Prospectus Supplement No. 1
Filed Pursuant to Rule 424(b)(3)
File No. 333-171878
SUNVALLEY SOLAR, INC.
398 LEMON CREEK DRIVE, STE. A
WALNUT, CA 91789
Prospectus Supplement No. 1
(to Final Prospectus dated July 8, 2011)
This Prospectus Supplement No. 1 supplements and amends the final prospectus dated July 8, 2011 (the “Final Prospectus”), relating to the sale from time to time of up to 106,666,663 shares of common stock by certain shareholders.
On August 15, 2011, we filed with the U.S. Securities and Exchange Commission the attached Quarterly Report on Form 10-Q.
This Prospectus Supplement No. 1 should be read in conjunction with the Final Prospectus and is qualified by reference to the Final Prospectus except to the extent that the information in this Prospectus Supplement No. 1 supersedes the information contained in the Final Prospectus.
Our shares of common stock are quoted on the OTC Bulletin Board and trade under the ticker symbol “SSOL.” On August 16, 2011, the last reported sale price of our common stock was $0.01 per share.
in our common stock involves a high degree of risk. See “Risk Factors”
beginning on page 7 of the Final Prospectus dated July 8, 2011.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus Supplement No. 1 is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus Supplement No. 1 is August 17, 2011.
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|[X]||Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934|
|For the quarterly period ended June 30, 2011|
|[ ]||Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934|
|For the transition period from to __________|
|Commission File Number: 333-150692|
(Exact name of registrant as specified in its charter)
|(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)|
(Former name, former address and former fiscal year, if changed since last report)
Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
[ ] Large accelerated filer
[ ] Non-accelerated filer
[ ] Accelerated filer
[X] Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 824,502,009 common shares as of August 10, 2011.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]
|TABLE OF CONTENTS|
PART I – FINANCIAL INFORMATION
|Item 1:||Financial Statements||3|
|Item 2:||Management’s Discussion and Analysis of Financial Condition and Results of Operations||4|
|Item 3:||Quantitative and Qualitative Disclosures About Market Risk||10|
II – OTHER INFORMATION
|Item 1:||Legal Proceedings||11|
|Item 2:||Unregistered Sales of Equity Securities and Use of Proceeds||11|
|Item 3:||Defaults Upon Senior Securities||11|
|Item 4:||Removed and Reserved||11|
|Item 5:||Other Information||11|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Our financial statements included in this Form 10-Q are as follows:
|F-1||Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010;|
|F-2||Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited);|
|F-3||Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited);|
|F-4||Notes to Financial Statements.|
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended June 30, 2011 are not necessarily indicative of the results that can be expected for the full year.
SUNVALLEY SOLAR, INC.
Consolidated Balance Sheets
|June 30,||December 31,|
|Cash and cash equivalents||$||430,637||$||546,164|
|Accounts receivable, net||1,856,054||546,388|
|Construction in progress||200,518||56,004|
|Prepaid expenses and other current assets||98,376||15,792|
|Total current assets||3,770,584||3,097,062|
|PROPERTY AND EQUIPMENT, NET||94,971||71,208|
|Total other assets||14,730||18,186|
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)|
|Accounts payable and accrued expenses||$||3,336,345||$||2,883,316|
|Current portion of long-term debt||13,658||13,256|
|Total current liabilities||3,776,325||2,994,330|
|Total long-term liabilities||67,341||74,269|
|STOCKHOLDERS' EQUITY (DEFICIT)|
|Common stock, $0.001 par value, 1,500,000,000 shares authorized, 805,068,420 and 800,068,420 shares issued and outstanding, respectively||805,068||800,068|
|Additional paid-in capital||184,369||276,713|
|Total Stockholders' Equity (Deficit)||36,619||117,857|
|Total liabilities and stockholders' deficit||$||3,880,285||$||3,186,456|
The accompanying notes are an integral part of these financial statements.
SUNVALLEY SOLAR, INC.
