NOTE 1 - CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared by the Company without audit. The Consolidated Financial Statements include the accounts of Sunvalley and its subsidiary, Sunvalley Solar Energy, Inc. (formerly known as Rayco Energy, Inc). All significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at March 31, 2018, 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, 2017 audited consolidated financial statements. The results of operations for the periods ended March 31, 2018 and 2017 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
The Company has adopted ASC 606 as discussed in the revenue recognition policy below.
Management has considered all recent accounting pronouncements issued since the last audit of the financial statements. In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (
"ASC 606"
)
, to update the financial reporting requirements for revenue recognition. ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance became effective for us beginning on January 1, 2018. The
7
SUNVALLEY SOLAR, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 2018 and December 31, 2017
NOTE 3
–
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company
’
s management believes that these recent pronouncements will not have a material effect on the Company
’
s financial statements.
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.
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined on an average cost basis; and the inventory is comprised of raw materials and finished goods. Raw materials consist of fittings and other components necessary to assemble the Company
’
s finished goods. Finished goods consist of solar panels ready for installation and delivery to customers.
The Company
’
s inventory consisted of the following at March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Raw materials
|
$
|
-
|
|
$
|
-
|
|
Work in Progress
|
|
-
|
|
|
-
|
|
Finished goods
|
|
455,434-
|
|
|
371,532
|
|
TOTAL
|
$
|
455,434
|
|
$
|
371,532
|
Loss per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of outstanding common shares (restricted and free trading) during the periods presented. Basic loss per share and diluted loss per share are the same amount because the impact of additional common shares that might have been issued under the Company
’
s outstanding and exercisable stock options would be anti-dilutive. Dilutive instruments include 25,000 shares to be issued upon the conversion of the Series A Convertible Preferred Stock, and 900,000 shares to be issued upon the conversion of the Series B Convertible Preferred Stock. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 925,000 such potentially anti-dilutive shares excluded as of March 31, 2018.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based upon the Company
’
s assessment of the collectability of customer accounts. The Company periodically reviews the allowance by reviewing factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions which may affect a customer
’
s ability to pay.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiary. All intercompany amounts and transactions have been eliminated in consolidation,
Depreciation and Amortization
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the expected useful life of the asset.
Goodwill and Intangible Assets
Goodwill is tested on an annual basis and during the period between annual tests in certain circumstances, and written down when impaired. No impairment tests were performed during the periods ended March 31, 2018 and there was no impairment recorded as of March 31, 2018. The Company reported $218,076 of impairment to goodwill at the year ended December 31, 2017.
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.
NOTE 3
–
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Risk
Cash and cash equivalents are maintained with banks insured by the FDIC. Currently none of the cash held by banks exceeds the insured value.
Advertising Costs
Advertising costs are expensed as incurred. There were $13,608 and $13,081 of advertising costs for the periods ended March 31, 2018 and 2017, respectively.
Revenue Recognition
In preparation for adoption of the ASC 606 standard, we have implemented internal controls and completed our impact assessment of implementing this guidance. We have evaluated each of the five steps in ASC 606, which are as follows: (1) Identify the contract with the customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations; and (5) Recognize revenue when (or as) performance obligations are satisfied.
Our reported revenue will not be affected materially in any period due to the adoption of ASC 606 because: (1) we expect to identify similar performance obligations under ASC 606 as compared with deliverables and separate units of account previously identified; (2) we have determined the transaction price to be consistent; and (3) we record revenue at the same point in time, upon shipment or delivery under ASC 606, as applicable under the terms of the contract with the customer. Additionally, we do not expect the accounting for fulfillment costs or costs incurred to obtain a contract to be affected materially in any period due to the adoption of ASC 606.
Contract Assets
Contract assets 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 in accordance with ASC 606 effectively January 1, 2018. Revenues from fixed-price and cost-plus contracts are recognized on the percentage of completion method, whereby revenues on long-term contracts are recorded on the basis of the Company
’
s estimates of the percentage of completion of contracts based on the ratio of the actual cost incurred to total estimated costs. This cost-to-cost method is used because management considers it
8
SUNVALLEY SOLAR, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 2018 and December 31, 2017
to be the best available measure of progress on these contracts. Revenues from cost-plus fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured on the cost-to-cost method.
As of March 31, 2018, and December 31, 2017, the Company has capitalized $92,024 and $9,135 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 month period ended March 31, 2018.
NOTE 4
–
PREFERRED STOCK
The Company is authorized to issue up to 6,000,000 shares of $0.001 par value preferred stock; 1,000,000 shares of which are designated as Class A Convertible Preferred Stock, and 2,000,000 shares of which are designated as Class B Convertible Preferred Stock. The remaining 3,000,000 shares of preferred stock authorized remain undesignated.
