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 March 31, 2017
[  ]	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)

____________________________________N/A_________________________________

(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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

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]

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 25,263,176 common shares as of May 22, 2017.

	TABLE OF CONTENTS	Page
PART I – FINANCIAL INFORMATION
Item 1:	Consolidated Condensed Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4:	Controls and Procedures	16
PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	17
Item 1A:	Risk Factors	17
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3:	Defaults Upon Senior Securities	17
Item 4:	Mine Safety Disclosures	17
Item 5:	Other Information	18
Item 6:	Exhibits	18

 

2

PART I - FINANCIAL INFORMATION

 

Item 1.

     Condensed Financial Statements

 

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

 

F-1	Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016;
F-2	Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited);
F-3	Consolidated Statements of Cash Flows for the three months ended March 31, 2017  and 2016 (unaudited);
F-4	Notes to Condensed 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 March 31, 2017 are not necessarily indicative of the results that can be expected for the full year.

 

SUNVALLEY SOLAR, INC.
Consolidated Balance Sheets
ASSETS
				March 31,			December 31,
				2017			2016
				(unaudited)
CURRENT ASSETS
	Cash and cash equivalents			$	599,701		$	1,563,751
	Restricted cash				37,500			37,500
	Accounts receivable, net				2,112,517			3,062,923
	Inventory				114,347			95,461
	Costs in excess of billings on uncompleted contracts				355,746			37,790
	Prepaid expenses and other current assets				79,393			76,358
		Total current assets			3,299,204			4,873,783
PROPERTY AND EQUIPMENT, NET					73,913			62,751
OTHER ASSETS
	Long-term accounts receivable, net				1,266,847			1,414,589
	Intangible assets, net				507,207			537,536
	Goodwill				218,076			218,076
	Other assets				135,906			7,220
		Total other assets			2,128,036			2,179,421
		TOTAL ASSETS		$	5,501,153		$	7,113,985
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Accounts payable and accrued expenses			$	4,016,119		$	4,885,326
	Customer deposits				13,121			13,396
	Accrued warranty				166,342			163,121
	Advances from contractors				103,389			103,389
	Notes payable, net of discounts				32,281			81,181
		Total current liabilities			4,331,252			5,246,413
		TOTAL LIABILITIES			4,331,252			5,246,413
STOCKHOLDERS' EQUITY
	Class A convertible preferred stock, $0.001 par value,
	1,000,000 shares authorized, 500,000 and 120,000 shares
	issued and outstanding, respectively				500			120
	Class B convertible preferred stock, $0.001 par value,
	2,000,000 shares authorized, 90,000 and 130,000 shares
	issued and outstanding, respectively				90			130
	Common stock, $0.001 par value, 150,000,000 shares
	authorized, 24,536,176 and 23,857,176 shares issued and outstanding, respectively				24,560			23,858
	Additional paid-in capital				6,317,899			6,292,416
	Accumulated deficit				(5,173,148)			(4,448,952)
		Total Stockholders' Equity			1,169,901			1,867,572
		TOTAL LIABILITIES AND
		STOCKHOLDERS' EQUITY		$	5,501,153		$	7,113,985
The accompanying notes are an integral part of these consolidated financial statements.

SUNVALLEY SOLAR, INC.
Consolidated Statements of Operations
(unaudited)
				For the Three Months Ended
				March 31,
				2017			2016
REVENUES				$	295,109		$	-
COST OF SALES					263,597			-
GROSS PROFIT					31,512			-
OPERATING EXPENSES
	Selling, general and
	administrative expenses				750,373			831,295
	Total Operating Expenses				750,373			831,295
INCOME (LOSS) FROM OPERATIONS					(718,861)			(831,295)
OTHER INCOME (EXPENSES)
	Other income (expense)				(2,076)			2,096
	Interest expense				(3,259)			(147)
	Loss on disposal of assets				-			(415)
	Total other income (expenses)				(5,335)			1,534
INCOME (LOSS) BEFORE TAXES					(724,196)			(829,761)
	Provision for income taxes				-			-
NET LOSS				$	(724,196)		$	(829,761)
BASIC AND DILUTED LOSS PER SHARE				$	(0.03)		$	(0.19)
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING					23,896,398			4,357,849
The accompanying notes are an integral part of these consolidated financial statements.