Consolidated Statements of Operations
|For the Three Months Ended||For the Six Months Ended|
|June 30,||June 30,|
|COST OF SALES||1,496,381||1,157,901||2,179,827||1,779,297|
|Salary and wage expense||139,013||146,638||281,915||274,285|
|Bad debt expense||5,000||65,000||5,000||65,000|
|Depreciation and amortization||8,330||3,518||13,631||6,549|
|General and administrative expenses||76,019||95,864||241,057||199,600|
|Total operating expenses||228,362||311,020||541,603||545,434|
|LOSS FROM OPERATIONS||215,830||(88,425||)||16,953||(253,564||)|
|OTHER INCOME (EXPENSES)|
|Loss on derivative liability||(9,169||)||—||(11,822||)||—|
|Total other income (expenses)||(7,220||)||(4,445||)||(10,847||)||(7,477||)|
|INCOME (LOSS) BEFORE TAXES||208,610||(92,870||)||6,106||(261,041||)|
|Provision for income taxes||—||—||—||—|
|NET INCOME (NET LOSS)||$||208,610||$||(92,870||)||$||6,106||$||(261,041||)|
|LOSS PER SHARE|
|Basic and diluted||$||0.00||$||(0.00||)||$||0.00||$||(0.00||)|
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING|
|Basic and diluted||805,068,420||504,213,810||804,692,729||493,439,803|
The accompanying notes are an integral part of these financial statements.
SUNVALLEY SOLAR, INC.
Consolidated Statements of Cash Flows
|For the Six Months Ended|
|Net income (loss)||$||6,106||$||(261,041||)|
|Adjustments to reconcile net income (loss) to net cash|
|provided by operating activities:|
|Depreciation and amortization||13,630||6,548|
|Common stock issued for services||43,200||—|
|Loss on derivative liability||11,822||—|
|Changes in operating assets and liabilities:|
|Prepaid expenses and other assets||(82,583||)||(10,785||)|
|Construction in progress||(144,515||)||(335||)|
|Accounts payable and accrued warranty expenses||466,504||(160,105||)|
|Net Cash Provided by (Used) in Operating Activities||(271,609||)||(106,310||)|
|Purchase in property and equipment||(37,393||)||(384||)|
|Net Cash (Used) in Investing Activities||(37,393||)||(384||)|
|Repayments from related party notes payable||—||(6,150||)|
|Repayments of notes payable||(36,616||)||—|
|Proceeds from note payable||30,090|
|Proceeds from convertible notes||200,000||—|
|Repurchase of common stock||—||(40,000||)|
|Net Cash Provided by (Used) in Financing Activities||193,474||(46,150||)|
|NET INCREASE (DECREASE) IN CASH||(115,528||)||(152,844||)|
|CASH AT BEGINNING OF PERIOD||546,165||309,453|
|CASH AT END OF PERIOD||$||430,637||156,609|
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:|
|CASH PAID FOR:|
|NON-CASH INVESTING AND FINANCING ACTIVITIES|
The accompanying notes are an integral part of these financial statements.
SUNVALLEY SOLAR, INC.
Consolidated Notes to Financial Statements
June 30, 2011 and December 31, 2010
NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at June 30, 2011, and for all periods presented herein, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2010 audited financial statements. The results of operations for the periods ended June 30, 2011 and 2010 are not necessarily indicative of the operating results for the full years.
NOTE 2 - GOING CONCERN
The Company's financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES
of Financial Statement Accounts
Certain amounts in the June 30, 2010 financial statements have been reclassified to conform to the presentation in the June 30, 2011 financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements issued since the last audit of our financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
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 .
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company’s inventory consisted of the following at June 30, 2011 and December 31, 2010:
|Work in Progress||21,525||6,741|
NOTE 4 – CONSTRUCTION IN PROGRESS
The Company is currently involved in two major short-term solar panel installation projects. The Company is accounting for revenue and expenses associated with these two contracts under the completed contract method of accounting in accordance with ASC 605. Under ASC 605, income is recognized on when the contracts are completed or substantially completed and billings and others costs are accumulated on the balance sheet. Under the completed contract method, no profit or income is recorded before completion of substantial completion of the work.
