Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


[X]	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended September 30, 2016

[ ]	Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period from to__________

	Commission File Number: 333-150692

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


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

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

(Address of principal executive offices)

(909) 598-0618

(Registrant ’ s telephone number)

_____________________________________________________________________

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

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

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

[ ] Large accelerated filer

[ ] Non-accelerated filer

[ ] Accelerated filer

[X] Smaller reporting company

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

State the number of shares outstanding of each of the issuer ’ s classes of common stock, as of the latest practicable date: 23, 303,676 common shares as of November 21, 2016.

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


	TABLE OF CONTENTS	Page

PART I – FINANCIAL INFORMATION

Item 1:	Consolidated Condensed Financial Statements	3
Item 2:	Management ’ s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4:	Controls and Procedures	15

PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	16
Item 1A:	Risk Factors	16
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3:	Defaults Upon Senior Securities	16
Item 4:	Mine Safety Disclosures	16
Item 5:	Other Information	16
Item 6:	Exhibits	17

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 September 30, 2016 (unaudited) and December 31, 2015;
F-2	Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (unaudited);
F-3	Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (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 September 30, 2016 are not necessarily indicative of the results that can be expected for the full year.


SUNVALLEY SOLAR, INC.
Condensed Consolidated Balance Sheets

ASSETS
			September 30,		December 31,
			2016		2015
			(unaudited)
CURRENT ASSETS
	Cash and cash equivalents		$	808,457	$	1,209,198
	Resticted cash			37,500		37,500
	Accounts receivable, net			2,204,275		1,997,935
	Inventory, net			202,923		103,346
	Costs in excess of billings on uncompleted contracts			175,022		58,235
	Prepaid expenses and other current assets			69,335		14,187
		Total current assets		3,497,512		3,420,401

PROPERTY AND EQUIPMENT, NET				67,668		27,948

OTHER ASSETS
	Long-term accounts receivable, net			2,123,278		3,011,745
	Customer list, net			664,219		-
	Goodwill			266,664		-
	Other assets			7,220		7,757
	Intercompany receivable			-		-
		Total other assets		3,061,381		3,019,502
		TOTAL ASSETS	$	6,626,561	$	6,467,851

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
	Accounts payable and accrued expenses		$	4,128,292	$	4,478,157
	Customer deposits			668,270		75,654
	Accrued warranty			139,333		133,733
	Contingent liabilities			350,000		-
	Advances from contractors			103,389		103,389
	Current portion of capital lease			-		3,537
		Total current liabilities		5,389,284		4,794,470
		TOTAL LIABILITIES		5,389,284		4,794,470

STOCKHOLDERS' EQUITY

	Class A convertible preferred stock, $0.001 par value,
	1,000,000 shares authorized, 260,000 and 1,000,000 shares
	issued and outstanding, respectively			260		1,000
	Class B convertible preferred stock, $0.001 par value,
	2,075,500 shares authorized, 255,000 and 2,000,000 shares
	issued and outstanding, respectively			255		2,000
	Common stock, $0.001 par value, 150,000,000 shares
	authorized, 22,600,349 and 4,357,849 shares issued and oustanding, respectively			22,602		4,358
	Additional paid-in capital			6,293,406		5,115,857
	Accumulated deficit			(5,079,246)		(3,449,834)
		Total Stockholders' Equity		1,237,277		1,673,381
		TOTAL LIABILITIES AND
		STOCKHOLDERS' EQUITY	$	6,626,561	$	6,467,851

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


SUNVALLEY SOLAR, INC.
Condensed Consolidated Statements of Operations
(unaudited)

		For the Three Months Ended				For the Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015

REVENUES		$	2,956,670	$	817,481	$	3,267,217	$	1,886,906
COST OF SALES			2,310,302		557,767		2,443,564		1,355,585

GROSS PROFIT			646,368		259,714		823,653		531,321

OPERATING EXPENSES
	Salaries and wages		433,706		560,806		1,865,293		851,926
	Professional fees		37,923		53,374		122,751		148,527
	General and administrative		211,554		74,970		460,735		231,899

