UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 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 June 30, 2008
|
|
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
|
|
|
|
For
the transition period from ________________ to
_________________
|
Commission
File Number
333-120926
SOLAR
ENERTECH CORP.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
98-0434357
|
State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization
|
|
Identification
No.)
|
1600
Adams Drive
Menlo
Park, CA 94025
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code
(650) 688-5800
Indicate
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.
Yes
R
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
|
|
o
|
|
Accelerated
Filer
o
|
|
|
Non-accelerated
filer
|
o
|
|
Smaller
reporting company
x
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No
x
Number
of
shares outstanding of registrant’s class of common stock as of August 1,
2008:
111,906,710
Table
of Contents
SOLAR
ENERTECH CORP
FORM
10-Q
I
NDEX
|
|
|
PAGE
|
|
Part
I. Financial Information
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
Unaudited
Condensed Consolidated Balance Sheets - June 30, 2008 and September
30,
2007
|
|
3
|
|
Unaudited
Condensed Consolidated Statements of Operations – Three and Nine
Months Ended June 30, 2008 and June 30, 2007
|
|
4
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows – Nine Months Ended
June 30, 2008 and June 30, 2007
|
|
5
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
|
6
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
20
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risks
|
|
25
|
Item
4.
|
Controls
and Procedures
|
|
25
|
Item
4T.
|
Controls
and Procedures
|
|
26
|
|
Part
II. Other Information
|
|
|
Item
1.
|
Legal
Proceedings
|
|
27
|
Item 1A.
|
Risk
Factors
|
|
|
Item
2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
|
|
Item
3.
|
Defaults
upon Senior Securities
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
|
Item
5.
|
Other
Information
|
|
28
|
Item
6.
|
Exhibits
|
|
28
|
Signatures
|
|
29
|
ITEM
1. FINANCIAL STATEMENTS
Solar
EnerTech Corp.
Condensed
Consolidated Balance Sheets
|
|
June 30, 2008
|
|
September 30, 2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,681,000
|
|
$
|
3,908,000
|
|
Accounts
receivable
|
|
|
2,568,000
|
|
|
913,000
|
|
Advance
payments and other
|
|
|
4,955,000
|
|
|
6,500,000
|
|
Inventories,
net
|
|
|
9,312,000
|
|
|
5,708,000
|
|
VAT
taxes receivable
|
|
|
2,601,000
|
|
|
-
|
|
Other
receivable
|
|
|
1,438,000
|
|
|
590,000
|
|
Total
current assets
|
|
|
23,555,000
|
|
|
17,619,000
|
|
Fixed
assets, net of accumulated depreciation
|
|
|
8,300,000
|
|
|
3,215,000
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
1,860,000
|
|
|
2,540,000
|
|
Deposits
|
|
|
3,105,000
|
|
|
1,741,000
|
|
Total
assets
|
|
$
|
36,820,000
|
|
$
|
25,115,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDER'S EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
589,000
|
|
$
|
2,891,000
|
|
Customer
advance payment
|
|
|
1,184,000
|
|
|
1,603,000
|
|
Accrued
interest expense
|
|
|
-
|
|
|
615,000
|
|
Accrued
expenses
|
|
|
485,000
|
|
|
507,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
3,969,000
|
|
|
3,969,000
|
|
Demand
note payable to a related party
|
|
|
-
|
|
|
450,000
|
|
Demand
notes payable
|
|
|
-
|
|
|
700,000
|
|
Derivative
liabilities
|
|
|
2,500,000
|
|
|
16,800,000
|
|
Warrant
liabilities
|
|
|
6,360,000
|
|
|
17,390,000
|
|
Total
current liabilities
|
|
|
15,087,000
|
|
|
44,925,000
|
|
Convertible
notes, net of discount
|
|
|
55,000
|
|
|
7,000
|
|
Total
liabilities
|
|
|
15,142,000
|
|
|
44,932,000
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDER'S
EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
Common
stock - 200,000,000 shares authorized at $0.001 par value 111,616,855
and
78,827,012 shares issued and outstanding at June 30, 2008 and September
30, 2007, respectively
|
|
|
112,000
|
|
|
79,000
|
|
Additional
paid in capital
|
|
|
70,519,000
|
|
|
39,192,000
|
|
Other
comprehensive income
|
|
|
2,361,000
|
|
|
592,000
|
|
Accumulated
deficit
|
|
|
(51,314,000
|
)
|
|
(59,680,000
|
)
|
Total
stockholders' equity (deficit)
|
|
|
21,678,000
|
|
|
(19,817,000
|
)
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
36,820,000
|
|
$
|
25,115,000
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Solar
EnerTech Corp.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
10,272,000
|
|
$
|
1,517,000
|
|
$
|
18,582,000
|
|
$
|
1,520,000
|
|
Cost
of sales
|
|
|
(10,235,000
|
)
|
|
(1,507,000
|
)
|
|
(19,680,000
|
)
|
|
(1,513,000
|
)
|
Gross
profit (loss)
|
|
|
37,000
|
|
|
10,000
|
|
|
(1,098,000
|
)
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative
|
|
|
1,606,000
|
|
|
2,798,000
|
|
|
8,185,000
|
|
|
7,733,000
|
|
Research
& development
|
|
|
198,000
|
|
|
7,000
|
|
|
483,000
|
|
|
113,000
|
|
Loss
on debt extinguishment
|
|
|
1,529,000
|
|
|
-
|
|
|
3,996,000
|
|
|
-
|
|
Total
operating expenses
|
|
|
3,333,000
|
|
|
2,805,000
|
|
|
12,664,000
|
|
|
7,846,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(3,296,000
|
)
|
|
(2,795,000
|
)
|
|
(13,762,000
|
)
|
|
(7,839,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
24,000
|
|
|
27,000
|
|
|
80,000
|
|
|
40,000
|
|
Interest
expense
|
|
|
(238,000
|
)
|
|
(280,000
|
)
|
|
(814,000
|
)
|
|
(334,000
|
)
|
Loss
on issuance of convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(15,209,000
|
)
|
Gain
(loss) on change in fair market value of compound embedded
derivative
|
|
|
(22,000
|
)
|
|
7,100,000
|
|
|
12,267,000
|
|
|
(5,500,000
|
)
|
Gain
(loss) on change in fair market value of warrant liability
|
|
|
107,000
|
|
|
4,532,000
|
|
|
11,030,000
|
|
|
(5,427,000
|
)
|
Other
expense
|
|
|
(107,000
|
)
|
|
(267,000
|
)
|
|
(435,000
|
)
|
|
(267,000
|
)
|
Net
income (loss)
|
|
$
|
(3,532,000
|
)
|
$
|
8,317,000
|
|
$
|
8,366,000
|
|
$
|
(34,536,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic
|
|
$
|
(0.03
|
)
|
$
|
0.11
|
|
$
|
0.09
|
|
$
|
(0.44
|
)
|
Net
income (loss) per share - diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.10
|
)
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
104,528,145
|
|
|
78,807,012
|
|
|
97,518,130
|
|
|
78,257,561
|
|
Weighted
average shares outstanding - diluted
|
|
|
104,528,145
|
|
|
119,343,005
|
|
|
120,531,481
|
|
|
78,257,561
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Solar
EnerTech Corp.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
8,366,000
|
|
$
|
(34,536,000
|
)
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
of fixed assets
|
|
|
877,000
|
|
|
10,000
|
|
Stock-based
compensation
|
|
|
4,777,000
|
|
|
6,349,000
|
|
Loss
on issuance of convertible notes
|
|
|
-
|
|
|
15,209,000
|
|
Loss
on debt extinguishment
|
|
|
3,996,000
|
|
|
-
|
|
Inventory
reserve
|
|
|
438,000
|
|
|
-
|
|
Amortization
of note discount and deferred financing cost
|
|
|
61,000
|
|
|
2,000
|
|
Loss
(gain) on change in fair market value of compound embedded
derivative
|
|
|
(12,267,000
|
)
|
|
5,500,000
|
|
Loss
(gain) on change in fair market value of warrant liability
|
|
|
(11,030,000
|
)
|
|
5,427,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,339,000
|
)
|
|
(85,000
|
)
|
Advance
payments and other
|
|
|
2,069,000
|
|
|
(2,774,000
|
)
|
Inventories,
net
|
|
|
(3,485,000
|
)
|
|
(4,011,000
|
)
|
VAT
taxes receivable
|
|
|
(2,601,000
|
)
|
|
-
|
|
Other
receivable
|
|
|
(848,000
|
)
|
|
-
|
|
Accounts
payable and accrued liabilities
|
|
|
(2,735,000
|
)
|
|
1,480,000
|
|
Customer
advance payment
|
|
|
(419,000
|
)
|
|
794,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
-
|
|
|
(35,000
|
)
|
Net
cash used in operating activities
|
|
|
(14,140,000
|
)
|
|
(6,670,000
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
of fixed assets
|
|
|
(5,482,000
|
)
|
|
(2,671,000
|
)
|
Deposits
on equipment
|
|
|
(1,364,000
|
)
|
|
388,000
|
|
Net
cash used in investing actives
|
|
|
(6,846,000
|
)
|
|
(2,283,000
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock, net of offering cost
|
|
|
19,887,000
|
|
|
1,089,000
|
|
Proceeds
from note payable
|
|
|
-
|
|
|
100,000
|
|
Proceeds
from issuance of convertible notes, net of offering cost
|
|
|
-
|
|
|
15,950,000
|
|
Net
cash provided by financing activities
|
|
|
19,887,000
|
|
|
17,139,000
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
(128,000
|
)
|
|
84,000
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,227,000
|
)
|
|
8,270,000
|
|
Cash
and cash equivalents, beginning of period
|
|
|
3,908,000
|
|
|
2,799,000
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,681,000
|
|
$
|
11,069,000
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
SOLAR
ENERTECH CORP.
Notes
to Condensed Consolidated Financial Statements
June
30, 2008 (Unaudited)
NOTE
1 — ORGANIZATION AND NATURE OF OPERATIONS
Solar
EnerTech Corp. (formerly Safer Residence Corporation) was incorporated in
Nevada, United States of America, on July 7, 2004. To facilitate a change in
focus from providing customers with home security assistance services to the
solar energy industry on March 27, 2006, Safer Residence Corp. merged with
and
into Solar EnerTech Corp., and on April 7, 2006, changed its name to Solar
EnerTech Corp. (the “Company”).
On
July
18, 2006, the Company executed an agency agreement with Solar EnerTech
(Shanghai) Co., Ltd. (formerly known as Infotech (Shanghai) Solar Technologies
Ltd.), effective April 10, 2006, to engage in business in China on its behalf.
Infotech Shanghai is controlled through a Hong Kong company which is controlled
by the Company’s President and CEO. See additional disclosures related to the
agency agreement in Note 2 described below.
The
Company was in the development stage through March 31, 2007. The quarter ended
June 30, 2007 was the first quarter during which the Company was considered
an
operating company and no longer in the development stage.
On
August 13, 2008 the Company reincorporated to the
State of Delaware. See Note 13 of Notes to Condensed Consolidated Financial
Statements for additional information.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation and basis of accounting
These
consolidated financial statements have been prepared in U.S. dollars and in
accordance with accounting principles generally accepted in the United States
of
America, and include the accounts of Solar EnerTech and its wholly-controlled
variable interest entities, Infotech (Hong Kong) Solar Technologies Ltd
(“Infotech HK”) and Solar EnerTech (Shanghai) Co., Ltd. (formerly known as
Infotech (Shanghai) Solar Technologies Ltd.) (“Infotech Shanghai”).