As of June 30, 2011 and December 31, 2010, the Company has capitalized $200,518 and $56,004 of costs incurred in relation to these two major installation projects. The company expects one of these two projects to be completed or substantially completed by September 2011 and the other project to be completed or substantially completed by December 31, 2011.
NOTE 5 – CONVERTIBLE DEBT
On January 7, 2011, the Company borrowed $100,000 of convertible debt. The debt is convertible at the holder’s option at 61% of the average of the lowest three trading prices during the 10 trading days prior to conversion. The convertible debt is due on October 7, 2011, and it is unsecured and bears an interest rate of 8%.
On April 6, 2011, the Company borrowed $100,000 of convertible debt. The debt is convertible at the holder’s option at 61% of the average of the lowest three trading prices during the 10 trading days prior to conversion. The convertible debt is due on January 4, 2012, and it is unsecured and bears an interest rate of 8%.
NOTE 6 – DERIVATIVE LIABILITY
Effective July 31, 2009, the Company adopted ASC Topic No. 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. The Company borrowed $100,000 on January 7, 2011 and $100,000 on April 6, 2011. Both debts are convertible at the holder’s option at 61% of the average of the lowest three trading prices during the 10 days prior to conversion. The number of shares issuable upon conversion of these debts are limited so that the Holder’s total beneficial ownership of our common stock may not exceed 4.99% of the total issued and outstanding shares.
The exercise price of the both sets of these warrants are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced. As a result, the Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.
NOTE 6 – DERIVATIVE LIABILITY (CONTINUED)
The total fair value of the imbedded conversion feature associated with the note issued on January 7, 2011 was $65,581, and the total value of the imbedded conversion feature associated with the note issued on April 6, 2011 was $64,953. Both notes have been recognized as a derivative liability on the date of issuance with all future changes in the fair value of these warrants being recognized in earnings in the Company’s statement of operations under the caption “Other income (expense) – Gain (loss) on derivative liability” until the note is converted or extinguished.
ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as another income or expense item. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the above convertible debts. At June 30, 2011, the Company revalued the conversion features and determined that, during the six months ended June 30, 2011, the Company’s derivative liability increased by $3,741 to $69,322 for the note issued on January 7, 2011 and the Company’s derivative liability increased by $8,081 to $73,044 for the note issued on April 6, 2011. The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation.
NOTE 7 – COMMON STOCK
During the year ended December 31, 2010, the Company entered into agreements to repurchase a total of 5,110,353 (200,000 pre-split) common stock shares from shareholders at a price of $0.04 per share. As of December 31, 2010, the Company had received all of the stock certificates and had paid the investors in full.
On January 20, 2011, the Company issued 2,000,000 shares of its common stock for consulting services valued at $0.015 per share. The Company is amortizing the value of the services over the 1 year term of the consulting agreement.
On January 11, 2011, the Company issued 3,000,000 shares of its common stock for financing services valued at $0.0044 per share.
NOTE 8 – SIGNIFICANT EVENTS
On June 24, 2010, in accordance with the Exchange Agreement dated June 24, 2010 Western Ridge Minerals acquired all of the issued and outstanding shares of Sunvalley, which resulted in Sunvalley becoming a wholly-owned subsidiary. In exchange for all of the issued and outstanding shares of Sunvalley, the shareholders of Sunvalley received a total of 480,041,053 (2,514,600 pre-split) shares of Western Ridge Mineral’s common stock, which represented approximately 60% of the Company’s outstanding common stock following the Acquisition . There were 1,049,271,312 (5,496,400 pre-split) shares of our common stock outstanding before giving effect to the stock issuances in the Acquisition and the cancellation of 729,243,944 (3,820,000 pre-split) shares by Mr. Marco Bastidas and certain other shareholders resulted in there being 800,068,420 (4,191,000 pre-split) shares outstanding post acquisition. As a result, the shareholders of the Company became the controlling shareholders of the combined entity.