	Total Operating Expenses		683,183		689,150		2,448,779		1,232,352

LOSS FROM OPERATIONS			(36,815)		(429,436)		(1,625,126)		(701,031)

OTHER INCOME (EXPENSES)
	Other income		887		346		2,580		931
	Disposal of fixed asset		-		-		(415)		-
	Interest expense		(2,714)		(549)		(6,451)		(2,151)

	Total other income (expenses)		(1,827)		(203)		(4,286)		(1,220)

LOSS BEFORE TAXES			(38,642)		(429,639)		(1,629,412)		(702,251)

	Provision for income taxes		-		-		-		-

NET LOSS		$	(38,642)	$	(429,639)	$	(1,629,412)	$	(702,251)

BASIC AND DILUTED LOSS PER COMMON SHARE		$	(0.01)	$	(0.10)	$	(0.19)	$	(0.16)

BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING			5,850,164		4,357,849		8,750,114		4,357,849

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


SUNVALLEY SOLAR, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
			For the Nine Months Ended
			September 30,
			2016		2015

OPERATING ACTIVITIES:
	Net loss		$	(1,629,412)	$	(702,251)
	Adjustments to reconcile net loss to net cash
	provided by operating activities:
		Depreciation and amortization		110,228		17,253
		Stock issued for services		1,117,809		378,081
	Changes in operating assets and liabilities:
		Accounts receivable		786,921		1,560,074
		Inventory		(62,907)		264,684
		Prepaid expenses		(55,148)		(239,175)
		Restricted cash		-		(12,500)
		Costs in excess of billings on uncompleted contracts		(116,787)		(184,865)
		Other assets		3,886		(3,887)
		Accounts payable and accrued expenses		(1,116,034)		(999,544)
		Accrued warranty expense		(31,292)		(11,040)
		Customer deposits		592,616		(22,436)

		Net Cash Provided by (Used in) Operating Activities		(400,120)		44,394

INVESTING ACTIVITIES:
		Disposal of equipment		595		-
		Purchase of equipment		(36,300)		(23,124)
		Cash acquired in business combination		23,711		-

		Net Cash Used in Investing Activities		(11,994)		(23,124)
		Net Cash Provided By Discontinued Investing Activities		-		-

FINANCING ACTIVITIES:
	Repayments of long term debt			(3,537)		(12,401)
	Cash received for notes payable			74,000		-
	Repayment of capital lease			(59,090)		(2,943)

		Net Cash Provided by (Used in) Financing Activities		11,373		(15,344)

NET CHANGE IN CASH				(400,741)		5,926
CASH AT BEGINNING OF PERIOD				1,209,198		822,444

CASH AT END OF PERIOD			$	808,457	$	828,370

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

	CASH PAID FOR:
		Interest	$	10,974	$	549

NON-CASH INVESTING AND FINANCING ACTIVITIES
		Common stock and notes payable issued in business combination	$	1,151,786	$	-
		Conversion of preferred stock to common stock	$	18,245	$	-

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

SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2016

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 Enterprises, 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 September 30, 2016, 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, 2015 audited consolidated financial statements. The results of operations for the periods ended September 30, 2016 and 2015 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.

SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2016

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 September 30, 2016 and December 31, 2015:


	September 30, 2016		December 31, 2015
Raw materials	$	-	$	-
Work in Progress		-		-
Finished goods		202,923		103,346
TOTAL	$	202,923	$	103,346

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 5,200,000 shares to be issued upon the conversion of the Series A Convertible Preferred Stock, and 2,550,000 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 7,750,000 such potentially anti-dilutive shares excluded as of September 30, 2016.

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 September 30, 2016 and there was no impairment recorded as of September 30, 2016

SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2016

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 $29,774 and $-0- of advertising costs for the periods ended September 30, 2016 and 2015, 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 completed contract method of accounting in accordance with ASC 605. 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 September 30, 2016 and December 31, 2015, the Company has capitalized $175,022 and $58,235 of costs incurred in relation to installation projects.