SUNVALLEY SOLAR, INC.
Consolidated Statements of Cash Flows
(unaudited)
						For the Three Months Ended
						March 31,
						2017						2016
OPERATING ACTIVITIES:
	Net income (loss)					$		(724,196)				$	(829,761)
	Adjustments to reconcile net income (loss) to net cash
	provided by operating activities:
		Depreciation and amortization						35,667					3,711
		Preferred stock issued for services						26,527					498,629
		Loss on sale of asset						-					415
		Debt discount						3,407					-
	Changes in operating assets and liabilities:
		Accounts receivable						1,098,148					952,326
		Inventory						(18,886)					(4,524)
		Prepaid expenses and other assets						(3,035)					(82,948)
		Costs in excess of billings on uncompleted contracts						(317,956)					(103,664)
		Other assets					(128,686)						-
		Accounts payable and accrued expenses					(739,759)						(953,794)
		Accrued warranty expenses					(126,229)						(28,863)
		Customer deposits					(275)						374,558
		Net Cash Used in Operating Activities					(895,273)						(173,915)
INVESTING ACTIVITIES:
		Purchase of property and equipment					(16,500)						(2,013)
		Proceeds from disposal of equipment					-						595
		Net Cash Used in Investing Activities					(16,500)						(1,418)
FINANCING ACTIVITIES:
	Repayments of long term debt						(52,307)						-
	Payment of capital lease						-						(1,125)
		Net Cash Used in Financing Activities					(52,307)						(1,125)
NET CHANGE IN CASH							(964,080)						(176,458)
CASH AT BEGINNING OF PERIOD							1,563,781						1,209,198
CASH AT END OF PERIOD					$		599,701				$		1,032,740
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	CASH PAID FOR:
		Interest			$		3,259				$		147
		Income taxes			$		-				$		-
The accompanying notes are an integral part of these consolidated financial statements.

6

SUNVALLEY SOLAR, INC.

 Notes to Condensed Consolidated Financial Statements

March 31, 2016 and December 31, 2015

NOTE 1 - CONDENSED FINANCIAL STATEMENTS

The accompanying consolidated financial statements have been prepared by the Company without audit.  The Consolidated Financial Statements include the accounts of Sunvalley and its subsidiary, Sunvalley Solar Energy, Inc. (formerly known as Rayco Energy, Inc).  All significant intercompany accounts and transactions have been eliminated. 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 March 31, 2017, 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, 2016 audited consolidated financial statements.  The results of operations for the periods ended March 31, 2017 and 2016 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

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents.

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 these 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.

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SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2017

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventory

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

The Company’s inventory consisted of the following at March 31, 2017 and December 31, 2016:

	March 31, 2017			December 31, 2016
Raw materials	$	-		$	-
Work in Progress		-			-
Finished goods		114,347			95,461
TOTAL	$	114,347		$	95,461

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 stock options would be anti-dilutive. Dilutive instruments include 25,000 shares to be issued upon the conversion of the Series A Convertible Preferred Stock, and 900,000 shares to be issued upon the conversion of the Series B Convertible Preferred Stock. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 925,000 such potentially anti-dilutive shares excluded as of March 31, 2017.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is based upon the Company’s assessment of the collectability of customer accounts.  The Company periodically reviews the allowance by reviewing factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions which may affect a customer’s ability to pay.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiary.  All intercompany amounts and transactions have been eliminated in consolidation,

Depreciation and Amortization

Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are computed using the straight-line method over the expected useful life of the asset.

Goodwill and Intangible Assets

Goodwill is tested on an annual basis and during the period between annual tests in certain circumstances, and written down when impaired.  No impairment tests were performed during the periods ended March 31, 2017 and there was no impairment recorded as of March 31, 2017

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SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2017

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment and Long-Lived Assets

Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Determination of recoverability of long-lived assets is based upon an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition.  Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based upon the fair value of the asset.  Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Fair Value of Financial Instruments

The fair value of certain of the Company’s financial instruments, including cash and cash equivalents, accrued compensation and other current liabilities approximates the carrying amount because of their short maturities.  

Concentrations of Risk

Cash and cash equivalents are maintained with banks insured by the FDIC.  Currently none of the cash held by banks exceeds the insured value.

Advertising Costs

Advertising costs are expensed as incurred.  There were $13,081 and $1,311 of advertising costs for the periods ended March 31, 2017 and 2016, respectively.

Costs in Excess of Billings on Uncompleted Contracts

Costs in excess of billings represent unbilled amounts earned and reimbursable under contracts. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of milestones or completion of the project. Generally, such unbilled amounts will be billed and collected over the next twelve months. Based on our historical experience, we generally consider the collection risk related to these amounts to be low. When events or conditions indicate that the amounts outstanding may become uncollectible, an allowance is estimated and recorded.

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 percentage of completion method of accounting in accordance with ASC 605 effectively January 1, 2017.  Revenues from fixed-price and cost-plus contracts are recognized on the percentage of completion method, whereby revenues on  long-term contracts are recorded on the basis of the Company’s estimates of the percentage of completion of contracts based on the ratio of the actual cost incurred to total estimated costs. This cost-to-cost method is  used  because  management  considers  it  to  be  the  best  available  measure  of  progress  on  these  contracts.  Revenues from  cost-plus-fee  contracts  are  recognized  on  the  basis  of  costs  incurred  during  the  period  plus  the  fee  earned, measured on the cost-to-cost method.