Accordingly, the transaction is accounted for as a recapitalization with Sunvalley deemed to be the accounting acquirer and Western Ridge Mineral the legal acquirer in the reverse acquisition. Consequently, the assets and liabilities and the historical operations of Sunvalley prior to the Merger are reflected in the financial statements and are recorded at the historical cost basis of Sunvalley. The Company’s consolidated financial statements after completion of the Acquisition include the assets and liabilities of both companies. Following the Acquisition our fiscal year-end has been changed from March 31 to December 31.
On July 20, 2010 the Company’s board of directors approved a 19.0885235 for 1 forward stock split of the Company’s common stock. On August 23, 2010 the Company’s board of directors approved a 10 for 1 forward stock split of the Company’s common stock. The Company’s authorized common stock was increased to 1,500,000,000. This forward splits have been retroactively applied and is reflected in the financial statements.
NOTE 9 – SUBSEQUENT EVENTS
The Company had an additional convertible note of $100,000 with Asher Enterprises dated July 12, 2011 and the funding was received in 7/22/2011. During July 2011 Asher Enterprises was issued 15,652,625 shares of the Company’s common stock upon conversion of $100,000 of its debt issued on January 7, 2011.
On December 31, 2010, the Company entered into a Drawdown Equity Financing Agreement (the “DEFA”) and an accompanying Registration Rights Agreement (the “RRA”) with Auctus Private Equity Fund, LLC, a Massachusetts limited liability company (“Auctus”). Under the DEFA, the Company has agreed to issue and sell up to $10,000,000 worth of the Company’s common stock, par value $0.001 per share, over a three year period.
The DEFA entitles the Company to request “Advances,” or draw-downs, under the agreement at our election from time to time. By delivery of a Drawdown Notice under the agreement, the Company can affect the sale of common stock to Auctus valued at a maximum of either (i) $500,000 or (ii) 200% of the average daily volume of the common stock based on the ten (10) trading days preceding the Drawdown Notice Date (as defined in the DEFA), whichever is larger. The purchase price of the common stock for an Advance shall be set at ninety-three percent (93%) of the lowest closing bid price of the common stock during the Pricing Period, which is defined as the five (5) consecutive trading days immediately after the Drawdown Notice Date. There must be a minimum of five (5) trading days between each Drawdown Notice Date.
Under the DEFA, Auctus shall immediately cease selling any shares of the Company’s common stock during a Pricing Period if a) the market price of the Company’s common stock falls below a fixed-price floor that the Company provide per Drawdown or b) the market price of the Company’s common stock falls below seventy-five percent (75%) of the average closing bid price of the common stock over the preceding ten (10) trading days prior to the Drawdown Notice Date (the "Floor"). In the Company’s sole discretion, the Company may waive its right with respect to the Floor and allow Auctus to sell any shares below the Floor Price. The floor price restriction only applies to the five (5) consecutive trading days immediately after the Drawdown Notice Date.
In response to a Drawdown Notice issued by the Company on July 25, 2011, Auctus purchased from the Company 3,135,964 shares of common stock for a total purchase price of $26,248.
In response to a Drawdown Notice issued by the Company on August 2, 2011, Auctus purchased from the Company 20,000 shares of common stock for a total purchase price of $121.
On August 1, 2011, the Board of Directors approved the issuance of 625,000 new shares of common stock to Blue Future, Inc. for services provided to the Company over a period of three months from June 2011 to August 2011. The shares were valued at $0.012 per share based on the value of the shares at close of market on April 28, 2011 which was the date of the agreement signed between Blue Future Inc. and the Company.
In July 2011, the Company purchased a house valued of $111,000 in Coachella, California for which the escrow closed in July 2011.
In accordance with ASC 855, Company management reviewed all material events through the date of this report and there are no material subsequent events to report .
