included in the calculation of weighted average shares outstanding as of the date the expense was recognized or funds received.

2009 San West Long Term Equity Incentive Plan

On July 21, 2009, the Board of Directors of the Company adopted the 2009 San West Long Term Equity Incentive Plan (the “Stock Incentive Plan”).  The Stock Incentive Plan provides for equity incentive benefits to awardees in the form of option rights or appreciation rights, restricted stock, restricted stock units, and/or performance shares or performance units.  The total number of shares of Common Stock which may be awarded under the Plan is 50,000,000.  If any awarded shares are forfeited, they become available for future issuance.  An annual aggregate limit of 5,000,000 shares is set for any participant.  The terms of each award are determined by the board and are to be evidenced in writing.  No equity awards have been issued under the 2009 San West Long Term Equity Incentive Plan as of the date of this report.

-17-

SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

 

NOTE L – INVESTMENT AGREEMENTS

In December 2008, HBS entered into the Investment Agreement with Dutchess effective December 29, 2008 whereby the Company could sell up to $10 million of shares to Dutchess based on a certain formula.  However, as a result of the reverse merger between San West, Inc and Human BioSystems in June 2009, this original Investment Agreement was considered void due to the significant change in control.  As a result, on January 8, 2010, the Company filed a Post-Effective Amendment No.1 to Form S-1 seeking to register for resale up to 8.5 million shares common stock by Dutchess Opportunity Fund, II, LP, a selling stockholder pursuant to a “put right” under an investment agreement (the “Investment Agreement”), also referred to as an Equity Line of Credit, that we have entered into with Dutchess.  The S-1 and subsequent amendments became effective on June 21, 2010.  Pursuant to the terms of the Investment Agreement, we may offer, through a series of puts, and Dutchess must purchase from time to time shares of our common stock, provided that Dutchess shall not be required to purchase shares of our stock with an aggregate purchase price in excess of $10,000,000.  We will not receive any proceeds from the sale of these shares of common stock offered by Dutchess.  However, we will receive proceeds from the sale of securities pursuant to our exercise of this put right if and when the Company exercises its right.  The purchase price of shares purchased under this Investment Agreement shall be equal to 92% of the lowest closing “best bid” price (the highest posted bid price) of the common stock during the five consecutive trading days immediately following the date of our notice to Dutchess of our election to put shares pursuant to this Investment Agreement (The Company does not recognize expense for the 8% discount.  Dutchess in effect acts as a vehicle for the Company to be able to finance our operations through the Investment Agreement and they reasonably expect to make a small profit or commission which in this case is theoretically 8% assuming no negative volatility in our stock price.  In accounting for the discount, we rely on Title 17, 230.141; SFAS No. 141, Business Combinations, Paragraph 24; and IAS 32 Financial Instruments, SIC 17.  We treat the discount as an issuance cost.  As such, the value of the stock issuance is reduced by the 8% discount and each issuance is reflected at 92% in our common stock equity balance with no expense booked to the statement of operations).  The dollar value that we will be permitted to put pursuant to this Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the three trading days prior to the notice of our put, multiplied by the average of the three daily closing prices immediately preceding the date of the put, or (B) $100,000.  During the year ended December 31, 2010, the Company “put” to Dutchess 2,167,000 shares of common stock and received net proceeds of $37,852 of which $19,863 was applied to debt owed to Dutchess and $17,989 was remitted to the Company.  No PUTS were placed with Dutchess during the three months ended March 31, 2011.

NOTE M - RELATED PARTY TRANSACTIONS

 

During the year ended December 31, 2010, our CEO Frank Drechsler made a $5,000 payment to a vendor on behalf of the Company.  There were no related party transactions during the three months ended March 31, 2011.

-18-

SAN WEST, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

NOTE N – SUBSEQUENT EVENTS

Pursuant to FASB Accounting Standards Codification 855, Subsequent Events, Including ASC 855-10-S99-2, the Company evaluated subsequent events through May 15, 2011.

Subsequent to March 31, 2011, the Company:

1.

Issued 1,500 shares of Series A Preferred Stock in exchange for $1,500;

2.

Issued 3,000,000 shares of restricted common stock in exchange for services valued at $33,000;

3.

Issued 4,466,667 shares to Gemini Master Fund upon their conversion of $22,333 of debt; and

4.