Collectively, the variable interest entities are referred to in these financial
statements as “Infotech”. Infotech HK is the holding company for Infotech
Shanghai. Infotech HK does not have any investments or operations separate
from
Infotech Shanghai. All material intercompany accounts and transactions have
been
eliminated. The minority interests in Infotech were not significant at June
30,
2008 and as a result, no minority interest balance is reflected in these
financial statements.
Variable
interest entities
A
variable interest entity (“VIE”) is an entity with an ownership, contractual or
other financial interest held by a primary beneficiary that is determined by
control attributes other than a majority voting interest. The Company’s
contractual, financial and operating relationships with Infotech make the
Company the primary beneficiary of Infotech’s losses, which are expected to
extend into fiscal 2008 or longer, and any residual returns, if any, thereafter.
Upon consolidation, the primary beneficiary records all of the VIE’s assets,
liabilities and non-controlling interests as if it were consolidated based
on a
majority voting interest.
Under
the
Agency Agreement dated April 10, 2006, the Company engaged Infotech to undertake
all activities necessary to build a solar technology business in China,
including the acquisition of manufacturing facilities and equipment, employees
and inventory. Because the Company and Infotech share the same managers and
staff and the Company provides Infotech’s sole source of financial support, the
companies effectively operate as parent and subsidiary. Infotech is not
compensated for its services as agent; however, the Company is required to
reimburse Infotech for the normal and usual expenses of managing the Company’s
business activities as contemplated by the agreement. The Company does not
have
any responsibility to absorb costs incurred by Infotech beyond those incurred
in
its capacity as an agent for the Company, nor does the Company has any rights
to
future returns of Infotech that are not associated with them acting in their
capacity as our agent. However, substantially all of Infotech’s operations
consist of them acting as our agent.
Under
the
terms of the Agency Agreement, the Agency Agreement continues through its
initial term ended April 10, 2008 term and remains effective on a month-to-month
basis unless otherwise terminated. The Company may terminate the agreement
at
any time. While the Agency Agreement did not specifically provide the right
for
Infotech Shanghai to terminate the agreement after expiration of the initial
term on April 10, 2008, Infotech Shanghai may presumably terminate the Agency
Agreement at any time by electing not to continue. Upon termination of the
agreement, (i) Infotech Shanghai is obligated to return any funds advanced
by
the Company for future expenses and deliver to the Company a final accounting
of
expenses incurred on behalf of the Company along with associated books and
records and (ii) the Company is obligated to pay Infotech Shanghai any
outstanding amounts owed to Infotech Shanghai. Upon termination of the Agency
Agreement, shareholders of the Company would not have rights to the net assets
of Infotech Shanghai which exist independent of the Agency Agreement. However,
any property, plant and equipment purchased or constructed on behalf of the
Company under the Agency Agreement which were funded by the Company are legally
owned by the Company and not by Infotech Shanghai and therefore while the Agency
Agreement does not specifically provide for the transfer of any of the net
assets of Infotech Shanghai, under general principals of agency law, Infotech
Shanghai would be required to transfer such assets to the Company upon request.
While
Infotech is not a subsidiary of the Company, under Chinese law, funds held
by
Infotech for the operation of the Company’s business can be transferred from
Infotech pursuant to an agreement such as the existing Agency Agreement. We
are
not aware of any significant currency or other restrictions on Infotech’s
ability to perform under the Agency Agreement.
All
of
the Company’s business activities conducted in China are carried out by
Infotech. As of June 30, 2008 and September 30, 2007, total assets held by
Infotech as agent for the Company amounted to $33.0 million and $21.6 million,
respectively. Total advances and reimbursements made to date from the Company
to
Infotech as of June 30, 2008 and September 30, 2007 were $34.4 million and
$26.2
million, respectively, which effectively represent intercompany receivables
to
the Company from Infotech Shanghai which are eliminated during consolidation.
Infotech’s operating expenses on behalf of Solar for the nine months ended June
30, 2008 and 2007 totaled $2.5 million and $0.7 million, respectively.
Infotech’s only debt consisted of advances received from the
Company.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined by the
weighted-average method. Raw material cost is based on purchase costs while
work-in-progress and finished goods comprise of direct materials, direct labor
and an allocation of manufacturing overhead costs.
Inventory
in-transit is included in finished goods and consists of products shipped but
not recognized as revenue because they did not meet the revenue recognition
criteria.
Provisions
are made for excess, slow moving and obsolete inventory as well as inventory
whose carrying value is in excess of net realizable value.
Income
taxes
The
Company files federal and state income tax returns in the United States for
its
United States operations, and files separate foreign tax returns for its foreign
subsidiary in the jurisdictions in which this entity operates. The Company
accounts for income taxes under the provisions of SFAS No. 109, Accounting
for Income Taxes (“SFAS 109”).
Under
the
provisions of SFAS 109, deferred tax assets and liabilities are recognized
for
the future tax consequences attributable to differences between their financial
statement carrying amounts and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to
be recovered or settled. The effect on deferred tax assets and liabilities
of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Valuation
allowance
Significant
judgment is required in determining any valuation allowance recorded against
deferred tax assets. In assessing the need for a valuation allowance, we
consider all available evidence including past operating results, estimates
of
future taxable income, and the feasibility of tax planning strategies. In the
event that we change our determination as to the amount of deferred tax assets
that can be realized, we will adjust our valuation allowance with a
corresponding impact to the provision for income taxes in the period in which
such determination is made.
Unrecognized
Tax Benefits
Effective
on October 1, 2007, the Company adopted the provisions of Interpretation No.
48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109” (“FIN 48”). Under FIN 48, the impact of an uncertain
income tax position on the income tax return must be recognized at the largest
amount that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority based solely on the technical merits of the associated tax
position. An uncertain income tax position will not be recognized if it
has less than a 50% likelihood of being sustained. The Company also elected
the
accounting policy that requires interest recognized in accordance with Paragraph
15 of FIN 48 and penalties recognized in accordance with Paragraph 16 of FIN
48
be classified as part of its income taxes. The Company classifies the
unrecognized tax benefits that are expected to result in payment or receipt
of
cash within one year as current liabilities, otherwise, the unrecognized tax
benefits will be classified as non-current liabilities. Additionally, FIN 48
provides guidance on de-recognition, accounting in interim periods, disclosure
and transition. See Note 6 of Notes to Condensed Consolidated Financial
Statements for additional information.
Derivative
financial instruments
Statement
of Financial Accounting Standard No. 133 (“SFAS 133”), “Accounting for
Derivative Instruments and Hedging Activities,” as amended, requires all
derivatives to be recorded on the balance sheet at fair value. These
derivatives, including embedded derivatives in our structured borrowings, are
separately valued and accounted for on the balance sheet. Fair values for
exchange-traded securities and derivatives are based on quoted market prices.
Where market prices are not readily available, fair values are determined using
market based pricing models incorporating readily observable market data and
requiring judgment and estimates.
In
September 2000, the Emerging Issues Task Force issued EITF 00-19, “Accounting
for Derivative Financial Instruments Indexed to and Potentially Settled in,
a
Company’s Own Stock,” (“EITF 00-19”) which requires freestanding contracts that
are settled in a company’s own stock, including common stock warrants, to be
designated as an equity instrument, an asset or a liability. Under the
provisions of EITF 00-19, a contract designated as an asset or a liability
must
be carried at fair value on a company’s balance sheet, with any changes in fair
value recorded in the company’s results of operations.
The
Company’s management used market-based pricing models to determine the fair
values of the Company’s derivatives. The model uses market-sourced inputs such
as interest rates, exchange rates and option volatilities. Selection of these
inputs involves management’s judgment and may impact net income.
The
method used to estimate the value of the compound embedded derivatives (“CED”)
as of each valuation date was a Monte Carlo simulation. Under this method the
various features, restrictions, obligations and options related to each
component of the CED were analyzed and spreadsheet models of the net expected
proceeds resulting from exercise of the CED (or non-exercise) were created.
Each
model is expressed in terms of the expected timing of the event and the expected
stock price as of that expected timing.
Because
the potential timing and stock price may vary over a range of possible values,
a
Monte Carlo simulation was built based on the possible stock price paths (i.e.,
daily expected stock price over a forecast period). Under this approach an
individual potential stock price path is simulated based on the initial stock
price at the measurement date, the expected volatility and risk free rate over
the forecast period. Each path is compared against the logic described above
for
potential exercise events (or non-exercise which result in $0 value) and the
present value recorded. This is repeated over a significant number of trials,
or
individual stock price paths, in order to generate an expected or mean value
for
the present value of the CED.
The
Company’s management used the binomial valuation model to value warrants issued
in conjunction with convertible notes entered into in March 2007. The model
uses
inputs such as implied term, suboptimal exercise factor, volatility, dividend
yield and risk-free interest rate. Selection of these inputs involves
management’s judgment and may impact estimated value.
Stock-Based
Compensation
On
January 1, 2006, the Company began recording compensation expense associated
with stock options and other forms of employee equity compensation in accordance
with Statement of Financial Accounting Standards No. 123R,
Share-Based Payment,
as
interpreted by SEC Staff Accounting Bulletin No. 107.
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single option award approach.
This fair value is then amortized on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting period. The
following assumptions are used in the Black-Scholes-Merton option pricing
model:
Expected
Term —The Company’s expected term represents the period that the Company’s
stock-based awards are expected to be outstanding;
Expected
Volatility— The Company’s expected volatilities are based on historical
volatility of the Company’s stock, adjusted where determined by management for
unusual and non-representative stock price activity not expected to recur.
Due
to the limited trading history, we also considered volatility data of guidance
companies;
Expected
Dividend —The Black-Scholes-Merton valuation model calls for a single expected
dividend yield as an input. The Company currently pays no dividends and does
not
expect to pay dividends in the foreseeable future;
Risk-Free
Interest Rate— The Company bases the risk-free interest rate on the implied
yield currently available on United States Treasury zero-coupon issues with
an
equivalent remaining term; and
Estimated
Forfeitures— When estimating forfeitures, the Company uses the average
historical option forfeitures over a period of four years.
In
conjunction with stock option awards granted to the President/CEO and a director
in March 2006, the management estimated the fair value of the equity of the
Company using a simple weighted average (50/50) of the Income Approach,
Discounted Cash Flow Method (“Income Approach”), and Market Approach, Guideline
Public Company Method (“Market Approach”). There were no discounts taken for
this determination of the equity value of the Company.
For
the
Income Approach, management utilized a five year forecast of income and
expenses, including capital expenditures, to determine debt-free cash flow.
Management used a multiple of 2.9 times 2010 forecasted revenue to determine
a
terminal value for the Company. The multiple of 2.9 was based upon the median
2008 business enterprise value to revenue multiple of three comparable public
companies in the same industry as the Company, and of similar size. The discrete
cash flows and the terminal value were present-valued using a discount rate
of
fifty percent. The discount rate was based upon guideline discount rates for
early stage companies from the AICPA Practice Aid Series,
Valuation
of
Privately-Held-Company Equity Securities Issued as Compensation
.