Prior to January 1, 2017, the Company recognized revenue from a system installation under the completed contract method of accounting. Under ASC 605, income is recognized 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 substantial completion of the work.

As of March 31, 2017 and December 31, 2016, the Company has capitalized $355,746 and $37,790 of costs incurred in relation to installation projects.  

9

SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2017

NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

Income tax expense is based on pretax financial accounting income.  Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the bases of assets and liabilities and their reported amounts.  Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized.  No tax expense or benefit was recorded for the three month period ended March 31, 2017.

NOTE 4 – PROPERTY AND EQUIPMENT

The following is a summary of property and equipment at March 31, 2017 and December 31, 2016:

 

		March 31, 2017			December 31, 2016
Computer and equipment	$	91,300		$	91,300
Furniture		21,171			21,171
Software		22,368			22,368
Vehicles		135,340			118,840
Total property and equipment		270,179			253,679
Less: accumulated depreciation		(196,266)			(190,928)
Property and equipment, net		73,913			62,751

Depreciation expense for the three months ended March 31, 2017 and 2016 was $5,338 and $3,711, respectively.

NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

The components of intangible assets at March 31, 2017 were as follows:

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Assembled workforce	$        64,000		$           (11,217)		$      52,783
Goodwill	218,076		-		218,076
Customer List	551,000		(96,576)		454,424
Total	$      833,076		$        (107,793)		$    725,283

Amortization expense recognized was $30,329 and $-0- for the three-months ended March 31, 2017 and 2016, respectively. The Customer List and assembled workforce both have a useful life of 4.13 years as of March 31, 2017.

Estimated amortization expense to be recorded for the next five years is as follows:
	2017 (remaining)		$                                92,671
	2018		123,000
	2019		123,000
	2020		123,000
	2021		45,493
	Total Future Amortization:		$                              507,164

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SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

March 31, 2017

NOTE 6 – PREFERRED STOCK

 

The Company is authorized to issue up to 6,000,000 shares of $0.001 par value preferred stock; 1,000,000 shares of which are designated as Class A Convertible Preferred Stock, and 2,000,000 shares of which are designated as Class B Convertible Preferred Stock. The remaining 3,000,000 shares of preferred stock authorized remain undesignated.

Class A Convertible Preferred Stock

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 0.5 common share for 1 preferred share basis. The Class A Convertible Preferred shares were valued at the trading price of the common shares into which they are convertible. As of March 31, 2017 and December 31, 2016, there were 500,000 and 120,000 shares of Class A Convertible Preferred Stock issued and outstanding, respectively.

The Company issued 500,000 shares of Series A Preferred Stock, 30,000 shares of Series B Preferred Stock, and 700,000 shares of common stock to various individuals for services provided.

Class B Convertible Preferred Stock

The holders of the Class B Convertible Preferred Stock have no dividend rights, have the right to convert each Class B share into 10 post-split common shares and have the right to 10 votes per Class B Convertible Preferred share for all matters submitted to the holders of the Company’s common stock. As of March 31, 2017 and December 31, 2016, there were 90,000 shares and 130,000 shares respectively and 2,000,000 shares of Class B Convertible Preferred Stock issued and outstanding, respectively.

The Company had conversions of Preferred B into Common stock. There were 70,000 shares of Preferred B stock converted into 700,000 shares of Common stock.

NOTE 7 – COMMON STOCK

On February 24, 2017, the Company issued 700,000 shares of common stock to employees for services provided. The shares were valued at $61,600, which was based on the trading price of the Company’s common stock on the date of issuance. The shares vest one year from the issuance date if the recipients remain employed by the Company during the entire year. For the three months ended March 31, 2017, the Company recognized $5,401 of compensation expense related to the issuance of the shares, leaving a remaining amount to be expensed of $56,199.

NOTE 8 – SUBSEQUENT EVENTS

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

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Item 2.     Management’s Discussion and Analysis or Plan of Operation1

 

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

 

Sunvalley Solar, Inc. (the “Company”’ “we”, “our”) is 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, farming and 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.  We conduct our operations through our wholly-owned subsidiary, Sunvalley Solar Tech, Inc.  On May 15, 2016 we acquired Rayco Energy, Inc. (“Rayco”), a northern California company specializing in providing cost-saving and efficient energy solutions, including LED lighting, Solar Thermal and Solar Electricity, to local communities and business units. We also agreed to invest no less than $350,000 working capital into Rayco for its current projects and working capital.

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, networked PV panel 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.