 Issued two promissory notes to Seacoast advisors in exchange for $75,000.  The first note is dated April 1, 2011 for $50,000 and the second note was issued on April 18, 2011 for $25,000.  The notes have the same terms and conditions, including interest at eight percent (8%) per annum and only one principal and interest payment due upon maturity on each note’s six month anniversary and  in the event of default, the notes become convertible at the option of the holder into common stock of the Company at a conversion price of $0.005 per share.  Per ASC 470-20-25-12, no portion of the proceeds from these notes are attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount, and the interest rate is lower than the Company would pay for non-convertible debt. In addition, the restrictions on the conversion prevent the holders from fully exercising the conversion, the Company has experienced significant operating losses and shareholder dilution, in the event of a conversion an attempt to sell converted shares would most likely result in a lower stock price due to the thin trading volume of the Company’s stock on the secondary markets, and the perceived market value of the stock was less than the conversion price due to the above and due to the significant decrease in the stated trading values of the Company’s stock.

On April 19, 2011, the Company resolved to adopt the Non-Employee Consultants Retainer Stock Plan for the Year 2011. The purpose of this Plan is to enable the Company, to promote the interests of the Company and its stockholders by attracting and retaining non-employee consultants capable of furthering the future success of the Company and by aligning their economic interests more closely with those of the Company’s stockholders, by paying their retainer or fees in the form of shares of the Company’s common stock. 10,000,000 shares of common stock are registered to this plan at an offering price of $0.011. The Plan shall expire on April 19, 2021.

 

On April 27, 2011, Norman Reynolds received 3,000,000 shares common stock in lieu of payment by the Company for legal services he provided as the Company’s attorney.

 

-19-

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report contains forward-looking statements including statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “expects,” “anticipates,” “intends,” “believes” or similar language.  These forward-looking statements involve risks, uncertainties and other factors.  All forward-looking statements included in this quarterly report are based on information available to us on the date hereof and speak only as of the date hereof.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  The factors discussed elsewhere in this quarterly report are among those factors that in some cases have affected our results and could cause the actual results to differ materially from those projected in the forward-looking statements.

The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report.

Overview

Our goal is to become one of the largest dealers of off-road buggies in the United States through acquisitions and internal growth. The recreational vehicle industry is highly fragmented with an estimated 4,000 retail stores throughout the United States.  We are attempting to capitalize upon the consolidation opportunities available and increase our revenues and income by acquiring additional dealers and improving our performance and profitability.

We sell and service off-road buggies and related after market performance products and accessories.  Our products are sold both at our store and online while our buggy repair services are sold and fulfilled at our store.  Our goal is to address the growing demand for off-road vehicles while offering our customers the highest quality products at the most affordable and competitive prices, following up with customer care and support services.

Our plan of growth is to establish master dealer arrangements with leading brands, continue to expand our online sales and to leverage our equity to negotiate and acquire synergistic businesses to capitalize on the growth of the U.S. market for Chinese made off-road buggies and go karts.

We plan to maximize the operating and financial performance of our dealerships by achieving certain efficiencies that will enhance internal growth and profitability.  By consolidating our corporate and administrative functions, we believe we can reduce overall expenses, simplify dealership management and create economies of scope.

We will specifically target dealers in markets with strong buyer demographics that, due to under-management or under-capitalization, are unable to realize their market share potential and can benefit substantially from our systems and operating strategy.

Buggy World, located in Santee, California, is our primary location to sell buggies, modification parts, and accessories for off-road buggies built in China for the U.S. market.  We currently utilize a “just-in-time” inventory system which reduces our overall inventory expense and risk.  We ship all requested kits and products within 72 hours of each order.

 

Seasonality.

Our products are subject to seasonality.  Traditionally, the off-road buggy season begins in early September and runs until May.

Impact of Inflation.

General inflation in the economy has driven the operating expenses of many businesses higher, and, accordingly we have experienced increased salaries and higher prices for supplies, goods and services.  We continuously seek methods of reducing costs and streamlining operations while maximizing efficiency through improved internal operating procedures and controls.  While we are subject to inflation as described above, our management believes that inflation currently does not have a material effect on our operating results.  However, inflation may become a factor in the future.

-20-

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported.  Note A of Notes to Financial Statements describes the significant accounting policies used in the preparation of the financial statements.  Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations.  Specifically, critical accounting estimates have the following attributes:

·

We are required to make assumptions about matters that are highly uncertain at the time of the estimate; and

·

Different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty.  We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances.  These estimates may change as new events occur, as additional information is obtained and as our operating environment changes.  These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known.  Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations.