The sum
of the present values of the discrete cash flows plus the terminal value
determined the business enterprise value of the Company. “Net Debt” was
subtracted from the business enterprise value to determine the value of equity
of the Company.
For
the
Market Approach, management used the same three guideline public companies
that
were used for the terminal value multiple to determine 1) a revenue multiple
for
the twelve months trailing the Valuation Date of March 1, 2006; 2) a revenue
multiple for 2007; and 3) a revenue multiple for 2008 (the same multiple used
to
determine the terminal value of the Company). As the Company had no revenue
for
the trailing twelve months prior to the Valuation Date, management relied upon
the revenue multiples for 2007 and 2008. Management applied the multiples to
the
revenue forecast of the Company for the years 2007 and 2008, and determined
an
equity value for the Company as an equally weighted average sum of the two
multiples.
Revenue
Recognition
The
Company recognizes revenues from product sales in accordance with Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, which states that
revenue is realized or realizable and earned when all of the following criteria
are met: persuasive evidence of an arrangement exists; delivery has occurred
or
services have been rendered; the price to the buyer is fixed or determinable;
and collectability is reasonably assured. Where a revenue transaction does
not
meet any of these criteria it is deferred and recognized once all such criteria
have been met. In instances where final acceptance of the product, system,
or
solution is specified by the customer, revenue is deferred until all acceptance
criteria have been met.
On
a
transaction by transaction basis, we determine if the revenue should be recorded
on a gross or net basis based on criteria discussed in EITF99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent,
(“
EITF99-19
”)
.
We
consider the following factors when we determine the gross versus net
presentation: if the Company (i) acts as principal in the transaction; (ii)
takes title to the products; (iii) has risks and rewards of ownership, such
as
the risk of loss for collection, delivery or return; and (iv) acts as an agent
or broker (including performing services, in substance, as an agent or broker)
with compensation on a commission or fee basis.
For
the
nine months ended June 30, 2008, approximately 12% of the Company’s revenue came
from reselling of polysilicon or wafer raw materials. There was no such revenue
for the quarter ended June 30, 2008. All transactions related to reselling
of
polysilicon or wafer raw materials incurred in fiscal year 2008 were recorded
on
a gross basis. For the three months ended June 30, 2008, approximately 13%
of
the Company’s revenue came from contract manufacturing of solar modules. We
produced modules based on requirements specified by the customer. Our revenue
related to contract manufacturing was recorded on a net basis based on criteria
discussed in EITF 99-19.
Segment
Information
The
Company identifies its operating segments based on its business activities
and
geographical locations. The Company operates within a single operating segment
-
the manufacture of solar energy cells and modules. The Company operates in
the
United States and in China. All of the Company’s sales occurred in China and
substantially all of the Company’s fixed assets are located in
China.
Reclassifications
Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation. These reclassifications have no effect on
previously reported results of operations.
The
Company has also reclassified current year to date amounts, specifically
relating to stock-based compensation expense.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value
Measurements.” SFAS 157 defines fair value to measure assets and liabilities,
establishes a framework for measuring fair value, and requires additional
disclosures about the use of fair value. SFAS 157 is applicable whenever another
accounting pronouncement requires or permits assets and liabilities to be
measured at fair value. SFAS 157 does not expand or require any new fair value
measures. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact that the adoption of FAS
157 will have on its financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115.” SFAS 159 expands the use of fair value accounting but does
not affect existing standards which require assets or liabilities to be carried
at fair value. The objective of SFAS 159 is to improve financial reporting
by
providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Under SFAS 159, a company
may elect to use fair value to measure eligible items at specified election
dates and report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Eligible
items include, but are not limited to, accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees, issued debt and firm commitments. If elected,
SFAS
159 is effective for fiscal years beginning after November 15, 2007. The Company
is currently assessing whether fair value accounting is appropriate for any
of
its eligible items and is in process of estimating the impact, if any, on its
results of operations or financial position.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51.” The standard changes the accounting for non-controlling (minority)
interests in consolidated financial statements, including the requirements
to
classify non-controlling interests as a component of consolidated stockholders’
equity, and the elimination of “minority interest” accounting in results of
operations with earnings attributable to non-controlling interests reported
as
part of consolidated earnings. Additionally, SFAS 160 revises the
accounting for both increases and decreases in a parent’s controlling ownership
interest. SFAS 160 is effective for the first annual reporting period beginning
on or after December 15, 2008. Thus, SFAS 160 will be effective for
the Company on October 1, 2009, with early adoption prohibited. The Company
is
evaluating the potential impact of the implementation of SFAS 160 on its
financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised) (“SFAS 141(R)”),
“Business Combinations.” The standard changes the accounting for business
combinations, including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for preacquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment
of
acquisition related transaction costs, and the recognition of changes in the
acquirer’s income tax valuation allowance. SFAS 141(R) is effective for the
first annual reporting period beginning on or after December 15, 2008.
Thus, SFAS 141(R) will be effective for the Company on October 1, 2009,
with early adoption prohibited. The Company is evaluating the potential impact
of the implementation of Statement 141(R) on its financial position and results
of operations.
In
March 2008, the FASB issued SFAS No. 161 (“SFAS 161”),
“Disclosures
about
Derivative Instruments and Hedging Activities.” SFAS 161 requires additional
disclosures related to the use of derivative instruments, the accounting for
derivatives and how derivatives impact financial statements. SFAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. Thus, the Company is required to adopt this standard on January 1,
2009. The Company is currently evaluating the impact of adopting SFAS 161
on its financial position and results of operations.
In
May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of Generally
Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP)
in
the United States (the GAAP hierarchy). This Statement is effective for
financial statements issued 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company is currently evaluating the impact of adopting SFAS
162
on its
financial
position and results of operations.
NOTE
3 — INVENTORIES
At
June
30, 2008 and September 30, 2007, inventories consist of:
|
|
June 30, 2008
|
|
September 30, 2007
|
|
Raw
materials
|
|
$
|
4,636,000
|
|
$
|
2,724,000
|
|
Work
in process
|
|
|
204,000
|
|
|
839,000
|
|
Finished
goods
|
|
|
4,472,000
|
|
|
2,145,000
|
|
Total
inventories
|
|
$
|
9,312,000
|
|
$
|
5,708,000
|
|
At
June
30, 2008, the Company had $2.9 million of raw materials loaned to a customer
in
conjunction with the contract manufacturing arrangement.
NOTE 4
— ADVANCE PAYMENTS AND OTHER
At
June
30, 2008 and September 30, 2007, advance payments and other consist
of:
|
|
June 30, 2008
|
|
September 30, 2007
|
|
Prepayment
for raw materials
|
|
$
|
4,796,000
|
|
$
|
6,500,000
|
|
Others
|
|
|
159,000
|
|
|
-
|
|
Total
advance payments and other
|
|
$
|
4,955,000
|
|
$
|
6,500,000
|
|
NOTE
5— FIXED ASSETS
At
June
30, 2008 and September 30, 2007, fixed assets consist of:
|
|
June 30, 2008
|
|
September 30, 2007
|
|
Production
equipment
|
|
$
|
5,103,000
|
|
$
|
1,065,000
|
|
Leasehold
improvement
|
|
|
2,235,000
|
|
|
1,615,000
|
|
Automobiles
|
|
|
539,000
|
|
|
333,000
|
|
Office
equipment
|
|
|
352,000
|
|
|
88,000
|
|
Machinery
|
|
|
201,000
|
|
|
455,000
|
|
Furniture
|
|
|
38,000
|
|
|
38,000
|
|
Construction
in progress
|
|
|
1,173,000
|
|
|
-
|
|
Total
Fixed Assets
|
|
|
9,641,000
|
|
|
3,594,000
|
|
Less:
Accumulated depreciation
|
|
|
(1,341,000
|
)
|
|
(379,000
|
)
|
Net
Fixed Assets
|
|
$
|
8,300,000
|
|
$
|
3,215,000
|
|
NOTE
6 — INCOME TAX
The
Company has no taxable income and no provision for federal and state income
taxes is required for the three and nine months ended June 30, 2008 and June
30,
2007, respectively, except for certain minimum state taxes.
The
Company accounts for income taxes using the liability method in accordance
with
Financial Accounting Standards Board Statement No. 109 (“SFAS 109”),
“Accounting for Income Taxes”. SFAS 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company’s financial statements, but have not been
reflected in the Company’s taxable income. A valuation allowance is established
to reduce deferred tax assets to their estimated realizable value. Therefore,
the Company provides a valuation allowance to the extent that the Company does
not believe it is more likely than not that the Company will generate sufficient
taxable income in future periods to realize the benefit of the Company’s
deferred tax assets. As of June 30, 2008 and June 30, 2007, the deferred tax
asset was subject to a 100% valuation allowance and therefore is not recorded
on
the Company’s balance sheet as an asset. Realization of the Company’s deferred
tax assets is limited and the Company may not be able to fully utilize these
deferred tax assets to reduce the Company’s tax rates.
As
of
June 30, 2008, due to the history of losses the Company has generated in the
past, the Company believes that it is more-likely-than-not that the deferred
tax
assets cannot be realized before the respective utilization expiration dates.
Therefore, we have a full valuation allowance on our deferred tax assets.
Utilization of the net operating loss carry forwards and credits may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986, as amended and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization. The Company also has net operating losses
in its foreign jurisdiction and that loss can be carried over 5 years from
the
year the loss was incurred.
In
July
2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty
in
income taxes recognized in any entity’s financial statements in accordance with
SFAS 109 and prescribes a recognition threshold and measurement attributes
for
financial statement disclosure of tax positions taken or expected to be taken
on
a tax return. Under FIN 48, the impact of an uncertain income tax position
on
the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006.
The
Company has adopted the provisions of FIN 48 on October 1, 2007. The total
amount of unrecognized tax benefits as of the date of adoption was not material.
As a result of the implementation of FIN 48, the Company recognized no increase
in the liability for unrecognized tax benefits and no retained earnings
adjustment as of October 1, 2007. We have adopted the accounting policy such
that interest recognized in accordance with Paragraph 15 of FIN 48 and penalty
recognized in accordance with Paragraph 16 of FIN 48 are classified as part
of
our income tax expense.
The
Company is subject to taxation in the United States and China. There are no
ongoing examinations by taxing authorities at this time. The Company has open
tax years from 2004 to present in various taxing jurisdictions. Tax returns
filed for these tax years may be audited by the applicable tax
authorities.
NOTE
7— CONVERTIBLE NOTES
On
March
7, 2007, the Company entered into a securities purchase agreement to issue
$17,300,000 of secured convertible notes (the “notes”) and detachable stock
purchase warrants (the “warrants”). Accordingly, during the three months ended
March 31, 2007, the Company sold units consisting of:
|
•
|
$5,000,000
in principal amount of Series A Convertible Notes and warrants to
purchase
7,246,377 shares (exercise price of $1.21 per share) of its common
stock;
|
|
•
|
$3,300,000
in principal amount of Series B Convertible Notes and warrants to
purchase
5,789,474 shares (exercise price of $0.90 per share) of its common
stock;
and
|
|
•
|
$9,000,000
in principal amount of Series B Convertible Notes and warrants to
purchase
15,789,474 shares (exercise price of $0.90 per share) of its common
stock.
|
These
notes bear interest at 6% per annum and are due in 2010. The principal amount
of
the Series A Convertible Notes may be converted at the initial rate of $0.69
per
share for a total of 7,246,377 shares of common stock (which amount does not
include shares of common stock that may be issued for the payment of interest).
