Notes to Consolidated Financial Statements
December 31, 2016 and 2015
NOTE 1
–
ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Sunvalley Solar, Inc. (the Company) was incorporated on August 16, 2007 under the laws of the State of Nevada as Western Ridge Minerals, Inc., Sunvalley Solar Inc. (the "Subsidiary"), formerly known as West Coast Solar Technologies Corporation, a California corporation, was incorporated on January 30, 2007.
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. which was renamed as Sunvalley Solar Energy, Inc. effective August 9, 2016. (
“
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.
Description of Business
The Company markets, sells, designs and installs solar panels for residential and commercial customers. The Company
’
s primary market is in the state of California, however the Company may sell anywhere in the United States.
NOTE 2
–
SIGNIFICANT ACCOUNTING POLICIES
Going Concern
As reflected in the accompanying financial statements, the Company has experienced recurring losses from operations through December 31, 2016 and has a working capital deficit of $372,600 and an accumulated deficit of $4,448,952 as of December 31, 2016. These factors, among others, raise substantial doubt about the Company
’
s ability to continue as a going concern.
Management plans to raise additional operating capital through a private placement of the Company
’
s common stock. Management believes that with sufficient working capital the Company can produce sufficient sales to become cash flow positive and profitable which will allow it to continue as a going concern. There is no assurance that the Company will be successful in its plans.
Accounting Method
The Company's financial statements are prepared using the accrual method of accounting. The Company has elected a December 31, year-end.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States 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 periods. Significant estimates made in preparing the financial statements include the allowance for doubtful accounts, accrued warranty, convertible debt derivative liabilities and discount expenses. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.
NOTE 2
–
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Operating Segments
The Company operates as one operating segment.
Principles of Consolidation
The consolidated financial statements include the Company
’
s wholly owned subsidiaries. Intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
Cash equivalents are comprised of certain highly liquid investments with original maturities of three months or less when purchased. The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits. The Company has not experienced any losses related to this concentration of risk. As of December 31, 2016 and 2015, the Company had $1,425,746 and $959,198, respectively, in cash in bank deposits that exceeded the $250,000 federally insured limits.
Accounts Receivable
The Company
’
s trade accounts receivable consist primarily of accounts due from wholesale customers, and accounts due from installation customers, with the most significant amounts arising from installation contracts. Trade receivables are due within 30 days on wholesale contracts, while receivables on installation contracts are due in installments over terms ranging from five to seven years. The Company performs periodic credit evaluations of its customers
’
respective financial conditions and does not require collateral. Credit losses have consistently been within management
’
s expectations. An allowance for doubtful accounts is recorded when it is probable that all or a portion of a trade receivables balance will not be collected. The Company
’
s accounts receivable consisted of the following as of December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31, 2015
|
Current portion
|
$
|
3,120,718
|
|
$
|
1,997,935
|
Long-term portion
|
|
1,459,589
|
|
|
3,050,940
|
Allowance for doubtful accounts
|
|
(102,795)
|
|
|
(39,195)
|
Total accounts receivable, net
|
$
|
4,477,512
|
|
$
|
5,009,680
|
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.
At each balance sheet date, the Company evaluates its ending inventory for excess quantities and obsolescence. This evaluation includes an analysis of sales levels by product type. Among other factors, the Company considers current product configurations, historical and forecasted demand, market conditions and product life cycles when determining the net realizable value of the inventory. Provisions are made to reduce excess or obsolete inventories to their estimated net realizable values. Once established, write-downs are considered permanent adjustments to the cost basis of the excess or obsolete inventory.
SUNVALLEY SOLAR, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
NOTE 2
–
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. Management evaluates useful lives regularly in order to determine recoverability taking into consideration current technological conditions.
Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed, and any resulting gain or loss is recorded. Fully depreciated assets are not removed from the accounts until physical disposition. The estimated useful lives are as follows:
|
|
|
Classification
|
|
Useful life
|
Automobile
|
|
5 years
|
Furniture
|
|
7 years
|
Software
|
|
3 years
|
Office equipment
|
|
5 years
|
Machinery
|
|
5 to 7 years
|
Long-Lived Assets
Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Based on this analysis, the Company believes that no impairment of the carrying value on its long-lived assets existed at December 31, 2016 and 2015.