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- and nine-month periods ended September 30, 2016.

SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2016

NOTE 4 – PROPERTY AND EQUIPMENT

The following is a summary of property and equipment at September 30, 2016 and December 31, 2015:



		September 30, 2016		December 31, 2015
Computer and equipment	$	91,300	$	95,667
Furniture		21,171		20,029
Software		22,368		2,368
Vehicles		118,840		86,340
Total property and equipment		253,679		204,404
Less: accumulated depreciation		(186,011)		(176,456)
Property and equipment, net		67,668		27,948

Depreciation expense for the nine months ended September 30, 2016 and 2015 was $14,450 and $11,483, respectively.

NOTE 5 – INTANGIBLE ASSETS AND GOODWILL

The components of intangible assets at September 30, 2016 were as follows:



	Gross Carrying Amount	Accumulated Amortization	Net Carrying Amount

Goodwill	$ 266,664	$ -	266,664
Customer List	760,000	(95,781)	664,219
Total	$ 1,026,664	$ (95,781)	$ 930,883

Amortization expense recognized was $95,781 and $-0- for the nine-months ended September 30, 2016 and 2015, respectively. The Customer List has a useful life of 3.0 years and has a remaining life of 2.6 years as of September 30, 2016.

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 2,075,500 shares of which are designated as Class B Convertible Preferred Stock. The remaining 2,924,500 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 20 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 September 30, 2016 and December 31, 2015, there were 260,000 shares of Class A Convertible Preferred Stock issued and outstanding.

In the month of July 2016, 430,000 shares of Class A Convertible Preferred stock was converted into 21,500 shares of Common stock.

In the month of August 2016, 310,000 shares of Class A Convertible Preferred stock was converted into 15,500 shares of common stock.

SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2016

NOTE 6 – PREFERRED STOCK (CONTINUED)

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 September 30, 2016 and December 31, 2015, there were 255,000 shares and 2,000,000 shares of Class B Convertible Preferred Stock issued and outstanding, respectively.

On July 23, 2015, the Company issued 2,000,000 shares of Class B Convertible Preferred Stock, to certain officers, directors and/or employees for services valued at $2,000,000, the value of which was based on the trading price of the common stock into which each share of preferred stock is convertible. The issuance of such preferred shares was valued as a stock subscription payable of $2,000,000 which is being amortized ratably over the vesting period to compensation expenses based on the fair market value of the Company ’ s preferred shares on the date of issuance. Compensation expense of $120,549 and $1,117,809 was recorded during the three-month and nine-month periods ended September 30, 2016.

On May 15, 2016, the Company issued 75,500 shares of Series B Preferred Shares, valued at $75,500 to the owners of Rayco Energy, Inc. ( ‘ Rayco ” ) as consideration toward the purchase of Rayco. (See Note 7, - Business Combination).

In the month of July 2016, 1,395,000 shares of Class B Convertible Preferred Shares were converted into 13,955,000 shares of common stock.

In the month of August 2016, 425,000 shares of Class B Convertible Preferred Shares were converted into 4,250,000 of common stock.

NOTE 7 – BUSINESS COMBINATION

On May 15, 2016, the Company entered into a share exchange agreement with to purchase 100 percent of the issued and outstanding common stock of Rayco Energy, Inc. ( “ Rayco ” ), a San Francisco Bay Area-based energy service company focused on energy efficiency, solar power, and building modernization, in exchange for 75,500 shares of Series B Preferred Stock. In addition, the Company agrees to pay an additional $350,000 in cash to shareholders of Rayco, conditioned upon the 2016 net profit from the operation of Rayco being in excess of $10,000 ( “ the Condition ” ). To evidence the contingent unpaid balance of the purchase price, the Company executed 6 percent subordinated promissory notes with Rayco ’ s shareholders in the aggregate amount $350,000, payable only upon Rayco ’ s 2016 net operating profit being in excess of $10,000 with interest and principal payable monthly on first day of each month commencing May 1, 2017. In the event that the Condition is not met, such notes will be deemed null and void. The Company has recorded the $350,000 as a contingent liability.

