Item 2. Management’s Discussion and Analysis or Plan of Operation
Forward-Looking
Statements
Certain
statements, other than purely historical information, including estimates, projections, statements relating to our business plans,
objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking
statements.” These forward-looking statements generally are identified by the words “believes,” “project,”
“expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely
result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are
subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our
ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have
a material adverse affect on our operations and future prospects on a consolidated basis include, but are not limited to: changes
in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted
accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements.
Company
Overview and Plan of Operation
We
are a California-based solar power technology and system integration company founded in January of 2007. We are focused on developing
our expertise and proprietary technology to install residential, commercial and governmental solar power systems. We offer turnkey
solar system solutions for owners, builders and architecture firms that include designing, building, operating, monitoring and
maintaining solar power systems. Our customers range from small private residences to large commercial solar power users. We have
the necessary licenses and expertise to design and install large scale solar power systems. We hold a C-46 Solar License from
CBCL (California Board of Contractor License). Some of the large scale commercial solar power systems that we have designed and
installed include large office buildings, manufacturing facilities and warehouses. Our proprietary technologies in solar installation
provide our customers with a high quality, low cost and flexible solar power system solutions.
We
are working to develop as an end-to-end solar energy solution provider by providing system solution, post-sale service, customer
technical support, solar system design and field installation.
Business
Development Plan
The
primary components of our growth strategy are as follows:
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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.
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•
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Promoting
and enhancing our company’s brand and reputation in solar design and integration and expanding our installation business.
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•
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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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•
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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.
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Expansion
of Installation Business
We
are planning to expand its installation business. We will continue to execute our marketing and sales strategy in Southern California
and, with additional capital, will be able to expand our business to cover Northern California, Arizona or other states. The
planned expansion is expected to occur through acquiring smaller installation companies in these regions and/or through the establishment
of subsidiaries in these states and boost our installation profits. Our current intention is to establish two new offices located
in Northern California or other states and in San Diego. The estimated start-up cost for each new branch would be approximately
$500,000.
If
we are able to expand our installation business, it will assist us in gaining favorable terms from OEM international manufacturers
of our planned solar panel manufacturing operation. In addition, an expanded installation business would allow us to
accelerate the introduction of our new technologies and solar parts and would generate additional revenue to fund initial investment
in our planned Distributed Power Plant business and to further fund our investments in R&D.
Commercialization
of Research and Development
Prior
to initiating our planned OEM manufacturing of Sunvalley-branded solar panels, we will need to commercialize our advanced panel
technology through the design, fabrication, and characterization of a prototype solar cell. The total expense for planned
commercialization of our research and development will be approximately $500,000.
The necessary equipment and facilities
will be accessed from University of California, San Diego. The Nano3 clean room facilities in the school of Engineering at UCSD
are equipped with state-of-the-art micro and nano fabrication equipment and facilities, and can be accessed by outside users with
a $107 hourly fee.
The
interference pattern that will be recorded in the solar cells will be obtained using an Argon laser operating at 362nm. This laser
and its associated equipment is available to us through a special arrangement with the administration office in the University
of California, San Diego, as well as the Ultrafast and Nano-scale Optics lab in the Department of Electrical and Computer Engineering
in UCSD.
Other
equipment will also be required, including coating machine for PV panel testing.
Initiate
OEM Manufacturing of Solar Panels
By
leveraging our solar panel installation business and R&D, we plan to procure OEM solar panels from selected Chinese manufacturers
and to market them in the U.S. under our brand name. We will be responsible for R&D, quality control, customer service, sales
and marketing activities, as well as panel certification in U.S.
The
estimated OEM panel cost is less than $0.50 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:
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Set-up a platform
to showcase our innovative solar panel technologies and make Sunvalley solar panels a household name.
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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.
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Penetrate into
the main stream distribution network
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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.
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Further sale
activities
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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.
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Offer a low
cost, high efficiency solar panel derived from advanced research
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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:
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Registration and
Certification of OEM panels with our brand – $300,000, including UL certification fees, CEC registration fees, and lab
testing fees.
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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.
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•
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OEM Management
costs – $200,000
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Develop
Distributed Power Plant Business
With
our resources and experience gained from large scale solar power system designs, installation and other related business, we believe
we have unique advantages in the design and installation of large roof-top power plant systems. We are aggressively proposing
our Distributed Power Plant solution to utility companies in Southern California. We believe that by collaborating with us on
this approach, utility companies will benefit in the form of free installation, field space, and our expertise on large commercial
solar system designs, installation and maintenance services, as well as our technical and management experience. By collaborating
with us, utility companies can help to achieve their alternative energy requirements under California law.