In preparing our financial statements to conform to accounting principles generally accepted in the United States, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes.  These estimates include useful lives for fixed assets for depreciation calculations and assumptions for valuing options and warrants.  Actual results could differ from these estimates.

Revenue Recognition

Revenue from the sale of inventory is recognized when the earning process is complete and when title has transferred to the customer, which is considered to have occurred after delivery.

Stock-Based Compensation

The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  Stock issued for compensation is valued using the market price of the stock on the date of the related agreement or the date of issuance whichever is most relevant.  We use the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both employees and non-employees.  In calculating this fair value, there are certain assumptions that we use consisting of the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate.  The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.

Inventories

Inventory is valued at the lower of cost or market.  Cost is determined on a first-in-first-out basis.  Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value.  San West’s inventory consists primarily of vehicle parts and complete vehicles.

-21-

Intangible Assets

 

Goodwill and other intangible assets with indefinite useful lives are no longer amortized, but are evaluated for impairment annually, or immediately if conditions indicate that impairment could exist.  The evaluation requires a two-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss.  The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss.  Both steps of the goodwill impairment testing involve significant estimates.

Results of Operations

Three Months Ended March 31, 2011 Compared With the Three Months Ended March 31, 2010.

Revenues

Net Revenue for the three months ended March 31, 2011 and 2010 was $596,486 and $493,615, respectively.  The 102,871, or 20.8% increase in revenue is due to increasing sales through County Imports.  The Company acts as dealer and fulfillment house for www.countyimports.com resulting in additional revenue.

Gross Profit

Gross profit for the three months ended March 31, 2011 and 2010 was $119,391 and $135,492, respectively.  The Gross margin for the three months ended March 31, 2011 and 2010 20.0% and 27.4%, respectively.  Our three month year-over-year gross margin decreased 7.4% due to fluctuations in our product sales mix.     

Selling General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) for the three months ended March 31, 2011 were $249,077, a decrease of $675,365 from $924,442 for the three months ended March 31, 2010.  The decrease in expense is mainly due to the recognition of $642,175 in non-cash stock compensation in 2010 compared to $73,100 of stock compensation during 2011, $71,426 decrease in professional fees and $34,864 net decrease in other general expenses.

Other Income and Expense

 

Total other expense decreased $67,173 to $96,281 for the three months ended March 31, 2011 compared to $163,454 of expense during the same period last year.  The decrease is primarily due to a $26,000 reduction in the amortization of a convertible promissory note’s beneficial conversion feature to $80,000 in the current year compared to $150,000 in the prior year offset by a $3,685 increase in interest expense related to our promissory notes overall.

Net Loss

 

As a result of the foregoing factors, our net loss was $225,967, or $0.00 per share, for the three months ended March 31, 2011 compared to a loss of $952,404, or $0.01 per share for the three months ended March 31, 2010.  Excluding one-time, non-cash charges totaling $197,100 and $792,175 for the three months ended March 31, 2011 and 2010, respectively, related to stock compensation and the expense associated with the beneficial conversion feature of our convertible notes, the Company’s loss decreased $87,362 to $72,867 for the three months ended March 31, 2011 compared to $160,229 for the three months ended March 31, 2010.

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Financial Condition

From inception to March 31, 2011, we have incurred an accumulated deficit of $3,423,320.  This loss has been incurred through a combination of professional fees and expenses supporting our plans to acquire synergistic businesses as well as past operating losses.  

Our primary source of liquidity has been cash generated by operations, issuance of promissory notes and capital raised through equity sales of our common stock.  As of March 31, 2011 we had cash on hand of $57,454 and experienced a net increase in cash of $45,888 during the three months ended March 31, 2011 compared to cash on hand of $11,566 at December 31, 2010.

As of March 31, 2011, we had outstanding liabilities of $1,856,630 compared to $1,875,050 as of December 31, 2010.  Of this amount, approximately $1,465,573 is payable within 12 months.  In the event that we are unable to repay all or any portion of these outstanding amounts from cash from operations, we would be required to:

·

Seek one or more extensions for the payment of such amounts;

·

Refinance such debt to the extent available; Raise additional equity capital; or

·

Consummate any combination of the foregoing transactions.

Our available working capital and capital requirements will depend upon numerous factors, including product sales, the timing and cost of expanding into new markets, the status of our competitors, and our ability to attract and retain key employees.