The principal amount of the Series B Convertible Notes may be converted at
the
initial rate of $0.57 per share for a total of 21,578,948 shares of common
stock
(which amount does not include shares of common stock that may be issued for
the
payment of interest).
In
connection with the issuance of the notes and warrants, the Company engaged
an
exclusive advisor and placement agent (the “advisor”) and issued warrants to the
advisor to purchase an aggregate of 1,510,528 shares at an exercise price of
$0.57 per share and 507,247 shares at an exercise price of $0.69 per share,
of
the Company’s common stock (the “advisor warrants”). In addition to the issuance
of the warrants, the Company paid $1,038,000 in commissions, an advisory fee
of
$173,000, and other fees and expenses of $84,025.
The
Company evaluated the notes for derivative accounting considerations under
SFAS
133 and EITF 00-19 and determined that the notes contain two embedded derivative
features, the conversion option and a redemption privilege accruing to the
holder if certain conditions exist (the “compound embedded derivative”). The
compound embedded derivative is measured at fair value both initially and in
subsequent periods. Changes in fair value of the compound embedded derivative
are recorded in the account “gain (loss) on fair market value of compound
embedded derivative” in the accompanying consolidated statements of
operations.
The
warrants (including the advisor warrants) are classified as a liability, as
required by SFAS No. 150, due to the terms of the warrant agreement which
contains a cash redemption provision in the event of a fundamental transaction.
The warrants are measured at fair value both initially and in subsequent
periods. Changes in fair value of the warrants are recorded in the account
“gain
(loss) on fair market value of warrant liability” in the accompanying
consolidated statements of operations.
The
following table summarizes the valuation of the notes, the warrants (including
the advisor warrants), and the compound embedded derivative:
|
|
Amount
|
|
Proceeds
of convertible notes
|
|
$
|
17,300,000
|
|
Allocation
of proceeds:
|
|
|
|
|
Fair
value of warrant liability (excluding advisor warrants)
|
|
|
(15,909,000
|
)
|
Fair
value of compound embedded derivative liability
|
|
|
(16,600,000
|
)
|
Loss
on issuance of convertible notes
|
|
|
15,209,000
|
|
Carrying
amount of notes at grant date
|
|
$
|
-
|
|
|
|
|
|
|
Amortization
of note discount
|
|
$
|
7,000
|
|
Carrying
amount of notes at September 30, 2007
|
|
|
7,000
|
|
Amortization
of note discount
|
|
|
48,000
|
|
Carrying
amount of notes at June 30, 2008
|
|
$
|
55,000
|
|
|
|
|
|
|
Fair
value of warrant liability (including advisor warrants) at
issuance
|
|
$
|
17,100,000
|
|
Loss
on fair market value of warrant liability
|
|
|
290,000
|
|
Fair
value of warrant liability at September 30, 2007
|
|
|
17,390,000
|
|
Gain
on fair market value of warrant liability
|
|
|
(11,030,000
|
)
|
Fair
value of warrant liability at June 30, 2008
|
|
$
|
6,360,000
|
|
|
|
|
|
|
Fair
value of compound embedded derivative at grant date
|
|
$
|
16,600,000
|
|
Loss
on fair market value of embedded derivtive liability
|
|
|
200,000
|
|
Fair
value of compound embedded derivative at September 30,
2007
|
|
|
16,800,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(12,267,000
|
)
|
Conversion
of Series A and B Notes
|
|
|
(2,033,000
|
)
|
Fair
value of compound embedded derivative at June 30, 2008
|
|
$
|
2,500,000
|
|
The
value
of the warrants (including the advisor warrants) was estimated using a binomial
valuation model with the following assumptions:
|
|
June 30, 2008
|
|
September 30, 2007
|
|
Implied
term (years)
|
|
|
3.68
|
|
|
4.43
|
|
Suboptimal
exercise factor
|
|
|
2.5
|
|
|
2.5
|
|
Volatility
|
|
|
82
|
%
|
|
72
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
0
|
%
|
Risk
free interest rate
|
|
|
3.06
|
%
|
|
4.23
|
%
|
In
conjunction with March 2007 financing, we recorded total deferred financing
cost
of $2.5 million, of which $1.3 million represented cash payment and $1.2 million
represented the fair market value of the advisor warrants. The deferred
financing cost is amortized over the three year life of the notes using a method
that approximates the effective interest rate method. The advisor warrants
were
recorded as a liability and adjusted to fair value in each subsequent period.
As
of June 30, 2008, total unamortized deferred financing cost was $1.9
million.
The
method used to estimate the value of the CED as of each valuation date was
a
Monte Carlo simulation. Under this method the various features, restrictions,
obligations and option related to each component of the CED were analyzed and
spreadsheet models of the net expected proceeds resulting from exercise of
the
CED (or non-exercise) were created. Each model is expressed in terms of the
expected timing of the event and the expected stock price as of that expected
timing.
Because
the potential timing and stock price may vary over a range of possible values,
a
Monte Carlo simulation was built based on the possible stock price paths (i.e.,
daily expected stock price over a forecast period). Under this approach an
individual potential stock price path is simulated based on the initial stock
price at the measurement date, the expected volatility and risk free rate over
the forecast period. Each path is compared against the logic describe above
for
potential exercise events and the present value (or non-exercise which result
in
$0 value) recorded. This is repeated over a significant number of trials, or
individual stock price paths, in order to generate an expected or mean value
for
the present value of the CED.
The
significant assumptions used in estimating stock price paths as of each
valuation date are:
|
|
June 30, 2008
|
|
September 30, 2007
|
|
Starting
stock price (closing price on date preceding valuation
date)
|
|
$
|
0.59
|
|
$
|
1.28
|
|
Annual
volatility of stock
|
|
|
82.30
|
%
|
|
72.10
|
%
|
Risk
free rate
|
|
|
2.63
|
%
|
|
3.97
|
%
|
Additional
assumptions were made regarding the probability of occurrence of each exercise
scenario, based on stock price ranges (based on the assumption that scenario
probability is constant over narrow ranges of stock price). The key scenarios
included public offering, bankruptcy and other defaults.
During
the quarter ended June 30, 2008, $1.5 million of Series A and B convertible
notes were converted into our common shares. We recorded a loss on debt
extinguishment of $1.5 million as a result of the conversion based on the quoted
market closing price of our common shares on the conversion dates. For the
nine
months ended June 30, 2008, $4.6 million of Series A and B convertible notes
were converted into our common shares. We recorded a loss on debt extinguishment
of $4.4 million as a result of the conversion based on the quoted market closing
price of our common shares on the conversion dates.
The
loss
on debt extinguishment is computed at the conversion dates as
follow:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2008
|
|
Fair
value of the common shares
|
|
$
|
1,735,000
|
|
$
|
5,743,000
|
|
Unamortized
deferred financing costs associated with the converted
notes
|
|
|
224,000
|
|
|
673,000
|
|
Fair
value of the CED liability associated with the converted
notes
|
|
|
(422,000
|
)
|
|
(2,033,000
|
)
|
Accreted
amount of the notes discount
|
|
|
(8,000
|
)
|
|
(13,000
|
)
|
Loss
on debt extinguishment
|
|
$
|
1,529,000
|
|
$
|
4,370,000
|
|
For
the
nine months ended June 30, 2008, we recorded $4.4 million of loss on debt
extinguishment from Series A and B convertible notes. This loss was offset
by a
gain on debt extinguishment from settlement agreement with Coach Capital LLC
in
the amount of $0.4 million (see Note 8 below). The net amount of $4.0
million loss on debt extinguishment is included in the Consolidated Statements
of Operations.
NOTE
8 — EQUITY TRANSACTIONS
Common
stock issued for repayment of loans
During
the quarter ended December 31, 2007, the Company was informed by Thimble Capital
that it had assigned the note payable of $100,000 due from us to Coach Capital
LLC. The Company was also informed by Infotech Essentials Ltd. that it had
assigned the note payable of $450,000 due from us to Coach Capital
LLC.
On
December 20, 2007, we entered into a settlement agreement with Coach Capital
LLC
to settle all outstanding notes payable in the amount of $1.2 million and
related interest in exchange for the issuance of the Company’s common stock. The
share price stated in the settlement agreement was $1.20 per share. The
Company’s shares of common stock were valued at $0.84 per share, the closing
price, on December 20, 2007. As a result, the Company recorded a gain on
extinguishment of debt of $0.4 million.
Warrants
During
November 2006, in connection with the sale of the Company’s common stock, the
board of directors approved the issuance of a warrant to purchase an additional
2,500,000 shares of the Company’s common stock. The warrant is exercisable at $1
per share and expired as of November 20, 2007.
The
fair
value of the warrants issued in May through November 2006 in connection with
the
purchase of common stock has been allocated on a relative fair value basis
between the value of the common stock and the warrants issued using the
Black-Scholes -Merton option pricing model with the following assumptions:
a
risk-free interest rate of 4.50%, no dividend yield, a volatility factor of
82.57% and a contract life of one year.
During
March 2007, in conjunction with the issuance of $17,300,000 in convertible
debt,
the board of directors approved the issuance of warrants (as described in Note
7
above) to purchase shares of the Company’s common stock. The 7,246,377 series A
warrants and the 21,578,948 series B warrants are exercisable at $1.21 and
$0.90, respectively and expire in March 2012. In addition, in March 2007, as
additional compensation for services as placement agent for the convertible
debt
offering, the Company issued the advisor warrants, which entitle the placement
agent to purchase 507,247 and 1,510,528 shares of the Company’s common stock at
exercise prices of $0.69 and $0.57 per share, respectively. The advisor warrants
expire in March 2012.
On
January 11, 2008, the Company sold 24,318,181 shares of its common stock and
24,318,181 Series C warrants to purchase shares of Common Stock for an aggregate
purchase price of $21.4 million in a private placement offering to accredited
investors. The exercise price of the warrants is $1.00 per share. The warrants
are exercisable for a period of 5 years from the date of issuance of the
warrants.
For
the
services in connection with this closing, the placement agent and the selected
dealer, Knight Capital Markets, LLC and Ardour Capital Investments, received
an
aggregate of a 6.0% cash commission, a 1.0% advisory fee and warrants to
purchase 1,215,909 shares of common stock at $0.88 per share, exercisable for
a
period of 5 years from the date of issuance of the warrants. The net proceeds
from issuing common stocks and Series C warrants in January 2008 after all
the
financing costs were $19.9 million and were recorded in additional paid in
capital and common stock. Neither the shares of common stock nor the shares
of
common stock underlying the warrants sold in this offering were granted
registration rights. Additionally, in connection with the offering all of our
Series A and Series B warrant holders waived their full ratchet
anti-dilution and price protection rights previously granted to them in
connection with our March 2007 convertible note and warrant
financing.
The
warrants (including the advisor warrants) are classified as a liability in
accordance with SFAS No. 150, as interpreted by FASB Staff Position
150-1
“Issuer’s
Accounting for Freestanding Financial Instruments Composed of More Than One
Option or Forward Contract Embodying Obligations under FASB Statement No.