Intangible Assets
Intangible assets are stated at cost and are amortized on a straight line basis, at the following rates:
|
|
|
Classification
|
|
Useful life
|
Customer list
|
|
5 years
|
Assembled workforce
|
|
5 years
|
Goodwill
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of December 31, 2016, is attributable to the purchase of Rayco Energy, Inc. The Company does not amortize goodwill.
In January 2017, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that simplifies the assessment of goodwill for impairment when the estimated fair value of a reporting unit is less than its carrying value by eliminating the requirement to determine the fair value of goodwill. Under the new guidance, the amount of goodwill impairment will be determined by the amount the carrying value of the reporting unit exceeds its fair value. The new guidance is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company adopted this new guidance in the fourth quarter of 2016.
NOTE 2
–
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill (Continued)
The Company performs an impairment assessment of goodwill annually as of December 31, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. There was no impairment to goodwill in 2016.
Customer Deposits
Customer deposits represent advance payments received for installation projects. Typically the Company will receive five percent of a contract total at the commencement of the installation project. These amounts are recorded as liabilities until such time that the Company has performed the majority of its contractually agreed-upon work, at which time the deposits are recognized as revenue in accordance with the Company
’
s revenue recognition policy.
Product Warranties
The Company warrants its products for various periods against defects in material or installation workmanship. The manufacturers of the solar panels and the inverters provide a warranty period of generally 25 years and l0 years, respectively. The Company will assist its customers in the event that the manufacturers
’
warranty needs to be used to replace a defective solar panel or inverter. The Company provides for a 10-year warranty on the installation of a system and all equipment and incidental supplies other than solar panels and inverters that are recovered under the manufacturers
’
warranty. Maintenance services such as cleaning the solar panels and checking the systems are offered to customers twice a year without a separate service charge.
The Company records a provision for the installation warranty, an expense included in cost of sales, based on management's best estimate of the probable cost to be incurred in honoring its warranty commitment. The Company's accrued warranty provision was $163,121 and $133,733 at December 31, 2016 and 2015, respectively.
Revenue Recognition
The completion of a solar installation project ranges from six to eighteen months; therefore, the Company recognizes revenue from a system installation under the completed contract method of accounting. Revenue from system installations and sales of solar panels is recognized when (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable and (4) collection of the related receivable is reasonably assured. The Company defines its services as having been substantially completed upon the installed systems are ready for City
’
s Building Department
’
s final inspection. Wholesale revenues are recognized pursuant to the same criteria; however, with wholesale arrangements the Company defines its delivery as having been completed at such time the customer takes possession of the Company
’
s product.
Rayco
’
s revenue consists of solar and LED installation projects, both to commercial and residential customers. Revenues from fixed-price and cost-plus contracts are recognized on the percentage of completion method, whereby revenues on long-term contracts are recorded on the basis of the Company
’
s estimates of the percentage of completion of contracts based on the ratio of the actual cost incurred to total estimated costs. This cost-to-cost method is used because management considers it to be the best available measure of progress on these contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured on the cost-to-cost method.
Cost of Sales
Cost of sales is comprised primarily of the cost of purchased product, as well as direct labor, inbound freight costs and other material costs required to complete products and installation projects. For installation projects, the direct labor costs are recorded as work-in-progress inventory and other installation project costs incurred by the Company
SUNVALLEY SOLAR, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
are recorded as costs in excess of billings on uncompleted contracts before the project
’
s revenue is recognized. When the Company uses contractors for installation projects, if the contractor provides progress billings to the Company, then those costs will be recorded as work-in-progress inventory. However, if the contractor doesn
’
t provide progress billings to the Company, then the Company will record the costs to cost of sales once the contractor bills the Company.