Item 2. Management’s Discussion and Analysis or Plan of Operation
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Company Overview and Plan of Operation
We are a California-based solar power technology and system integration company. Since the inception of our business in 2007, we have focused on developing our expertise and proprietary technology to install residential, commercial and governmental solar power systems. We offer turnkey solar system solutions for owners, builders and architecture firms that include designing, building, operating, monitoring and maintaining solar power systems. Our customers range from small private residences to large commercial solar power users. We have the necessary licenses and expertise to design and install large scale solar power systems. We hold a C-46 Solar License from CBCL (California Board of Contractor License). Some of the large scale commercial solar power systems that we have designed and installed include large office buildings, manufacturing facilities and warehouses. Our proprietary technologies in solar installation provide its customers with a high quality, low cost and flexible solar power system solutions.
We seek to continue our development as an end-to-end solar energy solution provider by providing system solution, post-sale service, customer technical support, solar system design and field installation.
Business Development Plan
The primary components of our growth strategy are as follows:
|Developing and commercializing our proprietary solar technologies including our coating and focusing technologies, racking and panel cleaning system. By deploying these new technologies into our PV panels and solar installation business, we hope to enhance the value provided to our customers and increase our profitability.|
|Promoting and enhancing our company’s brand and reputation in solar design and integration and expanding our installation business from Southern California to Northern California, Arizona or other states.|
|Developing a PV panel manufacturing capability to provide high efficiency and low cost solar panels to US market. This will complement our installation business and provide an implementation platform for our R&D.|
||Getting involved in the private power providing business (Distributed Power Plants). Developing this line of business will lead to higher profit margins and income to our business. In the future, this line of business could become one of our main income sources.|
Expansion of Installation Business
We are planning to expand its installation business from Southern California to Northern California, Arizona or other states in two to three years. We will continue to execute our marketing and sales strategy in Southern California and, with additional capital, will be able to expand our business to cover Northern California, Arizona or other states. The planned expansion is expected to occur through acquiring smaller installation companies in these regions and/or through the establishment of subsidiaries in these states and boost our installation profits. Our current intention is to establish two new offices located in Northern California or other states and in San Diego. The estimated start-up cost for each new branch would be approximately $500,000.
If we are able to expand our installation business, it will assist us in gaining favorable terms from OEM international manufacturers of our planned solar panel manufacturing operation. In addition, an expanded installation business would allow us to accelerate the introduction of our new technologies and solar parts and would generate additional revenue to fund initial investment in our planned Distributed Power Plant business and to further fund our investments in R&D.
Commercialization of Research and Development
Prior to initiating our planned OEM manufacturing of Sunvalley-branded solar panels, we will need to commercialize our advanced panel technology through the design, fabrication, and characterization of a prototype solar cell. The total expense for planned commercialization of our research and development will be approximately $500,000. The necessary equipment and facilities will be accessed from University of California, San Diego. The Nano3 clean room facilities in the school of Engineering at UCSD are equipped with state-of-the-art micro and nano fabrication equipment and facilities, and can be accessed by outside users with a $107 hourly fee.
The interference pattern that will be recorded in the solar cells will be obtained using an Argon laser operating at 362nm. This laser and its associated equipment is available to us through a special arrangement with the administration office in the University of California, San Diego, as well as the Ultrafast and Nano-scale Optics lab in the Department of Electrical and Computer Engineering in UCSD.
Other equipment will also be required, including coating machine for PV panel testing.
Initiate OEM Manufacturing of Solar Panels
By leveraging our solar panel installation business and R&D, we plan to procure OEM solar panels from selected Chinese manufacturers and to market them in the U.S. under our brand name. We will be responsible for R&D, quality control, customer service, sales and marketing activities, as well as panel certification in U.S.
The estimated OEM panel cost is less than $1.40 per watt. As a reference, currently, the lowest panel price is around $1.80 per watt (Mono-crystalline, Polycrystalline). We can use our own sales and installation platform to showcase the new panels and drive sales of the new panels in the U.S market. Meanwhile, we will continue our R&D effort on panel coating and other advanced technologies and apply the results to its panel manufacturing business. The goal will be to further improve the efficiency, lower the cost of solar panels with our proprietary technologies, and to grow our market share.