150,
Accounting
for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity”,
due to
the terms of the warrant agreements which contain cash redemption provisions
in
the event of a fundamental transaction, which provide that the Company would
repurchase any unexercised portion of the warrants at the date of the occurrence
of the fundamental transaction for the value as determined by the Black-Scholes
Merton valuation model. As a result, the warrants are measured at fair value
both initially and in subsequent periods. Changes in fair value of the warrants
are recorded in the account “gain (loss) on fair market value of warrant
liability” in the accompanying Consolidated Statements of Operations.
A
summary
of warrant activities through June 30, 2008 is as follows:
|
|
Number of Shares
|
|
Exercise Price ($)
|
|
Recognized as
|
|
Granted in connection with
common stock purchase
|
|
|
2,500,000
|
|
|
1.00
|
|
|
Additional
paid in capital
|
|
Granted
in connection with convertible notes — Series A
|
|
|
7,246,377
|
|
|
1.21
|
|
|
Discount
to notes payable
|
|
Granted
in connection with convertible notes — Series B
|
|
|
21,578,948
|
|
|
0.90
|
|
|
Discount
to notes payable
|
|
Granted
in connection with placement service
|
|
|
507,247
|
|
|
0.69
|
|
|
Deferred
financing cost
|
|
Granted
in connection with placement service
|
|
|
1,510,528
|
|
|
0.57
|
|
|
Deferred
financing cost
|
|
Outstanding
at September 30, 2007
|
|
|
33,343,100
|
|
|
|
|
|
|
|
Granted
in connection with common stock purchase — Series C
|
|
|
24,318,181
|
|
|
1.00
|
|
|
Additional
paid in capital
|
|
Granted
in connection with placement service
|
|
|
1,215,909
|
|
|
0.88
|
|
|
Additional
paid in capital
|
|
Expired
|
|
|
(2,500,000
|
)
|
|
1.00
|
|
|
Additional
paid in capital
|
|
Outstanding
at June 30, 2008
|
|
|
56,377,190
|
|
|
|
|
|
|
|
At
June
30, 2008, the range of warrant prices for shares under warrants and the
weighted-average remaining contractual life is as follows:
Warrants Outstanding and Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
Range of
|
|
|
|
Average
|
|
Remaining
|
|
Warrant
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Exercise Price
|
|
Warrants
|
|
Price
|
|
Life
|
|
$0.57-$0.69
|
|
|
2,017,775
|
|
$
|
0.60
|
|
|
3.71
|
|
$0.88-$1.00
|
|
|
47,113,038
|
|
$
|
0.95
|
|
|
4.16
|
|
$1.21
|
|
|
7,246,377
|
|
$
|
1.21
|
|
|
3.69
|
|
Options
Non-Plan
Options
Pursuant
to an option agreement dated March 1, 2006 between Jean Blanchard, a former
officer and director, and the President of the Company, the President has the
right and option to purchase a total of 36,000,000 shares of the Company’s
common stock at a price of $0.0001 per share, until February 10, 2010. The
options granted under the agreement vest in three equal installments over a
period of two years, with the first installment vesting immediately, and the
remaining installments vesting at 12 and 24 months after the date of the
agreement. During the year ended September 30, 2006, the President exercised
10,750,000 options to purchase 10,750,000 shares and transferred 5,750,000
shares to various employees of Infotech Shanghai. The Company recorded a stock
compensation charge of $10.7 million in the fiscal year ended September 30,
2006
for the transfer of shares to the employees.
Pursuant
to an option agreement dated March 1, 2006 between Jean Blanchard, a former
officer and director of the Company, and Frankie Xie, a former director of
the
Company, Mr. Xie has the right and option to purchase a total of 1,500,000
shares of the Company’s common stock at a price of $0.0001 per share, until
February 10, 2010. The options granted under the agreement vested immediately.
Mr. Xie exercised the 1,500,000 shares of the Company’s common stock in April
2008.
The
fair
value of the options granted under these agreements was estimated at $26.4
million using the Black-Scholes stock price valuation model with the following
assumptions:
|
•
|
Risk-free
interest rate of 4.65%;
|
|
•
|
Expected
lives - 4 years;
|
|
•
|
Market
value per share of stock on measurement date of
$0.70.
|
Summary
information regarding these options as of June 30, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
Number
|
|
Average
|
|
Weighted
|
|
|
|
of
|
|
|
|
|
|
|
|
Outstanding
|
|
Remaining
|
|
Average
|
|
|
|
Options
|
|
|
|
Exercise
|
|
|
|
At June
|
|
Contractual
|
|
Exercise
|
|
|
|
Granted
|
|
Expiration Date
|
|
Price
|
|
Exercised
|
|
30, 2008
|
|
Life (year)
|
|
Price
|
|
Granted
to Leo Young, the President, March 1, 2006
|
|
|
36,000,000
|
|
|
February 10, 2010
|
|
$
|
0.0001
|
|
|
10,750,000
|
|
|
25,250,000
|
|
|
1.62
|
|
$
|
0.0001
|
|
Granted
to Frank Fang Xie, a former director, March 1, 2006
|
|
|
1,500,000
|
|
|
February 10, 2010
|
|
$
|
0.0001
|
|
|
—
|
|
|
1,500,000
|
|
|
1.62
|
|
$
|
0.0001
|
|
Total
|
|
|
37,500,000
|
|
|
|
|
|
|
|
|
10,750,000
|
|
|
26,750,000
|
|
|
1.62
|
|
|
|
|
Mr.
Xie’s
option vested on the grant date in March 2006. The option to purchase 25.3
million shares of the Company’s common stock for Mr. Young has vested in March
2008.
2007
Equity Incentive Plan
In
September 2007, the Company adopted the 2007 Stock Incentive Plan (the “Plan”)
that allows the Company to grant non-statutory stock options to employees,
consultants and directors. A total of 10,000,000 shares of the Company’s common
stock are authorized for issuance under the Plan. The maximum number of shares
that may be issued under the Plan will be increased for any options granted
that
expire, are terminated or repurchased by the Company for an amount not greater
than the holder’s purchase price and may also be adjusted subject to action by
the stockholders for changes in capital structure. Stock options may have
exercise prices of not less than 100% of the fair value of a share of stock
at
the effective date of the grant of the option.
These
options vest over various periods up to four years and expire no more than
ten
years from the date of grant. A summary of activity under this Plan is as
follows:
|
|
Shares Available For
Grant
|
|
Number of Shares
|
|
Weighted
Average
Fair
Value
Per Share
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Balance at September 30, 2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares
reserved
|
|
|
10,000,000
|
|
|
—
|
|
|
|
|
|
|
|
Options
granted
|
|
|
(7,300,000
|
)
|
|
7,300,000
|
|
$
|
0.66
|
|
$
|
1.20
|
|
Options
exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Options
cancelled
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance
at September 30, 2007
|
|
|
2,700,000
|
|
|
7,300,000
|
|
$
|
0.66
|
|
$
|
1.20
|
|
Options
cancelled
|
|
|
298,958
|
|
|
(298,958
|
)
|
$
|
0.55
|
|
$
|
1.20
|
|
Options
granted
|
|
|
(870,000
|
)
|
|
870,000
|
|
$
|
0.37
|
|
$
|
0.61
|
|
Balance
at June 30, 2008
|
|
|
2,128,958
|
|
|
7,871,042
|
|
$
|
0.38
|
|
$
|
0.62
|
|
At
June
30, 2008 and September 30, 2007, 7,871,042 and 7,300,000 options were
outstanding, respectively and had a weighted-average remaining contractual
life
of 9.28 years and an exercise price of $0.62 and $1.20, respectively. Of these
options, 2,694,590 and 1,453,338 shares were vested and exercisable on June
30,
2008 and September 30, 2007, respectively. The fair values of employee
stock options granted were estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
June
30, 2008
|
|
June
30, 2008
|
|
Volatility
|
|
|
99.2
|
%
|
|
99.2
|
%
|
Expected
dividend
|
|
|
0.0
|
%
|
|
0.0
|
%
|
Risk-free
interest rate
|
|
|
2.24
|
%
|
|
2.38
|
%
|
Expected
term in years
|
|
|
2.2
|
|
|
2.6
|
|
Weighted-average
fair value
|
|
$
|
0.36
|
|
$
|
0.37
|
|
On
May 5,
2008, at the Company’s Annual Meeting of Stockholders, the Company’s
stockholders approved an amendment and restatement of the Plan, which, among
other things, will increase the maximum number of shares of Common Stock that
may be issued under the Plan from 10,000,000 shares to 15,000,000 shares upon
its effectiveness upon the Company’s anticipated reincorporation to the State of
Delaware.
On
May 9,
2008, the Compensation Committee of the Board of Directors of the Company
authorized the repricing of all outstanding options issued to current employees,
directors, officers and consultants prior to February 5, 2008 under the
Company’s 2007 Equity Incentive Plan ("Plan") to $0.62, determined in accordance
with the Plan as the closing price for shares of Common Stock on the
Over-the-Counter Bulletin Board on the date of the repricing.
The
Company repriced a total of 7,720,000 shares of Common Stock underlying
outstanding options.
The
other
terms of the options, including the vesting schedules, remained unchanged as
a
result of the repricing. Total additional compensation expense on non-vested
options relating to the May 9, 2008 repricing is approximately $0.4 million
which will be expensed ratably over the remaining vesting period. Additional
compensation expense on vested options relating to the May 9, 2008 repricing
is
approximately $0.3 million which was fully expensed as of June 30, 2008. The
repriced options had originally been issued with $0.94 to $1.65 per share option
exercise prices, which prices reflected the then current market prices of our
stock on the dates of original grant. As a result of the recent sharp reduction
in our stock price, our Board of Directors believed that such options no longer
would properly incentivize our employees, officers, directors and consultants
who held such options to work in the best interests of our company and
stockholders.
In
accordance with the provisions of SFAS 123(R), the Company has recorded
stock-based compensation expense of $0.6 million and $4.8 million for the three
months and nine months ended June 30, 2008, respectively, which include the
compensation effect for the options repriced. The stock-based compensation
expense is based on the fair value of the options at the grant
date.
NOTE
9 — OTHER COMPREHENSIVE INCOME
The
components of comprehensive income (loss) were as follows:
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net
income (loss)
|
|
$
|
(3,532,000
|
)
|
$
|
8,317,000
|
|
$
|
8,366,000
|
|
$
|
(34,536,000
|
)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in foreign currency translation
|
|
|
484,000
|
|
|
74,000
|
|
|
1,769,000
|
|
|
84,000
|
|
Comprehensive
income (loss)
|
|
$
|
(3,048,000
|
)
|
$
|
8,391,000
|
|
$
|
10,135,000
|
|
$
|
(34,452,000
|
)
|
Accumulated
other comprehensive income at June 30, 2008 and September 30, 2007 is
comprised of accumulated translation adjustments of $2.4 million and $0.6
million, respectively.