NOTE 2
–
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 31, 2016 and December 31, 2015, the Company has capitalized $37,790 and $58,235 of costs incurred in relation to installation projects.
Advertising Expenses
Advertising expenses are expensed as incurred. Total advertising expenses amounted to $36,655 and $3,013 for the years ended December 31, 2016 and 2015, respectively.
Research and Development
Research and development costs are expensed as incurred and amounted to $-0- and $-0- for the years ended December 31, 2016 and 2015, respectively. These costs are included in selling, general and administrative expenses in the accompanying statements of operations.
Income Taxes
The Company applies the asset and liability method of accounting for income taxes. The asset and liability method requires that the current or deferred tax consequences of all events recognized in the financial statements are measured by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years. Deferred tax assets are reviewed for recoverability and the Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that all or some portion of the deferred tax assets will not be recovered.
The Company recognizes and measures any uncertain tax positions using a
“
more-likely-than-not
”
approach. Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will to be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
SUNVALLEY SOLAR, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
NOTE 2
–
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic and Diluted Earnings (Loss) per Common Share
Basic earnings (loss) per common share is computed by dividing the net earnings by the weighted average number of outstanding common shares (restricted and free trading) during the periods presented. Basic earnings (loss) per share are equal to diluted earnings (loss) per share due to the impact of additional common shares that could be issued upon conversion of issued and outstanding convertible preferred stock would be anti-dilutive. Dilutive instruments include 6,000 shares to be issued upon conversion of Series A Convertible Preferred Stock and 1,300,000 shares to be issued upon conversion of Series B Convertible Preferred Stock. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 1,306,000 such potentially anti-dilutive shares excluded as of December 31, 2016 as their effect would have been antidilutive.
Fair Value Measurements
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1
–
Quoted prices in active markets for identical assets or liabilities;
Level 2
–
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
Level 3
–
Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
Stock-based Compensation
The Company recognizes compensation expense for stock-based awards expected to vest on a straight-line basis over the requisite service period of the award based on their grant date fair value.
Reclassification of Financial Statement Accounts
Certain balances in previously issued financial statements have been reclassified to be consistent with the current period presentation.
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.
NOTE 3
–
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. As of December 31, 2016 the Condition had not been met, and as such the note was deemed null and void.
The results of operations related to this acquisition have been included in our financial statement since the acquisition date. During the period from acquisition through December 31, 2016, our net sales of the products acquired from Rayco Energy, Inc. were $1,204,913.
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 total purchase price for the business combination was allocated as follows:
|
|
|
|
|
|
Consideration paid:
|
|
|
Liabilities assumed
|
$
|
840,563
|
Contingent liability issued
|
|
104,000
|
Preferred stock issued
|
|
75,500
|
Total
|
$
|
1,020,063
|
|
|
|
|
|
|
Consideration received:
|
|
|
Cash
|
$
|
23,711
|
Accounts receivable
|
|
104,794
|
Inventories
|
|
36,670
|
Other current assets
|
|
3,350
|
Property and equipment, net
|
|
18,462
|
Identified intangible assets (customer list and assembled workforce)
|
|
615,000
|
Goodwill
|
|
218,076
|
Total
|
$
|
1,020,063
|
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 December 31, 2016.
NOTE 4
–
RESTRICTED CASH
In order to comply with the State of California's licensing requirement or contract bonds as of December 31, 2016 and 2015 the Company maintains a certificate of deposit in the amount of $37,500 and $37,500, respectively, with a financial institution.
NOTE 5
–
INVENTORY
The Company
’
s inventory consisted of the following at December 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
Raw materials
|
$
|
-
|
|
$
|
-
|
Work in progress
|
|
-
|
|
|
-
|
Finished goods
|
|
95,461
|
|
|
103,346
|
Total inventory
|
$
|
95,461
|
|
$
|
103,346
|
The Company
’
s reserve for excess and obsolete inventory amounted to $-0- and $-0- as of December 31, 2016 and 2015.