Our marketing strategy for its planned OEM solar panels is as follows:
|- Set-up a platform to showcase our innovative solar panel technologies and make Sunvalley solar panels a household name.|
Unlike other merchandise, solar panel is very unique in that it requires very high level of quality assurance and customer satisfaction. Providing satisfactory customer service and technical support is absolutely vital in solar panel sales. As the first step, we will strive to make its brand a household name. The Sunvalley solar panel will be used by our installation business as well as several other installation companies which have partnerships with us. We do not currently have partnerships with other solar installation companies, but we plan to pursue them after introducing the panels to the market through our own installation business. A marketing campaign aimed at other solar installation companies will help to achieve this goal. We will use our own installation business as the platform to showcase the product quality and build up consumer awareness of its brand.
|- Penetrate into the main stream distribution network|
By leveraging early successes and customer trust earned from our initial installations, we plan to penetrate into the mainstream distribution network with our OEM solar panels.
|- Further sale activities|
Once our brand name solar panels become well known, our sales team will begin an aggressive marketing campaign to connect the individual sales points (distributors and venders) to form a distribution network. The marketing campaigns will also include attending trade shows, advertising in the media (TV commercials and newspaper advertisement) and designating local representatives to boost the market share and brand awareness.
|- Offer a low cost, high efficiency solar panel derived from advanced research|
To boost our solar panel market share, our R&D team will work with our OEM partner to apply selective coating technique and other cutting edge technologies to further reduce the manufacturing cost and improve the panel efficiency.
The total capital required to initiate our planned panel manufacturing business would be approximately $2,000,000 which can be categorized into three parts:
|- Registration and Certification of OEM panels with our brand – $300,000, including UL certification fees, CEC registration fees, and lab testing fees.|
|- Initial Inventory – $1,500,000. We will need to keep at least 4 containers of PV panels in the warehouse in order to support sales of 5~10M watts per year, which means we will need to have over $1,000,000 in inventory for PV panels only. An additional $300,000 in inventory would be needed in order to keep the requisite amount of inverters and racking and panel cleaning systems. In addition, we anticipate providing variable payment terms to different customers based on their creditworthiness; this will add additional cash flow pressure.|
|- OEM Management costs – $200,000|
Develop Distributed Power Plan Business
With our resources and experience gained from large scale solar power system designs, installation and other related business, we believe we have unique advantages in the design and installation of large roof-top power plant systems. We are aggressively proposing our Distributed Power Plant solution to utility companies in Southern California. We believe that by collaborating with us on this approach, utility companies will benefit in the form of free installation, field space, and our expertise on large commercial solar system designs, installation and maintenance services, as well as our technical and management experience. By collaborating with us, utility companies can help to achieve their alternative energy requirements under California law.
We are pursuing substantial contracts with some of our current installation customers who control or own over 2,000,000 square feet of roofs on warehouses or other buildings in Southern California. We are also seeking additional private space agreements with other commercial customers. We are among the few companies in California that has the permit and expertise to install large-scale commercial and/or government solar power systems, together with roof constructional design and building interior/exterior electrical designs. We believe additional advantages are provided by our experience in filing solar power system permit applications and rebate applications and our expertise gained through our experience with governments and utility companies.
Expected Changes In Number of Employees, Plant, and Equipment
We do not currently plan to purchase specific additional physical plant and significant equipment within the immediate future. We do not currently have specific plans to change the number of our employees during the next twelve months.
Results of Operations for the three and six months ended June 30, 2011 and 2010
During the three months ended June 30, 2011, we generated gross revenues of $1,940,573. Total cost of sales was $1,496,381, resulting in gross profit of $444,192. Total operating expenses were $228,362, and consisted of salary and wage expenses of $139,013, general and administrative expenses of $76,019, depreciation and amortization of $8,330, and bad debt expense of $5,000. We experienced interest income of $7,200, interest expense of $5,251 and a loss due to the change in value of a derivative liability of $9,169. Our net profit for the three months ended June 30, 2011 was therefore $208,610. By comparison, during the three months ended June 30, 2010, we generated gross revenues of $1,380,496. Total cost of sales was $1,157,901, resulting in gross profit of $222,595. Total operating expenses were $311,020, and consisted of salary and wage expenses of $146,638, general and administrative expenses of $95,864, depreciation and amortization of $3,518, and bad debt expense of $65,000. We experienced interest income of $438 and interest expense of $4,883. The net loss for the three months ended June 30, 2010 was therefore $92,870.