The Company’s Liquidity Plan

Recent operating results give rise to concerns about the Company's ability to generate cash flow from operations sufficient to sustain ongoing viability. Net loss for the three months ended March 31, 2011 was $225,967, while cash used for operations was $13,904.

During the three months ended March 31, 2011, San West:

·

The Company issued 10,000 shares of preferred stock in exchange for $10,000;

·

The Company issued 5,000,000 shares to in exchange for services valued on the date of issuance at $73,100;

·

The Company issued 23,460,000 upon the conversion of $117,300 of debt;

·

The company received $61,000 in exchange for a convertible promissory note with a face amount of $80,000 with a $19,000 original issue discount being accreted over the term of the note.

During the year ended December 31, 2010, San West:

·

The Company issued 5,275,000 shares of common stock at prices ranging from $0.005 to $0.035 per share with a weighted average price of $0.0084 per share for proceeds of $44,500;

·

The Company issued 5,000,000 shares to Jesse Gonzales for director services valued on the date of issuance at $552,925;

·

The Company issued 6,000,000 shares of common stock for services valued on the date of issuance at $202,951;

·

The Company PUT 2,167,000 shares of common stock to Dutchess in exchange for $37,852 of which the Company received $17,989 and $19,863 was applied to reduce our debt due to Dutchess;

·

The Company issued 2,093,145 to Dutchess as a finder’s fee related to the Investment Agreement and recorded stock compensation expense of $75,353;

·

The Company issued 44,369,871 upon the conversion of $503,660 of debt;

·

The company issued 77,100 shares of Series A Preferred stock in exchange for $77,100;

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·

The Company received $296,500 and repaid $38,656 of various promissory notes.

In its report prepared in connection with our 2010 financial statements, our independent registered public accountants have included an explanatory paragraph that the Company has suffered recurring losses and current liabilities exceed current assets which raises substantial doubt about its ability to continue as a going concern.

Management is currently in the process of seeking additional equity financing with potential investors. There can be no assurance that such additional financing will be obtained. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company's need to raise additional equity or debt financing and the Company's ability to generate cash flow from operations will depend on its future performance and the Company's ability to successfully implement business and growth strategies.  The Company's performance will also be affected by prevailing economic conditions.   Many of these factors are beyond the Company's control.   If future cash flows and capital resources are insufficient to meet the Company's commitments, the Company may be forced to reduce or delay activities and capital expenditures or obtain additional equity capital.   In the event that the Company is unable to do so, the Company may be left without sufficient liquidity.   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We conduct all of our transactions, including those with foreign suppliers and customers, in U.S. dollars. We are therefore not directly subject to the risks of foreign currency fluctuations and do not hedge or otherwise deal in currency instruments in an attempt to minimize such risks.  Demand from foreign customers and the ability or willingness of foreign suppliers to perform their obligations to us may be affected by the relative change in value of such customer or supplier's domestic currency to the value of the U.S. dollar.  Furthermore, changes in the relative value of the U.S. dollar may change the price of our products relative to the prices of our foreign competitors.

Item 4.  Controls and Procedures.

See Item 4(T) below.

Item 4(T).  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of March 31, 2011, under the direction of the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a — 15(e) under the Securities Exchange Act of 1934, as amended.  Based on the evaluation of these controls and procedures required by paragraph (b) of Sec. 240.13a-15 or 240.15d-15 the disclosure controls and procedures have been found to be ineffective to provide reasonable assurance that information we are required to disclose in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our manager's CEO and CFO, as appropriate to allow timely decisions regarding required disclosure due to the material weakness in our internal control over financial reporting as described below.

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the securities Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms.  Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Evaluation of Internal Control Over Financial Reporting

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Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2011.  In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. In management’s assessment of the effectiveness of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) as required by Exchange Act Rule 13a-15(c), our management concluded as of the end of the period covered by this Report, that we did not maintain effective internal control over financial reporting due to the weakness described below.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We identified the following material weakness in our assessment of the effectiveness of internal control over financial reporting:

We did not have adequate segregation of duties, due to our resources and size which prevent us from being able to employ sufficient resources to enable us to have adequate segregation of duties within our internal control system.

We did not design and implement adequate controls related to the accounting of our merger with Human BioSystems.  Specifically, applying guidance from ASC 805-40, Business Combinations, Reverse Acquisitions, we originally accounted for the merger under purchase accounting when recapitalization accounting was more appropriate.  This material weakness has resulted in the required restatement of previously issued financial statements for the year ended December 31, 2009.