NOTE 6
–
COSTS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
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 and percentage of completion methods of accounting. The Company recognizes revenue when the contracts are completed or substantially completed and billings and others costs are accumulated on the balance sheet. Under the completed contract method, no profit or income is recorded before completion of substantial completion of the work.
As of December 31, 2016 and December 31, 2015, the Company has capitalized $37,790 and $58,235 of costs incurred in relation to installation projects.
NOTE 7
–
PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
December 31, 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
|
|
(190,928)
|
|
|
(176,456)
|
Property and equipment, net
|
$
|
62,751
|
|
$
|
27,948
|
Depreciation expense for the years ended December 31, 2016 and 2015 was $15,200 and $22,783, respectively.
NOTE 8
–
INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of goodwill and of the unamortized portion of identified intangible assets (customer list and assembled workforce) recorded in connection with the business combination with Rayco Energy, Inc. The following table presents the detail of intangible assets for the periods presented:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
Identified intangible assets
|
$
|
615,000
|
|
$
|
-
|
Goodwill
|
|
218,076
|
|
|
-
|
Accumulated amortization
|
|
(77,464)
|
|
|
-
|
Total intangible assets and goodwill
|
|
755,612
|
|
|
-
|
|
|
|
|
|
|
Weighted average remaining life
|
|
4.37 years
|
|
|
-
|
Amortization expense on definite-lived intangible assets (excluding goodwill) included as a charge to income was $77,464 and $-0- for the years ended December 31, 2016 and 2015, respectively.
NOTE 9
–
ADVANCES FROM CONTRACTORS
On August 14, 2012 the Company entered into a funding agreement with a contractor to receive funding to complete various projects. During the year ended December 31, 2012, the Company received advances under said funding agreement of $247,175. The advances bear no interest and are due on demand. The outstanding balance of the advances at December 31, 2016 and 2015, was $103,389 and $103,389, respectively.
NOTE 10
–
EQUIPMENT LEASE
In September 2011, the Company entered a lease-to-own purchase agreement. The Company evaluated the lease at the time of purchase and determined that the agreement contained a beneficial by-out option wherein the Company has the option to buy the equipment for $1 at the end of the lease term. The Company has classified the lease as a capital lease. The Company used the discounted value of future payments as the fair value of this asset and has recorded the discounted value of the remaining payments as a liability.
Capital leases payable outstanding as of December 31, 2016 and 2015 consisted of the following:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
Forklift lease
|
$
|
-
|
|
$
|
3,537
|
Total equipment leases
|
$
|
-
|
|
$
|
3,537
|
NOTE 11
–
NOTES PAYABLE
Notes payable outstanding as of December 31, 2016 and 2015 consisted of the following:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
Notes payable (1)
|
|
|
|
|
|
Current portion
|
$
|
-
|
|
$
|
-
|
Long-term portion
|
|
81,181
|
|
|
-
|
Total notes payable
|
$
|
81,181
|
|
$
|
-
|
(1)
Arrangement with a bank having a maximum borrowing of $100,000; is collateralized by all business assets. Any principal amounts outstanding accrue interest at the bank's variable index rate (currently 6.07 percent as of December 31, 2016). The remaining loan balance of $76,266 was paid off in full on August 15, 2016 through the execution of a new note payable under the same terms with a face value of $150,000 and an original issuance discount of $14,514 which matures on May 25, 2017. As of December 31, 2016, the principal remaining on the note is $85,210 with a remaining discount of $4,029.
NOTE 12
–
STOCKHOLDERS
’
EQUITY
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 shares 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 December 31, 2016 and December 31, 2015, there were 120,000 and 1,000,000 shares of Class A Convertible Preferred Stock issued and outstanding, respectively.
During the year ended December 31, 2016, holders of Class A Convertible Preferred stock elected to convert 880,000 shares into 44,000 shares of common stock.
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 December 31, 2016 and December 31, 2015, there were 130,000 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.
SUNVALLEY SOLAR, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Compensation expense of $1,117,812 and $880,191 was recorded during the years ended December 31, 2016 and 2015, respectively.