NOTE
10 — NET INCOME (LOSS) PER SHARE
The
following table presents the computation of basic and diluted net income (loss)
per share applicable to common stockholders:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Calculation
of net income (loss) per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,532,000
|
)
|
$
|
8,317,000
|
|
$
|
8,366,000
|
|
$
|
(34,536,000
|
)
|
Weighted-average
number of common shares outstanding
|
|
|
104,528,145
|
|
|
78,807,012
|
|
|
97,518,130
|
|
|
78,257,561
|
|
Net
income (loss) per share - basic
|
|
$
|
(0.03
|
)
|
$
|
0.11
|
|
$
|
0.09
|
|
$
|
(0.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation
of net loss per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(3,532,000
|
)
|
$
|
8,317,000
|
|
$
|
8,366,000
|
|
$
|
(34,536,000
|
)
|
Less:
Gain on change in fair market value of compound embedded
derivative
|
|
|
—
|
|
|
(7,100,000
|
)
|
|
(12,267,000
|
)
|
|
—
|
|
Interest
expense on convertible notes
|
|
|
—
|
|
|
259,000
|
|
|
814,000
|
|
|
—
|
|
Less:
Gain on change in fair market value of advisor warrants
|
|
|
—
|
|
|
—
|
|
|
(765,000
|
)
|
|
—
|
|
Less:
Gain on change in fair market value of Series B warrants
|
|
|
—
|
|
|
(4,531,000
|
)
|
|
(7,786,000
|
)
|
|
—
|
|
Net
loss assuming dilution
|
|
$
|
(3,532,000
|
)
|
$
|
(3,055,000
|
)
|
$
|
(11,638,000
|
)
|
$
|
(34,536,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding
|
|
|
104,528,145
|
|
|
78,807,012
|
|
|
97,518,130
|
|
|
78,257,561
|
|
Effect
of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued to advisors
|
|
|
—
|
|
|
11,710,668
|
|
|
511,102
|
|
|
—
|
|
Convertible
notes
|
|
|
—
|
|
|
28,825,325
|
|
|
21,397,371
|
|
|
—
|
|
Series
B Warrants
|
|
|
—
|
|
|
—
|
|
|
1,104,878
|
|
|
—
|
|
Weighted-average
number of common shares outstanding assuming dilution
|
|
|
104,528,145
|
|
|
119,343,005
|
|
|
120,531,481
|
|
|
78,257,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.10
|
)
|
$
|
(0.44
|
)
|
NOTE
11 — COMMITMENTS AND CONTINGENCIES
Capital
investments
Pursuant
to a joint research and development laboratory agreement with Shanghai
University, dated December 15, 2006 and expiring on December 15, 2016, the
Company is committed to fund the establishment of laboratories and completion
of
research and development activities. The Company committed to invest no less
than RMB5 million each year for the first three years and no less than RMB30
million cumulatively for the first five years. The following table summarizes
the commitments in U.S. dollar based upon a translation of the RMB amounts
into
U.S. dollars at an exchange rate of 6.8591.
Year
|
|
Amount
|
|
2008
(Remaining balance)*
|
|
$
|
966,000
|
|
2009
|
|
|
933,000
|
|
2010
|
|
|
933,000
|
|
2011
|
|
|
1,108,000
|
|
Total
|
|
$
|
3,940,000
|
|
*
|
The
amount includes approximately $149,000 of 2007 commitment, which
remained
unpaid as of June 30, 2008. The Company intended to increase research
and
development spending as we grow our business. The payment to Shanghai
University will be used to fund program expenses and equipment purchase.
The delay in payment could lead to Shanghai University requesting
the
Company to pay the committed amount within a certain time frame.
If the
Company is still not able to correct the breach within the time frame,
Shanghai University could seek compensation up to an additional 15%
of the
committed amount which would then total a 2007 commitment of approximately
$656,000. As of the date of this report, we have not received any
request
from Shanghai University.
|
The
agreement is for shared investment in research and development on fundamental
and applied technology in the fields of semi-conductive photovoltaic theory,
materials, cells and modules. The agreement calls for Shanghai University to
provide equipment, personnel and facilities for joint laboratories. The Company
will provide funding, personnel and facilities for conducting research and
testing. Research and development achievements from this joint research and
development agreement will be available to both parties. The Company is entitled
to intellectual property rights including copyrights and patents obtained as
a
result of this research.
Expenditures
under his agreement are accounted for as research and development expenditures
under Statement of Financial Accounting Standard No. 2, “Accounting for Research
and Development Costs” and expensed as incurred.
NOTE
12 — RELATED PARTY TRANSACTIONS
At
June
30, 2008, accounts payable and accrued liabilities, related party, of $4 million
primarily represent compensation expense related to the Company’s obligation to
withhold tax upon exercise of stock options by our President and CEO of the
transaction incurred in the fiscal year 2006. The amount represents the
Company’s estimate of the tax withholding obligation.
NOTE
13 - SUBSEQUENT EVENTS
Reincorporation
On
August
13, 2008, the Company entered into an Agreement and Plan of Merger with Solar
EnerTech Corp., a Delaware corporation and wholly owned subsidiary of the
Company (“Solar EnerTech Delaware”), whereby the Company merged with and into
Solar EnerTech Delaware in order to effect a reincorporation changing the
Company’s state of domicile from Nevada to Delaware (the “Reincorporation”).
After the Reincorporation, the Company ceased to exist and Solar EnerTech
Delaware was the surviving entity.
The
Reincorporation was duly approved by both the Company’s Board of Directors and a
majority of the Company’s stockholders at its annual meeting of stockholders
held on May 5, 2008. On August 13, 2008, the Reincorporation was completed.
The
Reincorporation into Delaware did not result in any change to the Company’s
business, management, employees, directors, capitalization, assets or
liabilities.
ITEM
2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
All
references to “Solar EnerTech”, the “Company,” “we,” “our,” and “us” refer to
Solar EnerTech Corp. and its subsidiaries.
The
following discussion contains forward-looking statements within the meaning
of
the Private Securities Litigation Reform Act of 1995 that relate to our current
expectations and views of future events. In some cases, readers can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential,” or “continue.” These statements relate to events that involve known
and unknown risks, uncertainties and other factors, including those listed
under
the heading “Risks Related to Our Business,” “Risks Related to an Investment in
Our Securities” and under the heading “Risks Related To an Investment in Our
Securities” in our Form 10-KSB filed with the Securities and Exchange Commission
(the “SEC”) on December 28, 2007 as well as other relevant risks detailed in our
filings with the SEC which may cause our actual results, performance or
achievements to be materially different from any future results, performance
or
achievements expressed or implied by the forward-looking statements. The
information set forth in this report on Form 10-Q should be read in light of
such risks and in conjunction with the consolidated financial statements and
the
notes thereto included elsewhere in this Form 10-Q.
Overview
We
were
incorporated under the laws of the state of Nevada on July 7, 2004 and engaged
in a variety of businesses, including home security assistance, until March
2006, when we began our current operations. We manufacture and sell photovoltaic
(commonly known as “PV”) cells and modules. PV modules consist of solar cells
that produce electricity from the sun’s rays. Our manufacturing operations are
based in Shanghai, China, where we established a 63,000 square-foot
manufacturing facility. We also plan to expand our marketing, purchasing and
distribution office in Menlo Park, California. While we expect to sell most
of
our products in Europe, the United States and China, our goal is to become
a
worldwide supplier of PV cells.
We
currently have one 25MW solar cell production line and 50MW solar module
production facility. We intend to expand our solar cell production and add
a
second production line. We expect the second production line to be completed
by
the end of the 2008 calendar year.
During
the quarter ended June 30, 2008, we recorded revenue of $10.3 million. A
majority of the sales were to Sky Solar (Hong Kong) International Co., Ltd.
(“Sky Solar”), a contract we previously disclosed in our Form 10-Q for the
quarter ended March 31, 2008. We also shipped to other customers in Europe
and
Australia. Approximately 36% of modules shipped during the quarter used our
own
solar cells. The remaining cells were purchased from a third party. We are
ramping up our solar cell production and expect to produce majority of the
modules using our own cells in the fourth fiscal quarter 2008.
On
January 11, 2008, we sold 24,318,181 shares of our common stock and 24,318,181
Series C warrants to purchase shares of common stock for an aggregate purchase
price of $21.4 million in a private placement offering to accredited investors.
The exercise price of the warrants is $1.00 per share. The warrants are
exercisable for a period of 5 years from the date of issuance of the warrants.
We used the net proceeds from the offering for working capital and general
corporate purposes.
Our
future operations are dependent upon the identification and successful
completion of additional long-term or permanent equity financing, the support
of
creditors and shareholders, and, ultimately, the achievement of profitable
operations. Other than as discussed in this report, we know of no trends, events
or uncertainties that are reasonably likely to impact our future
liquidity.
Critical
Accounting Policies
We
consider our accounting policies related to principles of consolidation, revenue
recognition, inventory reserve, and stock based compensation, fair value of
equity instruments and derivative financial instruments to be critical
accounting policies. A number of significant estimates, assumptions, and
judgments are inherent in determining our consolidation policy, when to
recognize revenue, how to evaluate our equity instruments and derivative
financial instruments, and the calculation of our inventory reserve and
stock-based compensation expense. We base our estimates and judgments on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results could differ materially
from
these estimates. Management believes that there have been no significant changes
during the nine months ended June 30, 2008 to the items that we disclosed as
our
critical accounting policies and estimates in Management’s Discussion and
Analysis or Plan of Operations in our Annual Report on Form 10-KSB filed for
the
year ended September 30, 2007 with the Securities and Exchange Commission.
For a
description of those critical accounting policies, please refer to our 2007
Annual Report on Form 10-KSB.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value
Measurements.” SFAS 157 defines fair value to measure assets and liabilities,
establishes a framework for measuring fair value, and requires additional
disclosures about the use of fair value. SFAS 157 is applicable whenever another
accounting pronouncement requires or permits assets and liabilities to be
measured at fair value. SFAS 157 does not expand or require any new fair value
measures. SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Company is currently evaluating the impact that the adoption of FAS
157 will have on its financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115.” SFAS 159 expands the use of fair value accounting but does
not affect existing standards which require assets or liabilities to be carried
at fair value. The objective of SFAS 159 is to improve financial reporting
by
providing companies with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. Under SFAS 159, a company
may elect to use fair value to measure eligible items at specified election
dates and report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Eligible
items include, but are not limited to, accounts and loans receivable,
available-for-sale and held-to-maturity securities, equity method investments,
accounts payable, guarantees, issued debt and firm commitments. If elected,
SFAS
159 is effective for fiscal years beginning after November 15, 2007. The Company
is currently assessing whether fair value accounting is appropriate for any
of
its eligible items and is in process of estimating the impact, if any, on its
results of operations or financial position.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Non-controlling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51.” The standard changes the accounting for non-controlling (minority)
interests in consolidated financial statements, including the requirements
to
classify non-controlling interests as a component of consolidated stockholders’
equity, and the elimination of “minority interest” accounting in results of
operations with earnings attributable to non-controlling interests reported
as
part of consolidated earnings. Additionally, SFAS 160 revises the
accounting for both increases and decreases in a parent’s controlling ownership
interest. SFAS 160 is effective for the first annual reporting period beginning
on or after December 15, 2008. Thus, SFAS 160 will be effective for
the Company on October 1, 2009, with early adoption prohibited. The Company
is
evaluating the potential impact of the implementation of SFAS 160 on its
financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 141 (revised) (“SFAS 141(R)”),
“Business Combinations.” The standard changes the accounting for business
combinations, including the measurement of acquirer shares issued in
consideration for a business combination, the recognition of contingent
consideration, the accounting for preacquisition gain and loss contingencies,
the recognition of capitalized in-process research and development, the
accounting for acquisition-related restructuring cost accruals, the treatment
of
acquisition related transaction costs, and the recognition of changes in the
acquirer’s income tax valuation allowance. SFAS 141(R) is effective for the
first annual reporting period beginning on or after December 15, 2008.