Class A Convertible Preferred Stock
Holders of Class A Convertible Preferred Stock are entitled to vote together with the holders of the Company
’
s common stock on all matters submitted to shareholders at a rate of one hundred (100) votes for each share held. Holders of Class A Convertible Preferred Stock are also entitled, at their option, to convert their shares into shares of the Company
’
s common stock on a 0.5 common share for 1 preferred share basis. The Class A Convertible Preferred shares were valued at the trading price of the common shares into which they are convertible. As of March 31, 2018, and December 31, 2017, there were 500,000 and 500,000 shares of Class A Convertible Preferred Stock issued and outstanding, respectively.
Class B Convertible Preferred Stock
The holders of the Class B Convertible Preferred Stock have no dividend rights, have the right to convert each Class B share into 10 post-split common shares and have the right to 10 votes per Class B Convertible Preferred share for all matters submitted to the holders of the Company
’
s common stock. As of March 31, 2018, and December 31, 2017, there were 90,000 shares and 90,000 shares respectively and 2,000,000 shares of Class B Convertible Preferred Stock issued and outstanding, respectively.
NOTE 5
–
COMMON STOCK
On February 24, 2017, the Company issued 700,000 shares of common stock to employees for services provided. The shares were valued at $61,600, which was based on the trading price of the Company
’
s common stock on the date of issuance. The shares vest one year from the issuance date if the recipients remain employed by the Company during the entire year. The 700,000 shares were fully vested as of February 24, 2018, and have been issued as common stock in the 1st quarter.
For the three months ended March 31, 2018 and 2017, the Company recognized $9,790 and $5,401 of compensation expense related to the issuance of the shares, leaving a remaining amount to be expensed of $0 as of March 31, 2018.
NOTE 6
–
SUBSEQUENT EVENTS
In accordance with ASC 855-10, Company management reviewed all material events through the date of this report and determined that there are no additional material subsequent events to report.
9
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. From energy management, system design, permitting, to installation, maintenance and system services, we oversee the entire project from beginning to the end, and provide a single point of contact to our customer throughout the life of the solar system.
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 subsidiaries, Sunvalley Solar Tech, Inc., and 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.
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. Expanding our business into the energy management space.
·
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.
10
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.
·
11
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 have 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, 2018 and March 31, 2017
During the three months ended March 31, 2018, we generated revenues of $196,760 and incurred costs of sales of $152,088, resulting in gross profit of $44,672. We incurred general and administrative expenses of $511,997 and other expense of $3,824. Our net income for the quarter ended March 31, 2018 was $471,149.
By comparison, during the quarter ended March 31, 2017, we generated revenues of $295,109 and incurred costs of sales of $263,597 resulting in gross profit of $31,512. We incurred general and administrative expenses of $750,373, interest expense of $3,259, and other expense of $2,076. Our net loss for the quarter ended March 31, 2017 was $724,196.
Liquidity and Capital Resources
As of March 31, 2018, we had current assets in the amount of $1,672,636 consisting of cash and cash equivalents in the amount of $635,133, inventory of $435,434, the current portion of accounts receivable of $281,600, prepaid expenses and
12
other current assets of $137,744, contract assets of 92,024, restricted cash of $37,500, and current portion of notes receivable in the amount of $33,221.
As of March 31, 2018, we had current liabilities in the amount of $2,233,098. These consisted of accounts payable and accrued expenses in the amount of $1,687,626, customer deposits of $277,945, accrued warranty of $164,138, and advances from contractors of $103,389. Our working capital deficit as of March 31, 2018 was therefore $560,462. During the three months ended March 31, 2018, our operating activities used a net $164,554 in cash. Investing activities provided $7,617 in cash during the period.
Our accounts payable and accrued expenses as of March 31, 2018 consisted of the following:
|
|
|
Accounts Payable
|
$1,060,962
|
|
Credit Card payable
|
125,851
|
|
Contingent liability
|
334,528
|
|
Other accrued expense
|
4,721
|
|
Payroll liabilities
|
160,090
|
|
Sales tax payable
|
1,474
|
|
Total
|
$1,687,626
|
As of March 31, 2018, we had no long term liabilities.
In order to move forward with our business development plan set forth above, we will require additional financing in the approximate amount of $4,500,000, to be allocated as follows:
Initiate OEM Manufacturing
$ 2,000,000
R&D Commercialization Costs
$ 500,000
Expansion of Installation Business
(3 new branches)
$ 1,500,000
Additional working capital and
general corporate
$ 500,000
Total capital needs
$ 4,500,000
We will require substantial additional financing in the approximate amount of $4,500,000 in order to execute our business expansion and development plans and we may require additional financing in order to sustain substantial future business operations for an extended period of time. We currently do not have any firm arrangements for financing and we may not be able to obtain financing when required, in the amounts necessary to execute on our plans in full, or on terms which are economically feasible.
We are currently seeking additional financing. If we are unable to obtain the necessary capital to pursue our strategic plan, we may have to reduce the planned future growth of our operations.
Off Balance Sheet Arrangements
As of March 31, 2018, there were no off balance sheet arrangements.
Going Concern
We have experienced recurring net losses and had an accumulated deficit of $6,700,659 as of March 31, 2018. 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
13
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.