During the six months ended June 30, 2011, we generated gross revenues of $2,738,383. Total cost of sales was $2,179,827, resulting in gross profit of $558,556. Total operating expenses were $541,603, and consisted of salary and wage expenses of $281,915, general and administrative expenses of $241,057, depreciation and amortization of $13,631, and bad debt expense of $5,000. We experienced interest income of $9,591, interest expense of $8,616 and a loss due to the change in value of a derivative liability of $11,822. Our net profit for the six months ended June 30, 2011 was therefore $6,106. By comparison, during the six months ended June 30, 2010, we generated gross revenues of $2,071,167. Total cost of sales was $1,779,297, resulting in gross profit of $291,870. Total operating expenses were $545,434, and consisted of salary and wage expenses of $274,285, general and administrative expenses of $199,600, bad debt expense of $65,000, and depreciation and amortization of $6,549. We experienced interest income of $1,700 and interest expense of $9,177. The net loss for the six months ended June 30, 2010 was therefore $261,041.
Our revenues increased significantly for the three months ended June 30, 2011 compared to the second quarter of last year because a large installation project was substantially completed during the quarter ended June 30, 2011 and we recognized revenues of approximately $1.3 million for this project. The gross profit increased significantly for the three months ended June 30, 2011 in comparison to the same quarter last year largely because we been able to generate a higher gross profit margin on our installation projects.
Although we had expected to see an increase of over 150% in our solar installation business in 2009, our solar installation business and the solar industry as a whole was badly affected by the global economic crisis started in late 2008. During 2009 and 2010, because banks and investment institutes were very reluctant to loan money to solar customers, many potential solar power system customers suspended their plans to invest in new solar power systems. This development, in turn, had a negative impact on our solar installation business in 2009 and 2010. In order to reduce the risk to our business presented by these developments, we expanded our operations to include a new solar equipment distribution business beginning in November of 2008. We established distribution partnerships with Canadian Solar Inc., CEEG SST, Tainwei Solarfilms, and PV Powered Inc., to distribute solar panels, solar inverters and other solar equipments to their clients in the U.S. Although the gross margin for our distribution business is less than 10%, this line of business contributed to the majority of our gross revenues in 2009 and 2010.
During 2011, due to the incentives provided by utility companies’ rebate programs and the Federal Recovery Act’s cash grant program, we have been able to obtain more large commercial installation projects than we did in 2010. We just completed a large installation project in June of 2011 and we are currently involved in two other major solar panel installation projects. We expect one of these two projects to be completed or substantially completed by September of 2011 and the other project to be completed or substantially completed by December 31, 2011.
Liquidity and Capital Resources
As of June 30, 2011, we had current assets in the amount of 3,770,584, consisting of cash in the amount of $430,637, accounts receivable of $1,856,054, inventory in the amount of $1,170,499, construction in progress of $200,518, prepaid expenses and other current assets of $98,376, other receivables of $2,000, and restricted cash of $12,500. As of June 30, 2011, we had current liabilities in the amount of $3,776,325. These consisted of accounts payable and accrued expenses in the amount of $3,336,345, convertible debt of $200,000, a derivative liability of $142,366, customer deposits of $42,793, accrued warranty in the amount of $41,163, and the current portion of long term debt in the amount of $13,658. Our working capital deficit as of June 30, 2011 was therefore $5,741.