We
are among the few companies in California that has the permit and expertise to install large-scale commercial and/or government
solar power systems, together with roof constructional design and building interior/exterior electrical designs. We believe additional
advantages are provided by our experience in filing solar power system permit applications and rebate applications and our expertise
gained through our experience with governments and utility companies.
Expected
Changes In Number of Employees, Plant, and Equipment
We do not
currently plan to purchase specific additional physical plant and significant equipment within the immediate future. We do not
currently have specific plans to change the number of our employees during the next twelve months.
Results
of Operations for the three months ended March 31, 2014 and 2013
During
the three months ended March 31, 2014, we generated gross revenues of $2,048. Total cost of sales was $1,863, resulting in gross
profit of $185. Total operating expenses were $213,381, and consisted of salary and wage expenses of $100,397, selling, general
and administrative expenses of $72,250, and professional fees of $37,374. We experienced interest expense of $1,195 and other
income of $132. Our net loss for the three months ended March 31, 2014 was therefore $214,259.
By
comparison, during the three months ended March 31, 2013, we generated gross revenues of $12,656. Total cost of sales was $28,675,
resulting in gross loss of $16,019. Total operating expenses were $311,387, and consisted of salary and wage expenses of $101,687,
selling, general and administrative expenses of $106,160, professional fees of $46,017, and an impairment of inventory in amount
of $57,523. We experienced interest expense of $3,358, other income of $58, a loss on derivative liability in the amount of $53,602,
and a default penalty on convertible notes of $5,000. Our net loss for the three months ended March 31, 2013 was therefore $389,148.
We
did not have significant gross revenues during the three months ended March 31, 2014 and 2013. Under the completed contract method
of accounting, no profit or income is recorded before substantial completion of the work. The revenue for the projects which were
in progress are therefore be recognized after their completion. Due to the implementation periods for different size of projects,
revenue fluctuations like the one experienced during this quarter are a normal occurrence for construction companies, including
solar system integration companies.
We
are currently working on one major installation project with a contract price of $900,000. This contract is expected to be substantially
completed by the second quarter of 2014. In addition, we have signed an agreement with an installation customer for a contract
price of approximately $2.5 million.
The
operating expenses decreased in the first quarter of 2014 were mainly due to the factoring fee of $50,885 and the impairment of
inventory of $57,523 only incurred during the three months ended March 31, 2013.
Liquidity
and Capital Resources
As
of March 31, 2014, we had current assets in the amount of $2,290,739, consisting of cash in the amount of $178,837, accounts receivable
of $1,511,782, inventory in the amount of $500,107, costs in excess of billings on uncompleted contracts of $54,064, prepaid expenses
and other current assets of $20,949 and restricted cash of $25,000. As of March 31, 2014, we had current liabilities in the amount
of $5,903,377. These consisted of accounts payable and accrued expenses in the amount of $5,394,773, customer deposits of $313,296,
accrued warranty of $72,395, advances from contractors of $103,389, the current portion of long term debt in the amount of $16,025,
and the current portion of a capital lease in the amount of $3,499. Our working capital deficit as of March 31, 2014 was therefore
$3,612,638.
As
of March 31, 2014, our long-term liabilities were $32,164, which consisted of a loan owing to East West Bank with a long term
portion of $25,546 and the remaining long term obligations of a capital lease in the amount of $6,618. The principal amount outstanding
on the East West Bank loan accrues annual interest at the bank's variable index rate. The East West Bank loan is collateralized
by all business assets.
In
order to move forward with our business development plan set forth above, we will require additional financing in the approximate
amount of $4,500,000, to be allocated as follows:
Initiate
OEM Manufacturing
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$
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2,000,000
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R&D
Commercialization Costs
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$
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500,000
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Expansion
of Installation Business (3 new branches)
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$
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1,500,000
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Additional
working capital and general corporate
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$
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500,000
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Total
capital needs
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$
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4,500,000
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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, 2014, there were no off balance sheet arrangements.
Going
Concern
We
have experienced recurring losses from operations and had an accumulated deficit of $2,575,576 as of March 31, 2014. 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.