NOTE 12
–
STOCKHOLDERS
’
EQUITY (CONTINUED)
Class B Convertible Preferred Stock (Continued)
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 its wholly-owned subsidiary, Rayco Energy, Inc.
During the year ended December 31, 2016, holders of Class B Convertible Preferred stock elected to convert 19,455,500 shares into 1,945,000 shares of common stock.
Common Stock
Effective July 22, 2015, the Company
’
s common stock was reverse split on a 1 share for 20 shares basis. The accompanying consolidated financial statements reflect the reverse stock split on a retroactive basis. The Company also increased the number of authorized common shares from 4,500,000 to 150,000,000 and preferred shares from 1,000,000 to 6,000,000. No shares of common stock were issued during the years ended December 31, 2016 and 2015, other than shares issued in the preferred stock conversions noted above.
NOTE 13
–
INCOME TAXES
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company
’
s net deferred tax assets consist of the following components:
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
Deferred tax asset:
|
|
|
|
|
|
Net operating loss carryforwards
|
$
|
(1,314,939)
|
|
$
|
(1,172,943)
|
Valuation allowance
|
|
1,314,939
|
|
|
1,172,943
|
Net deferred tax asset
|
$
|
-
|
|
$
|
-
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income statutory tax rates to pretax income (loss) from continuing operations as follows:
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
Tax benefit at statutory rates
|
$
|
(339,700)
|
|
$
|
66,576
|
Change in valuation allowance
|
|
(339,700)
|
|
|
(66,576)
|
Net provision for income taxes
|
$
|
-
|
|
$
|
-
|
The Company has accumulated net operating loss carryovers of approximately $1,314,393 as of December 31, 2016 which are available to reduce future taxable income. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards for federal income tax reporting purposes may be subject to annual limitations. A change in ownership may limit the utilization of the net operating loss carry forwards in future years. The tax losses begin to expire in 2033. The fiscal years 2016 and 2015 remain open to examination by federal tax authorities and other tax jurisdictions.
SUNVALLEY SOLAR, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
NOTE 14
–
CONCENTRATIONS OF RISK
Supplier Concentrations
The Company purchases solar panels from two manufacturers during the years ended December 31, 2016 and 2015, respectively. For the years ended December 31, 2016 and 2015, these vendors accounted for approximately 59 percent and 54 percent, respectively, of total inventory purchases.
Customer Concentrations
For the years ended December 31, 2016 and 2015, two and four customers, respectively, represented more than 10 percent of the Company
’
s sales. This translates to approximately 93 and 99 percent of the Company's annual net revenues for the years ended December 31, 2016 and 2015.
NOTE 15
–
COMMITMENTS AND CONTINGENCIES
Leases
At December 31, 2016, minimum annual commitments, which do not include common are maintenance charges or real estate taxes which are also required contractual obligation under our operating leases, under non-cancelable leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
|
Operating Leases
|
|
|
Totals
|
2017
|
$
|
-
|
|
$
|
61,009
|
|
$
|
61,009
|
2018
|
|
-
|
|
|
57,533
|
|
|
57,533
|
2019
|
|
-
|
|
|
1,908
|
|
|
1,908
|
2020
|
|
-
|
|
|
1,908
|
|
|
1,908
|
2021
|
|
-
|
|
|
1,749
|
|
|
1,749
|
Thereafter
|
|
-
|
|
|
-
|
|
|
-
|
Total minimum lease payments
|
$
|
-
|
|
$
|
124,107
|
|
$
|
124,107
|
Less: amount representing interest
|
|
-
|
|
|
|
|
|
|
Net minimum lease payments on capital leases
|
$
|
-
|
|
|
|
|
|
|
Total rent expense amounted to $54,904 and $44,961 for the fiscal years ended December 31, 2016 and 2015, respectively.