We did not design and implement adequate controls related to the accounting for the issuance of stock and the inclusion of beneficial conversion features associated with our convertible promissory notes as described in the footnotes to our 2010 Form 10-K financial statements; Note P - 2010 Accounting Error Adjustments.  

Plan of Remediation

To remediate the aforementioned material accounting weaknesses, we are implementing additional controls to help ensure that all accounting pronouncements are sufficiently researched and that our conclusions relative to the effect of such pronouncements on us are communicated to management and our auditors.

Regarding the lack of segregation of duties, if the volume of business increases and sufficient capital is secured, it is the Company’s intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.

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 temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this prospectus.

Changes in Internal Controls

Management of the Company has evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report.  There was no change in the Company’s internal control over financial reporting identified in that evaluation that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, other than what has been reported above.

Limitations on the Effectiveness of Controls and Other Matters

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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, as amended).  Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  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 may be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the 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, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Risk Factor Related to Controls and Procedures

The Company has limited segregation of duties amongst its employees with respect to the Company’s preparation and review of the Company’s financial statements due to the limited number of employees, which is a material weakness in internal controls, and if the Company fails to maintain an effective system of internal controls, it may not be able to accurately report its financial results or prevent fraud.  As a result, current and potential stockholders could lose confidence in the Company’s financial reporting which could harm the trading price of the Company’s stock.

Management has found it necessary to limit the Company’s administrative staffing in order to conserve cash until the Company’s level of business activity increases.  As a result, there is limited segregation of duties amongst the employees.  The Company and its independent public accounting firm have identified this as a material weakness in the Company’s internal controls.  The Company intends to remedy this material weakness by hiring additional employees and reallocating duties, including responsibilities for financial reporting, among the employees as soon as there are sufficient resources available.  However, until such time, this material weakness will continue to exist.

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings.

Not applicable.

Item 1a.  Risk Factors.

Not applicable.

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

During the three months ended March 31, 2011, San West issued 28,460,000 shares of its common stock and 10,000 shares of preferred stock in private transactions not involving a public offering as follows:

·

Issued 23,460,000 shares upon the conversion of $117,300 of debt.

·

Issued 5,000,000 shares in exchange for services valued at $73,100.  

All funds received from the sale of our shares were used for working capital purposes.

All shares bear a legend restricting their disposition.

The shares were issued in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act or Rule 506 of Regulation D promulgated under the Securities Act.  Each investor took his securities for investment purposes without a

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view to distribution and had access to information concerning us and our business prospects, as required by the Securities Act.  In addition, there was no general solicitation or advertising for the purchase of our shares.  Our securities were sold only to an accredited investor, as defined in the Securities Act with whom we had a direct personal preexisting relationship, and after a thorough discussion.  Finally, our stock transfer agent has been instructed not to transfer any of such shares, unless such shares are registered for resale or there is an exemption with respect to their transfer.

Each purchaser was provided with access to our filings with the SEC, including the following:

·

Our annual report to stockholders for the most recent fiscal year, the definitive proxy statement filed in connection with that annual report, and, if requested by the purchaser in writing, a copy of our most recent Form 10-K under the Exchange Act.

·

The information contained in an annual report on Form 10-K under the Exchange Act.

·

The information contained in any reports or documents required to be filed by San West under sections 13(a), 14(a), 14(c), and 15(d) of the Exchange Act since the distribution or filing of the reports specified above.

·

A brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in San West’ affairs that are not disclosed in the documents furnished.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

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

Not applicable.

Item 5.  Other Information.

Not applicable.

Item 6.  Exhibits.

Exhibit No.	Identification of Exhibit
31.1*	Certification of Frank J. Drechsler, Chief Executive Officer, Chief Financial Officer and Principle Accounting Officer of San West, Inc., pursuant to 18 U.S.C. §1350, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Frank J. Drechsler, Chief Executive Officer, Chief Financial Officer and Principle Accounting Officer of San West, Inc., pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

*

Filed Herewith

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SAN WEST, INC.

Date: May 18, 2011.

By /s/ Frank J. Drechsler

Frank J. Drechsler, Chief Executive Officer, Chief Financial Officer

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

Signature		Title		Date
/s/ Frank J. Drechsler		Chief Executive Officer, Chief Financial Officer and Director		May 18, 2011

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