The results of operations related to this acquisition have been included in our financial statement since the acquisition date. During the three and nine-month periods ended September 30, 2016, our net sales of the products acquired from Rayco Energy, Inc, were approximately $483,516 and $711,085, respectively.

In addition to consolidating the financial statements of the Company and subsidiary, certain intangible assets were identified and recognized, based upon the excess of purchase price to the net assets of the acquired subsidiary. The accounting for the business combination is based on provisional amounts and the allocation of the excess purchase price is not final, the amounts allocated to intangibles assets and goodwill, are subject to change pending the completion of final valuations of certain assets and liabilities.

NOTE 7 – BUSINESS COMBINATION (CONTINUED)

The total provisional purchase price for the business combination was allocated as follows:


Consideration paid:
Liabilities assumed	$	788,151
Contingent liability issued		350,000
Preferred stock issued		75,500
Total	$	1,213,651


Consideration received:
Cash	$	23,711
Accounts receivable		104,794
Inventories		36,670
Other current assets		3,350
Property and equipment		18,462
Customer List		760,000
Goodwill		266,664
Total	$	1,213,651

The company added a wholly-owned subsidiary named Sunvalley Solar Service, Inc. during 2016 which business is mainly for solar system maintenance and services. No business activities were incurred for this company as of September 30, 2016.

NOTE 8 – PRO FORMA RESULTS OF OPERATIONS

The Company ’ s unaudited pro forma results of operations for the nine months ended September 30, 2016 and 2015, assuming the Rayco Energy ’ s acquisition had occurred as of January 1, 2015, are presented for comparative purposes below. These amounts are based on available information of the results of operations of Rayco Energy ’ s prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisition been completed on January 1, 2015. The pro forma adjustments related to the acquisition of Rayco Energy are based on a preliminary purchase price allocation. Differences between the preliminary and final purchase price allocation could have an impact on the pro forma financial information presented below and that impact could be material. This unaudited pro forma information does not project operating results post acquisition.

This preliminary pro forma information is as follows:


		Nine Months		Nine Months
		Ended September 30,		Ended September 30,
		2016		2015

Total revenues	$	4,409,203	$	4,229,600
Net loss		(1,319,951)		(362,708)

Pro forma loss per common share	$	(0.06)	$	(0.08)

NOTE 9 – COMMITMENTS AND CONTINGENCIES

In connection with the purchase of Rayco Enterprises, Inc., the Company agreed to pay $350,000 as part of the purchase price. The Company issued a Note Payable for $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. If the condition is met, the note and interest are payable monthly on the first day of each month

SUNVALLEY SOLAR, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2016

commencing May 1, 2017 consistent with a nine-month amortization schedule. If the contingency is not met, the note will be voided. Prepayments may be made by the Company.

NOTE 10 – SUBSEQUENT EVENTS

Subsequent to period end, the Company had conversions of Preferred A into Common stock. There were 70,000 shares of Preferred A stock converted into 3,500 shares of common stock.

Subsequent to period end, 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.

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

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.

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 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 and nine months ended September 30, 2016 and 2015

During the three months ended September 30, 2016, we generated revenues of $2,956,670 and incurred costs of sales of $2,310,302, resulting in gross profit of $646,368. We incurred general and administrative expenses of $211,554, salary and wage expense of $433,706, and professional fees of $37,923. We recorded other income of $887 and interest expense of $2,714. Our net loss for the quarter ended September 30, 2016 was $38,642.

By comparison, during the quarter ended September 30, 2015, we generated revenues of $817,481 and incurred costs of sales of $557,767, resulting in gross profit of $259,714. We incurred general and administrative expenses of $74,970, salary and wage expense of $560,806, and professional fees of $53,374. We recorded other income of $346 and interest expense of $549. Our net loss for the quarter ended September 30, 2015 was $429,639.