Thus, SFAS 141(R) will be effective for the Company on October 1, 2009,
with early adoption prohibited. The Company is evaluating the potential impact
of the implementation of Statement 141(R) on its financial position and results
of operations.
In
March 2008, the FASB issued SFAS No. 161 (“SFAS 161”),
“Disclosures
about
Derivative Instruments and Hedging Activities.” SFAS 161 requires additional
disclosures related to the use of derivative instruments, the accounting for
derivatives and how derivatives impact financial statements. SFAS 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. Thus, the Company is required to adopt this standard on January 1,
2009. The Company is currently evaluating the impact of adopting SFAS 161
on its financial position and results of operations.
In
May
2008, the FASB issued
SFAS
No.
162
(“
SFAS
162”),
“The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
This Statement is effective for financial statements issued 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company is currently evaluating
the impact of adopting SFAS 162 on its
financial
position and results of operations.
Results
of Operations for the three and nine months ended June 30, 2008 and
2007
The
following discussion of the financial condition, results of operations, cash
flows and changes in financial position of our Company should be read in
conjunction with our audited consolidated financial statements and notes filed
with the SEC on Form 10-KSB and its subsequent amendments.
Revenues,
Cost of Sales and Gross Margin
|
|
Three Months Ended June 30, 2008
|
|
Three Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Net sales
|
|
$
|
10,272,000
|
|
|
100.
|
%
|
$
|
1,517,000
|
|
|
100.
|
%
|
$
|
8,755,000
|
|
|
577.1
|
%
|
Cost
of sales
|
|
|
(10,235,000
|
)
|
|
(99.6
|
)%
|
|
(1,507,000
|
)
|
|
(99.3
|
)%
|
|
(8,728,000
|
)
|
|
579.2
|
%
|
Gross
profit (loss)
|
|
$
|
37,000
|
|
|
0.4
|
%
|
$
|
10,000
|
|
|
0.7
|
%
|
$
|
27,000
|
|
|
270.
|
%
|
|
|
Nine Months Ended June 30, 2008
|
|
Nine Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Net sales
|
|
$
|
18,582,000
|
|
|
100.
|
%
|
$
|
1,520,000
|
|
|
100.
|
%
|
$
|
17,062,000
|
|
|
1,122.5
|
%
|
Cost
of sales
|
|
|
(19,680,000
|
)
|
|
(105.9
|
)%
|
|
(1,513,000
|
)
|
|
(99.5
|
)%
|
|
(18,167,000
|
)
|
|
1,200.7
|
%
|
Gross
profit (loss)
|
|
$
|
(1,098,000
|
)
|
|
(5.9
|
)%
|
$
|
7,000
|
|
|
0.5
|
%
|
$
|
(1,105,000
|
)
|
|
(15,785.7
|
)%
|
For
the
three months ended June 30, 2008, the Company reported total revenue of $10.3
million compared to $1.5 million of revenue in the same period of the prior
year. The revenue of $10.3 million during the three months ended June 30, 2008
primarily represented solar module sales of $9.0 million and contract
manufacturing revenue of $1.3 million. The majority of the modules purchased
by
Sky Solar under the contract, which was previously disclosed in our Form 10-Q
for the quarter ended March 31, 2008 were delivered during the quarter ended
June 30, 2008. Besides Sky Solar, our modules were shipped to customers in
Australia, Holland, Germany, Switzerland and Belgium. For contract manufacturing
arrangement, we produced modules based on requirements specified by the
customer.
For
the
nine months ended June 30, 2008, the Company recorded $18.6 million in revenue
which was comprised of $14.3 million in solar module sales, $1.3 million in
contract manufacturing revenue, $0.7 million in solar cell sales, and $2.3
million in resale of raw materials compared to $1.5 million of revenue in the
same period of the prior year. We generated revenue from resale of raw materials
such as silicon wafer because we were over-stocked due to our still-limited
production capability.
For
the
three months ended June 30, 2008 and 2007, we incurred a gross profit of $37,000
and $10,000, respectively. The positive gross margin in the third quarter 2008
was primarily attributable to sales of our solar module compared to the prior
year period where gross margin benefited primarily from the resale of raw
materials.
For
the
nine months ended June 30, 2008, we incurred a negative gross margin of $1.1
million mainly from high manufacturing costs due to increased raw material
cost
and production inefficiencies associated with our low production
volume.
Selling,
general & administrative
|
|
Three Months Ended June 30, 2008
|
|
Three Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Selling, general &
administrative
|
|
$
|
1,606,000
|
|
|
15.6
|
%
|
$
|
2,798,000
|
|
|
184.4
|
%
|
$
|
(1,192,000
|
)
|
|
(42.6
|
)%
|
|
|
Nine Months Ended June 30, 2008
|
|
Nine Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Selling,
general & administrative
|
|
$
|
8,185,000
|
|
|
44.
|
%
|
$
|
7,733,000
|
|
|
508.8
|
%
|
$
|
452,000
|
|
|
5.8
|
%
|
For
the
three months ended June 30, 2008, we incurred selling, general and
administrative expense of $1.6 million, representing a decrease of $1.2 million
or 43% from $2.8 million in the three months ended June 30, 2007. The selling,
general and administrative expense included stock-based compensation expense
related to employee options of $0.5 million and $2.1 million for the three
months ended June 30, 2008 and 2007, respectively. Excluding stock-based
compensation expense, our selling, general & administrative costs increased
by approximately $0.4 million largely from increases in professional fees,
the
number of additional employees hired as we grow our business, and increased
sales and marketing activities.
For
the
nine months ended June 30, 2008, we incurred selling, general and administrative
expense of $8.2 million, representing an increase of $0.5 million or 5.8% from
the $7.7 million incurred in the nine months ended June 30, 2007. The selling,
general and administrative expense included stock-based compensation expense
related to employee options of $4.7 million and $6.3 million for nine months
ended June 30, 2008 and 2007, respectively. The overall increase in the selling,
general and administrative expense excluding stock-based compensation was
primarily related to increases in professional fees and the number of additional
employees hired as we grow our business, and increased sales and marketing
activities.
Research
& development
|
|
Three Months Ended June 30, 2008
|
|
Three Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Research & development
|
|
$
|
198,000
|
|
|
1.9
|
%
|
$
|
7,000
|
|
|
0.5
|
%
|
$
|
191,000
|
|
|
2,728.6
|
%
|
|
|
Nine Months Ended June 30, 2008
|
|
Nine Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Research & development
|
|
$
|
483,000
|
|
|
2.6
|
%
|
$
|
113,000
|
|
|
7.4
|
%
|
$
|
370,000
|
|
|
327.4
|
%
|
Research
and development expense represents expense incurred in-house as well as for
the
joint research and development program with Shanghai University. Research and
development expense increased in the three and nine months ended June 30, 2008
and 2007 largely as a result of our commitment to fund our development contract
with Shanghai University. In accordance with our joint research and development
laboratory agreement with Shanghai University, dated December 15, 2006 and
expiring on December 15, 2016, we are committed to funding an additional $1.0
million in fiscal year 2008 and $3.0 million in the next 3 years. The delay
in
payment could lead to Shanghai University requesting the Company to pay the
committed amount within a certain time frame. If the Company is still not able
to correct the breach within the time frame, Shanghai University could seek
compensation up to an additional 15% of the committed amount which would then
total a 2007 commitment of approximately $656,000. As of the date of this
report, we have not received any compensation request from Shanghai University.
We expect to increase our funding to research and development activities as
we
grow our business.
Loss
on debt extinguishment
|
|
Three Months Ended June 30, 2008
|
|
Three Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Loss
on debt extinguishment
|
|
$
|
1,529,000
|
|
|
14.9
|
%
|
$
|
-
|
|
|
0.
|
%
|
$
|
1,529,000
|
|
|
*NM
|
|
*NM=
Not
measureable
|
|
Nine Months Ended June 30, 2008
|
|
Nine Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Loss on debt extinguishment
|
|
$
|
3,996,000
|
|
|
21.5
|
%
|
$
|
-
|
|
|
0.
|
%
|
$
|
3,996,000
|
|
|
*NM
|
|
*NM=
Not
measureable
For
the
three months ended June 30, 2008, we incurred a loss on debt extinguishment
of
$1.5 million. During the quarter, part of our Series A and B convertible notes
were converted into common stock which resulted in the non-cash loss of $1.5
million.
For
the
nine months ended June 30, 2008, we incurred a loss on debt extinguishment
of
$4.0 million. That loss was the result of a loss of $4.4 million related to
converting Series A and B convertible notes into common stocks. The loss was
partially offset by a gain of $0.4 million on settlement of loan due to Coach
Capital LLC and Infotech Essentials Ltd.
Other
income (expense)
|
|
Three Months Ended June 30, 2008
|
|
Three Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Interest income
|
|
$
|
24,000
|
|
|
0.2
|
%
|
$
|
27,000
|
|
|
1.8
|
%
|
$
|
(3,000
|
)
|
|
(11.1
|
)%
|
Interest
expense
|
|
|
(238,000
|
)
|
|
(2.3
|
)%
|
|
(280,000
|
)
|
|
(18.5
|
)%
|
|
42,000
|
|
|
(15.
|
)%
|
Gain
(loss) on change in fair market value of compound embedded
derivative
|
|
|
(22,000
|
)
|
|
(0.2
|
)%
|
|
7,100,000
|
|
|
468.
|
%
|
|
(7,122,000
|
)
|
|
(100.3
|
)%
|
Gain
(loss) on change in fair market value of warrant liability
|
|
|
107,000
|
|
|
1.
|
%
|
|
4,532,000
|
|
|
298.7
|
%
|
|
(4,425,000
|
)
|
|
(97.6
|
)%
|
Other
expense
|
|
|
(107,000
|
)
|
|
(1.
|
)%
|
|
(267,000
|
)
|
|
(17.6
|
)%
|
|
160,000
|
|
|
(59.9
|
)%
|
Total
other income (expense)
|
|
$
|
(236,000
|
)
|
|
(2.3
|
)%
|
$
|
11,112,000
|
|
|
732.5
|
%
|
$
|
(11,348,000
|
)
|
|
(102.1
|
)%
|
|
|
Nine Months Ended June 30, 2008
|
|
Nine Months Ended June 30, 2007
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of net sales
|
|
Amount
|
|
% of change
|
|
Interest income
|
|
$
|
80,000
|
|
|
0.4
|
%
|
$
|
40,000
|
|
|
2.6
|
%
|
$
|
40,000
|
|
|
100.
|
%
|
Interest
expense
|
|
|
(814,000
|
)
|
|
(4.4
|
)%
|
|
(334,000
|
)
|
|
(22.
|
)%
|
|
(480,000
|
)
|
|
143.7
|
%
|
Loss
on issuance of convertible notes
|
|
|
-
|
|
|
0.
|
%
|
|
(15,209,000
|
)
|
|
(1,000.6
|
)%
|
|
15,209,000
|
|
|
*NM
|
|
Gain
(loss) on change in fair market value of compound embedded
derivative
|
|
|
12,267,000
|
|
|
66.
|
%
|
|
(5,500,000
|
)
|
|
(361.8
|
)%
|
|
17,767,000
|
|
|
(323.
|
)%
|
Gain
(loss) on change in fair market value of warrant liability
|
|
|
11,030,000
|
|
|
59.4
|
%
|
|
(5,427,000
|
)
|
|
(357.
|
)%
|
|
16,457,000
|
|
|
(303.2
|
)%
|
Other
expense
|
|
|
(435,000
|
)
|
|
(2.3
|
)%
|
|
(267,000
|
)
|
|
(17.6
|
)%
|
|
(168,000
|
)
|
|
62.9
|
%
|
Total
other income (expense)
|
|
$
|
22,128,000
|
|
|
119.1
|
%
|
$
|
(26,697,000
|
)
|
|
(1,756.4
|
)%
|
$
|
48,825,000
|
|
|
(182.9
|
)%
|
*NM=
Not
measureable
For
the
three months ended June 30, 2008, total other expense was $0.2 million,
representing a decrease of $11.3 million compared to the same period of the
prior year. We incurred interest expenses of $0.2 million and $0.3 million
in
the three months ended June 30, 2008 and 2007, respectively primarily related
to
the 6% interest charges on Series A and B convertible notes. In the three months
ended June 30, 2008, we recorded a loss on a change in fair market value of
a
compound embedded derivative of $22,000 and a gain on change in the fair market
value of warrant liability of $0.1 million. This compared to a gain on a change
in the fair market value of a compound embedded derivative of $7.1 million
and a
gain on change in fair market value of warrant liability of $4.5 million during
the three months ended June 30, 2007. Other expense of $0.1 million in the
three
months ended June 30, 2008 was primarily related to foreign exchange loss
resulting from unfavorable movements in foreign exchange rates.