Legal Proceedings
The Company filed a contractual fraud case against one of its commercial installation customers, All Fortune Group, LLC (
“
All Fortune
”
), during September 2013 for causes of action such as breach of contract, common counts and fraudulent transfer. The reliefs claimed by the Company mainly are monetary damages and interest including punitive dames, costs of suits for no less than 1.2 million. As a result of the filing by the Company, All Fortune filed a lawsuit against the Company for causes of action which are breach of contract, negligent misrepresentation, intentional misrepresentation and fraud in All Fortune
’
s complaint. The reliefs claimed by All Fortune are mainly monetary damages including punitive damages, costs of suit and other recoverable fees and damages. A settlement was reached between the Company and All Fortune on October 7, 2015. A money judgement in the amount of $874,689 to the Company. All Fortune will pay $380,000 within 20 days after All Fortune
’
s receipt of the Company
’
s insurer payment for $215,000. All Fortune agrees to pay the Company the remaining balance owed of $494,689 in 30 monthly payments at $16,453 and the 31st monthly payment of $1,100. The Company recorded $874,689 as collection of bad debt in the operating expenses in the 4th quarter of 2015.
Sunvalley filed a complaint on February 21, 2014 against John Chiang for two causes of action which are breach of contract and common counts. The reliefs prayed by Sunvalley are monetary damages and interests including attorneys
’
fees and costs of suits for no less than $26,504. Chiang filed an answer to complaint on March 31, 2014. This case was consolidated with Sunvalley v. All Fourtune, et al., which was later consolidated with case All
SUNVALLEY SOLAR, INC.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Fortune v. Sunvalley. Sunvalley v. John Chiang was dismissed on December 18, 2015 due to dismissal of leading case All Fortune v. Sunvalley.
The Company filed a lawsuit against China Electric Equipment Group Corporation (CEEG) on January 17, 2013 for breach of contract, intentional and negligent misrepresentation and violation of California business & professions code. The Company requested CEEG to compensate the damages and economic losses in the amount of no less than $2,000,000.
CEEG (Shanghai) Solar Science & Technology Co., LTD., (parent of CEEG), here collectively called as CEEG, filed a lawsuit in USA against the Company on September 18, 2015 to enforce the Foreign Arbitration Award issued by the Shanghai International Economic and Trade Arbitration Commission (SIETAC) in favor of CEEG and against the Company, on December 10, 2013. CEEG requested damages of $1,000,000 representing the principal amount awarded to CEEG under the Arbitral Award in China plus interest, currency exchange loss and other professional fees in the amount approximately $450,000. On February 5, 2016, the Central District Court of California granted CEEG
’
s motion to confirm the Foreign Arbitration Award against Sunvalley. Sunvalley
’
s attorney is filing an appeal on this case.
The Company filed a contractual dispute case against one of its suppliers, Baoding Tianwei Solarfilms So. Ltd on September 20, 2013 for causes of action which are breach of contract, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose and negligence. The reliefs prayed by Sunvalley are monetary damages and interests including punitive damages, costs of suits, as well as other and further relief court deems just and proper. The damage sought is no less than $8 million dollars. Baoding Tianwei Baobian Electric Co. is added in as a codefendant and is undergoing Hague Convention service. On March 9, 2017, Sunvalley Solar voluntarily dismissed the complaint against Baoding Tianwei Baobian Electric Co., Ltd. Sunvalley has been preparing the default judgement package against Boading Tianwei Solarfilms So. Ltd. The package will be submitted with the court on or before April 20, 2017.
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
NOTE 16
–
SUBSEQUENT EVENTS
Subsequent to December 31, 2016, the Company issued 500,000 shares of Series A Preferred Stock, 30,000 shares of Series B Preferred Stock, and 700,000 shares of common stock to various individuals for services provided.
Subsequent to December 31, 2016, the Company had conversions of preferred A into common stock. There were 120,000 shares of Preferred A stock converted into 6,000 shares of common stock.
Subsequent to December 31, 2016, the Company had conversion of preferred B into common stock. There were 70,000 shares of Preferred B stock converted into 700,000 shares of common stock. In accordance with ASC 855, Company management reviewed all material events through the date of this report and there are no material subsequent events to report.