During the nine months ended September 30, 2016, we generated revenues of $3,267,217 and incurred costs of sales of $2,443,564, resulting in gross profit of $823,653. We incurred general and administrative expenses of $460,735, salary and wage expense of $1,865,293, and professional fees of $122,751. We recorded other income of $2,580, interest expense of $6,451, and a loss on disposal of fixed asset in the amount of $415. Our net loss for the nine ended September 30, 2016 was $1,629,412.

By comparison, during the nine months ended September 30, 2015, we generated revenues of $1,886,906 and incurred costs of sales of $1,355,585, resulting in gross profit of $531,321. We incurred general and administrative expenses of $231,899, salary and wage expense of $851,926, and professional fees of $148,527. We recorded other income of $931 and interest expense of $2,151. Our net loss for the quarter ended September 30, 2015 was $702,251.

We are currently working on three major installation projects with contract prices totaling approximately
$4.4 million and these contracts are expected to be substantially completed by the end of 2016.

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 and nine-month periods ended September 30, 2016, our net sales of the products acquired from Rayco Energy, Inc., were approximately $483,516 and $711,085, respectively.

Our significant increase 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 is being recognized over the vesting period of the

grants. Compensation expense of $120,549 and $1,117,809 was recorded during the three-month and nine-month periods ended September 30, 2016.

Liquidity and Capital Resources

As of September 30, 2016, we had current assets in the amount of $3,497,512, consisting of cash and cash equivalents in the amount of $808,457, accounts receivable of $2,204,275, inventory in the amount of $202,923, costs in excess of billings on uncompleted contracts of $175,022, prepaid expenses and other current assets of $69,335, and restricted cash of $37,500. As of September 30, 2016, we had current liabilities in the amount of $5,389,284. These consisted of accounts payable and accrued expenses in the amount of $4,128,292, customer deposits of $668,270, a contingent liability of $350,000, accrued warranty of $139,333, and advances from contractors of $103,389. Our working capital deficit as of September 30, 2016 was therefore $1,891,772. During the nine months ended September 30, 2016, our operating activities used a net $400,120 in cash. Investing activities used $11,994 in cash and financing activities provided $11,373 during the period.

Our accounts payable and accrued expenses as of September 30, 2016 consisted of the following:


Accounts Payable	3,490,255
Credit Card payable	353,858
Accrued vacation	72,360
Other accrued expense	102,998
Payroll liabilities	38,189
Sales tax payable	70,632
Total	$4,128,292

As of September 30, 2016, we had no long term liabilities. As part of our acquisition of Rayco Energy, we acquired a short-term note with a balance $121,201 as of September 30, 2016. The note accrues interest at a rate of 24.90%. This note has been included in the credit card payable figure as shown above.

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. If the condition is met, principal and interest are payable on the Note monthly on the first day of each month commencing May 1, 2017 consistent with a six-month amortization schedule. If the contingency is not met, the note will be voided. We may make prepayments under the Note.

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 September 30, 2016, there were no off balance sheet arrangements.

Going Concern

We have experienced recurring net losses and had an accumulated deficit of $5,079,246 as of September 30, 2016. To date, we have not been able to produce sufficient sales to become cash flow positive and profitable on a consistent basis. The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our costs of operations and/or upon obtaining additional financing. For these reasons, our auditor has raised substantial doubt about our ability to continue as a going concern.

Critical Accounting Policies

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

Recently Issued Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2016. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Zhijian (James) Zhang and our Chief Financial Officer, Mandy Chung. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30,

2016, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2016.

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 14, 2016 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.

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 September 30, 2016 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:	November 21, 2016

	By: /s/ Zhijian (James) Zhang Zhijian (James) Zhang Title: Chief Executive Officer and Director

Date:	November 21, 2016

	By: /s/ Mandy Chung Mandy Chung Title: Chief Financial Officer

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