Our accounts payable and accrued expenses as of June 30, 2011 consisted of the following:
|Credit Card payable||24,755|
|Other accrued expense||48,793|
|Sales tax payable||55,563|
|State Income tax payable||800|
As of June 30, 2011, our only long-term liability was a loan owing to East West Bank with a balance of $80,999. The current portion due within the next year is $13,658. The principal amount outstanding accrues annual interest at the bank's variable index rate (approx. 6.00% as of December 31, 2010). The East West Bank loan is collateralized by all business assets.
In addition, we are currently party to three Convertible Promissory Notes owing to Asher Enterprises, Inc. The first of these Notes, due on October 7, 2011, was issued in the original amount of $100,000. During July 2011 Asher Enterprises was issued 15,652,625 shares of the Company’s common stock upon conversion of $100,000 of its first note issued on January 7, 2011. The second Note is due on or before January 4, 2012 and the principal balance due is $100,000. The third Note is due on or before April 17, 2012 and the principal balance is also $100,000. All three Notes bear interest at a rate of 8% per year and are convertible at a conversion price equal to 61% of the Market Price of our common stock on the conversion date. For purposes of the Notes, “Market Price” is defined as the average of the 3 lowest closing prices for our common stock on the 10 trading days immediately preceding the conversion date. The number of shares issuable upon conversion of the Notes is limited so that the holder’s total beneficial ownership of our common stock may not exceed 4.99% of the total issued and outstanding shares. This condition may be waived at the option of the holder upon not less than 61 days notice.
The Company has determined that the conversion feature of these notes is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability. As of June 30, 2011 the value of the derivative liability was $142,366 and we recognized a loss on the change in the value of the derivative of $9,169.
In order to move forward with our business development plan set forth above, we will require additional financing in the approximate amount of $4,500,000, to be allocated as follows:
|Initiate OEM Manufacturing||$||2,000,000|
|R &D Commercialization Costs||$||500,000|
|Expansion of Installation Business (3 new branches)||$||1,500,000|
|Additional working capital and general corporate||$||500,000|
|Total capital needs||$||4,500,000|
We will require substantial additional financing in the approximate amount of $4,500,000 in order to execute our business expansion and development plans and we may require additional financing in order to sustain substantial future business operations for an extended period of time. We currently do not have any firm arrangements for financing and we may not be able to obtain financing when required, in the amounts necessary to execute on our plans in full, or on terms which are economically feasible.
We are currently seeking additional financing through the sale of common equity, including the sale of common equity to Auctus Private Equity Fund, LLC through a Draw-Down Equity Financing Agreement, and/or the issuance of debt convertible to common equity. 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 June 30, 2011, there were no off balance sheet arrangements.
We have experienced recurring losses from operations and had an accumulated deficit of $952,818 as of June 30, 2011. To date, we have not been able to produce sufficient sales to become cash flow positive and profitable on an ongoing basis. The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our costs of operations and/or upon obtaining additional financing. For these reasons, our auditor has raised substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We do not believe that any accounting policies currently fit this definition.
Recently Issued Accounting Pronouncements
Our management has considered all recent accounting pronouncements issued since the last audit of our financial statements. Our management believes that these recent pronouncements will not have a material effect on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2011. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Zhijian (James) Zhang and our Chief Financial Officer, Mandy Chung. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2011, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2011.
Management determined that the material weaknesses that resulted in controls being ineffective are primarily due to lack of resources and number of employees. Material weaknesses exist in the segregation of duties required for effective controls and various reconciliation and control procedures not regularly performed due to the lack of staff and resources.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
Item 1A. Risk Factors
A smaller reporting company is not required to provide the information required by this Item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
No matters have been submitted to our security holders for a vote, through the solicitation of proxies or otherwise, during the quarterly period ended June 30, 2011.
Item 5. Other Information
Item 6. Exhibits
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|
In accordance with the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|Sunvalley Solar, Inc.|
August 12, 2011
By: /s/ Zhijian (James) Zhang
Zhijian (James) Zhang
Title: Chief Executive Officer and Director
August 12, 2011
By: /s/ Mandy Chung
Title: Chief Financial Officer