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Expansion of Installation Business

We are planning to expand our 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

Our Patent “Networked Solar Panels and Related Methods” was issued on February 24, 2015.  We will need to commercialize this advanced technology through the design, fabrication, and characterization of prototype solar components and system cell.  Through this technology, it is able to address the undesirable fluctuations in the voltage of the power grid due to uncertain environmental impact to solar system. Commercializing this technology into mass production will involve cooperation and approval from utility companies. In addition, the networked PV panel concept will also need to demonstrate that panels using the technology will have a productive life-span and a tolerance to environmental conditions such as humidity, temperature, wind load that are sufficient for the panels to be used in real life application. Accordingly, there is no guarantee that we will be able to commercially produce and market solar panels using our new networked PV panel system technology.

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.

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 $0.50 per watt. As a reference, currently, the lowest panel price is around $0.70 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

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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

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 months ended March 31, 2017 and 2016

 

During the three months ended March 31, 2017, we generated revenues of $295,109 and incurred costs of sales of $263,597, resulting in gross profit of $31,512. We incurred general and administrative expenses of $218,119, salary and wage expense of $497,675, and professional fees of $34,581. We recorded other expenses of $2,076 and interest expense of $3,259. Our net loss for the quarter ended March 31, 2017 was $724,196.

By comparison, during the quarter ended March 31, 2016, we generated revenues of $0 and incurred costs of sales of $0, resulting in gross profit of $0. We incurred general and administrative expenses of $74,970, salary and wage

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expense of $560,806, and professional fees of $53,374. We recorded other income of $(2,096) and interest expense of $147. Our net loss for the quarter ended March 31, 2016 was $829,761.

We are currently working on two major installation projects with contract prices totaling approximately
$4.4 million and these contracts are expected to be substantially completed by the third quarter of 2017.

Our results of operations presented in this Quarterly Report include the results of our newly-acquired subsidiary, Rayco Energy, Inc., from the May 15, 2016 date of acquisition. We believe that, as a result of our acquisition of Rayco Energy, our total revenues will increase as compared to prior financial periods. During the three month periods ended March 31, 2017, our net sales of the products acquired from Rayco Energy, Inc., were approximately $184,653. 

Our decrease in salaries and wages expense as compared to the same periods last year is the result of our issuance of 2,000,000 shares of Class B Convertible Preferred Stock to certain officers, directors, and employees on July 23, 2015, which was being recognized over the vesting period of the grants.

Liquidity and Capital Resources

 

As of March 31, 2017, we had current assets in the amount of $3,299,204, consisting of cash and cash equivalents in the amount of $599,701, accounts receivable of $2,112,517, inventory in the amount of $114,347, costs in excess of billings on uncompleted contracts of $355,746, prepaid expenses and other current assets of $79,393, and restricted cash of $37,500. As of March 31, 2017, we had current liabilities in the amount of $4,331,252. These consisted of accounts payable and accrued expenses in the amount of $4,145,569, accrued warranty of $166,342, customer deposits of $13,121 and notes payable, net of $32,281. Our working capital deficit as of March 31, 2017 was therefore $1,032,048. During the three months ended March 31, 2017, our operating activities used a net $895,273 in cash.  Investing activities used $16,500 in cash and financing activities used $52,307 during the period.

Our accounts payable and accrued expenses as of March 31, 2017 consisted of the following:

Accounts Payable	3,530,811
Credit Card payable	171,802
Accrued vacation	70,558
Other accrued expense	148,135
Payroll liabilities	39,995
Sales tax payable	54,819
Total	$4,016,119

As of March 31, 2017, we had no long term liabilities. As part of our acquisition of Rayco Energy, we acquired a direct capital loan with a balance $32,281 as of March 31, 2017. The note accrues interest at a rate of 24.90%.

In connection with our acquisition of Rayco Energy, we agreed to pay $350,000 in cash as a part of the purchase price.  We issued a Note Payable for this obligation in the amount of $350,000, bearing interest at 6%.  The Note is contingent upon the operations of Rayco netting a profit in excess of $10,000 for the period May 16, 2016 through December 31, 2016.  The conditions were not met during 2016, therefore the note was voided and the company no longer has outstanding contingencies.

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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. 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 March 31, 2017, there were no off balance sheet arrangements.

 

Going Concern

 

We have experienced recurring net losses and had an accumulated deficit of $5,173,148 as of March 31, 2017. 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 March 31, 2017. This evaluation was

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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 March 31, 2017, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2017.

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

 

Please refer to our Annual Report on Form 10-K filed April 17, 2017 for information regarding our pending legal proceedings.

 

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.

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 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
101	Materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 formatted in Extensible Business Reporting Language (XBRL)

 

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:	May 22, 2017
	By: /s/ Zhijian (James) Zhang              Zhijian (James) Zhang Title:    Chief Executive Officer and Director
Date:	May 22, 2017
	By: /s/ Mandy Chung              Mandy Chung Title:    Chief Financial Officer

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