For
the
nine months ended June 30, 2008, total other income was $22.1 million,
representing an increase of $48.8 million or 182.9% from other expense of $26.7
million in the nine months ended June 30, 2007. In the nine months ended June
30, 2008, we recorded a gain on a change in fair market value of a compound
embedded derivative of $12.3 million and a gain on change in fair market value
of warrant liability of $11.0 million compared to a loss on change in fair
market value of compound embedded derivative of $5.5 million and a loss on
change in fair market value of warrant liability of $5.4 million during the
nine
months ended June 30, 2007. We incurred interest expenses of $0.8 million and
$0.3 million in the nine months ended June 30, 2008 and 2007, respectively,
primarily related to 6% interest charges on Series A and B convertible notes.
Other expense of $0.4 million in the nine months ended June 30, 2008 was
primarily related to foreign exchange loss resulting from unfavorable movements
in foreign exchange rates.
Liquidity
and Capital Resources
|
|
June 30, 2008
|
|
September 30, 2007
|
|
Change
|
|
Cash
and cash equivalents
|
|
$
|
2,681,000
|
|
$
|
3,908,000
|
|
$
|
(1,227,000
|
)
|
As
of
June 30, 2008, we had cash and cash equivalents of $2.7 million, as compared
to
$3.9 million at September 30, 2007. We funded our operations mainly from private
sales of equity securities and loans. We believe that we currently have
sufficient working capital to fund our current operations (one production line)
for the next twelve months. Changes in our operating plans, an increase in
our
inventory, increased expenses, additional acquisitions, or other events, may
cause us to seek additional equity or debt financing in the
future.
|
|
Nine Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(14,140,000
|
)
|
$
|
(6,670,000
|
)
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
(6,846,000
|
)
|
|
(2,283,000
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
19,887,000
|
|
|
17,139,000
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(128,000
|
)
|
|
84,000
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
$
|
(1,227,000
|
)
|
$
|
8,270,000
|
|
Net
cash
used in operating activities were $14.1 million and $6.7 million for the nine
months ended June 30, 2008 and 2007, respectively. The increase of $7.4 million
was mainly used to support the daily operations and expand the company’s
selling, marketing and general and administrative functions. The increased
of
net cash used in operating activities resulted from $2.7 million of lower
non-cash items adjustments mainly from gain on change in fair market value
of
warrant liability, gain on change in fair market value of compound embedded
derivatives, loss on issuance of convertible notes and stock-based compensation
expense, partially offset by higher net income. In addition, the increase of
net
cash used in operating activities was attributable to the changes in operating
assets and liabilities of $4.7 million, mainly from higher accounts receivable,
higher VAT taxes receivable and lower accounts payable related to inventory
purchases, partially offset by lower advanced payment for raw material at June
30, 2008.
Net
cash
used in investment activities were $6.8 million and $2.3 million for the nine
months ended June 30, 2008 and 2007, respectively. The increase of $4.5 million
in investing activities was due to increased investment in our manufacturing
facility and production line in Shanghai, China.
Net
cash
provided by financing activities totaled $19.9 million and $17.1 million for
the
nine months ended June 30, 2008 and 2007, respectively. The increase of $2.8
million was mainly due to proceeds of $19.9 million in January 2008 from issuing
common stock and warrants, net of financing cost through private equity
financing. That compares to proceeds of $17.0 million received in March 2007
from issuing convertible notes and warrants, net of deferred acquisition costs
through private equity financing.
The
exchange rate changes on cash and cash equivalents were primarily from exchange
gains of balances held in Chinese Renminbi (RMB). The exchange rates at June
30,
2008 and 2007 were 1 U.S. dollar for RMB 6.8591 and 1 U.S. dollar for RMB
7.6155, respectively.
Our
current cash requirements are significant because, aside from our operational
expenses, we are building our inventory of silicon wafers as we ramp-up our
production capability. We are also constructing a second production line, which
we expect to complete in calendar year 2008. The cost of silicon wafers, which
is the primary cost of sales for our SolarE solar modules, is currently volatile
and is expected to rise due to a current supply shortage. We are uncertain
of
the extent to which this will negatively affect our working capital in the
near
future. A significant increase in the cost of silicon wafers that we cannot
pass
on to our customers could cause us to run out of cash more quickly than our
projections, requiring us to raise additional funds or curtail
operations.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As
a
Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in
item
10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item 3.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Management
carried out an evaluation, under the supervision and with the participation
of
our President and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end
of
the period covered by this report. The evaluation was undertaken in consultation
with our accounting personnel. Based on that evaluation, the President and
Chief
Financial Officer concluded that our disclosure controls and procedures are
not
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms because of the existence of a material weakness
related to inadequate control over accounting and reporting for certain
non-routine transactions. During the process of preparing the fiscal year 2007
Form 10-KSB, management was incorrect in calculating the withholding tax
liability associated with stock options exercised by the President and CEO
of
the Company. We restated our consolidated financial statements for the fiscal
year ended September 30, 2006 and subsequent quarters ended June 30, 2007,
March
31, 2007 and December 31, 2006 in order to properly reflect additional accrued
liability.
We
have
taken the following steps to correct this weakness:
|
•
|
In
October 2007, we added a financial controller to oversee our Chinese
operations;
|
|
•
|
During
the quarter ended December 31, 2007, we began training of our accounting
staff on generally accepted accounting principles in the United States
(“U.S. GAAP”);
|
|
•
|
During
the quarter ended June 30, 2008, we completed implementation of our
Enterprise Resource Planning system
to
improve the reporting and business performance
.
The system is used by all key departments in all locations in China;
and
|
|
•
|
Throughout
the fiscal year 2008, we engaged a third party consultant with the
requisite expertise to assist with analysis and accounting for non-routine
transactions.
|
Internal
Control Over Financial Reporting
Except
as
discussed above, our management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, has concluded there were no changes
in
our internal controls over financial reporting that occurred during the fiscal
quarter ended June 30, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
4T. CONTROLS AND PROCEDURES
Reference
is made to the disclosures above in Item 4. Controls and
Procedures.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
ITEM
1A. RISK FACTORS
There
have been no material changes in our risk factors from those disclosed in our
2007 Annual Report on Form 10-K
SB.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At
our
annual meeting of stockholders on May 5, 2008, the stockholders elected each
of
the nominees for directors to our Board of Directors. The votes were as
follows:
Nominee
|
|
For
|
|
Withheld
|
|
Leo
Shi Young
|
|
|
79,783,081
|
|
|
721,606
|
|
Shi
Jian Yin
|
|
|
75,775,671
|
|
|
729,016
|
|
Kevin
Koy
|
|
|
79,773,622
|
|
|
731,065
|
|
Robert
Coackley
|
|
|
79,780,699
|
|
|
723,988
|
|
Donald
Morgan
|
|
|
79,782,989
|
|
|
781,698
|
|
The
following matters were also submitted to and approved by a vote of the
stockholders with the results of the voting being as shown:
Ratification
of the Appointment of Ernst & Young Hua Ming
|
|
Shares
|
|
For
approval
|
|
|
79,400,457
|
|
Against
approval
|
|
|
281,787
|
|
Abstained
|
|
|
822,443
|
|
Amendment
and Restatement of 2007 Equity Incentive Plan
|
|
Shares
|
|
For
approval
|
|
|
62,261,251
|
|
Against
approval
|
|
|
1,126,607
|
|
Abstained
|
|
|
347,552
|
|
Broker
Non-Votes
|
|
|
16,796,277
|
|
Reincorporation
into the State of Delaware
|
|
Shares
|
|
For
approval
|
|
|
63,412,123
|
|
Against
approval
|
|
|
202,101
|
|
Abstained
|
|
|
121,186
|
|
Broker
Non-Votes
|
|
|
16,769,277
|
|
|
|
|
|
|
Approve
an Increase of the Company’s Authorized Shares of Common
Stock
|
|
Shares
|
|
For
approval
|
|
|
72,938,280
|
|
Against
approval
|
|
|
5,528,053
|
|
Abstained
|
|
|
538,354
|
|
|
|
|
|
|
Approve
any Adjournments of the Meeting to another time and place
|
|
Shares
|
|
For
approval
|
|
|
77,182,379
|
|
Against
approval
|
|
|
2,105,252
|
|
Abstained
|
|
|
1,217,056
|
|
ITEM
5. OTHER INFORMATION
ITEM
6. EXHIBITS
(a)
Pursuant to Rule 601 of Regulation S-K, the following exhibits are included
herein or incorporated by reference.
3.1
|
|
Certificate
of Incorporation, Incorporated by reference from Exhibit 3.1 to our
Form
8-K filed on August 14, 2008.
|
|
|
|
3.2
|
|
By-laws,
Incorporated by reference from Exhibit 3.2 to our Form 8-K filed
on August
14, 2008.
|
|
|
|
3.3
|
|
Agreement
and Plan of Merger with Solar EnerTech Corp., a Nevada corporation
and our
predecessor in interest, dated August 13, 2008, incorporated by reference
from Exhibit 2.1 to our Form 8-K filed on August 14,
2008.
|
|
|
|
31.1
|
|
Section
302 Certification - Chief Executive Officer*
|
|
|
|
31.2
|
|
Section
302 Certification - Chief Financial Officer*
|
|
|
|
32.1
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 - Chief Executive
Officer.*
|
|
|
|
32.2
|
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 - Chief Financial
Officer.*
|
*
Filed
herewith.
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.
SOLAR
ENERTECH CORP.
Date:
August 14, 2008
|
By:
|
/s/
Anthea Chung
|
|
|
|
|
|
Anthea Chung
|
|
|
Chief Financial Officer
|
Solar Enertech (CE) (USOTC:SOEN)
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