UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
Mark
One
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended September 30, 2009
OR
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________ to ____________
Commission
File Number 000-51717
SOLAR
ENERTECH CORP.
(Exact
name of registrant as specified in its charter)
DELAWARE
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98-0434357
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State or other jurisdiction of
incorporation or organization
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(I.R.S. Employer
Identification No.)
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444
Castro Street, Suite #707, Mountain View, CA 94041
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code
650-688-5800
Securities
registered under Section 12(b) of the Exchange Act:
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Title
of each class
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Name
of each exchange on which registered
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None
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None
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Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 Par Value
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨
Yes
x
No
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.
x
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).Yes
o
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer
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Accelerated filer
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o
Non-accelerated filer
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x
Smaller reporting company
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(Do not check if
a small reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
The
aggregate market value of the common stock held by non-affiliates of the
registrant, computed based on the closing sale price as of the last business day
of the registrant’s second fiscal quarter, March 31, 2009, was approximately
$16,989,394.
According
to the records of the registrant's registrar and transfer agent, the number of
shares of the registrant's common stock outstanding as of January 6,
2010 was 111,406,696.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1. Business
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4
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Item
1A. Risk Factors
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7
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Item
1B. Unresolved Staff Comments
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17
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Item
2. Properties
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17
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Item
3. Legal Proceedings
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17
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Item
4. Submission of Matters to a Vote of Security
Holders
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17
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PART
II
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Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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18
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Item
6. Selected Financial Data
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20
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Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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20
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Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
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28
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Item
8. Financial Statements and Supplementary Data
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28
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Item
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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58
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Item
9A(T). Controls and Procedures
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58
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Item
9B. Other Information
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60
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PART
III
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Item
10. Directors and Executive Officers and Corporate
Governance
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61
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Item
11. Executive Compensation
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63
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Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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66
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Item
13. Certain Relationship and Related Transactions, and Director
Independence
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69
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Item
14. Principal Accountant Fees and
Services
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69
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PART
IV
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Item
15. Exhibits and Financial Statement Schedules
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71
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Signatures
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74
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EXHIBIT
21.1
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EXHIBIT
23.1
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EXHIBIT
31.1
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EXHIBIT
31.2
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EXHIBIT
32.1
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EXHIBIT
32.2
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report on Form 10-K contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, in particular in our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, that relate to our current expectations and views of future events.
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 Doing Business in China” and “Risks
Related To an Investment in Our Securities” in this document as well as other
relevant risks detailed in the our filings with the Securities and Exchange
Commission (the “SEC”) which may cause our actual results, performance or
achievements to be materially different from any future results, performances or
achievements expressed or implied by the forward-looking statements. The
information set forth in this report on Form 10-K should be read in light of
such risks.
In some
cases, these forward-looking statements can be identified by words or phrases
such as “may”, “will”, “expect”, “anticipate”, “aim”, “estimate”, “intend”,
“plan or planned”, “believe”, “potential”, “continue”, “is/are likely to”,
“hope” or other similar expressions. We have based these forward-looking
statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
These
forward-looking statements include, among other things, statements relating
to:
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our
expectations regarding the worldwide demand for electricity and the market
for solar energy in certain
countries;
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our
beliefs regarding the effects of environmental regulation, lack of
infrastructure reliability and long-term fossil fuel supply
constraints;
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our
beliefs regarding the inability of traditional fossil fuel-based
generation technologies to meet the demand for
electricity;
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our
beliefs regarding the importance of environmentally friendly power
generation;
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our
expectations regarding research and development agreements and
initiatives;
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our
expectations regarding governmental support and incentive programs for the
deployment of solar energy;
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our
beliefs regarding the acceleration of adoption of solar
technologies;
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our
beliefs regarding the competitiveness of photovoltaic (“PV”)
products;
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our
expectations regarding the creation and development of our manufacturing
capacity;
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our
expected benefits from manufacturing based on China’s favorable policies
and cost-effective workforce;
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our
expectations with respect to revenue and sales and our ability to achieve
profitability resulting from increases in production
volumes;
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our
expectations with respect to our ability to secure raw materials in the
future;
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our
future business development, results of operations and financial
condition; and
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competition
from other manufacturers of PV products and conventional energy
suppliers.
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YOU
SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS
The
forward-looking statements made in this report on Form 10-K relate only to
events or information as of the date on which the statements are made in this
report on Form 10-K. Except as required by law, we undertake no obligation to
update or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise, after the date on which the
statements are made or to reflect the occurrence of unanticipated events. You
should read this report and the documents that we reference in this report,
including documents referenced by incorporation, completely and with the
understanding that our actual future results may be materially different from
what we expect or hope.
PART
I
ITEM
1. BUSINESS
Solar
EnerTech Corp. was originally incorporated under the laws of the State of Nevada
on July 7, 2004 as Safer Residence Corporation and was reincorporated to
the State of Delaware on August 13, 2008 (“Solar EnerTech” or the
“Company”). The Company engaged in a variety of businesses until
March 2006, when the Company began its current operations as a photovoltaic
(“PV”) solar energy cell (“PV Cell”) manufacturer. The Company’s management
decided that, to facilitate a change in business that was focused on the PV Cell
industry, it was appropriate to change the Company’s name. A plan of merger
between Safer Residence Corporation and Solar EnerTech Corp., a wholly-owned
inactive subsidiary of Safer Residence Corporation, was approved on March 27,
2006, under which the Company was to be renamed “Solar EnerTech Corp.” On
April 7, 2006, the Company changed its name to Solar EnerTech
Corp.
The
Company’s management in February 2008 decided that it was in the Company’s and
its shareholders’ best interests to change the Company’s state of domicile from
Nevada to Delaware (the “Reincorporation”). On August 13, 2008, the
Company, a Nevada entity at the time, entered into an Agreement and Plan of
Merger with Solar EnerTech Corp., a Delaware corporation and wholly-owned
subsidiary of the Nevada entity (the “Delaware Subsidiary”), whereby the Nevada
entity merged with and into the Delaware Subsidiary in order to effect the
Reincorporation. After the Reincorporation, the Nevada entity ceased to exist
and the Company survived as a Delaware 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.
On April
27, 2009, the Company entered into a Joint Venture Agreement (the “JV
Agreement”) with Jiangsu Shunda Semiconductor Development Co., Ltd. (“Jiangsu
Shunda”) to form a joint venture in the United States by forming a new
company, to be known as Shunda-SolarE Technologies, Inc. (the “Joint Venture
Company”), in order to jointly pursue opportunities in the United
States solar market. After its formation, the Joint Venture Company’s name
was later changed to SET-Solar Corp.
Pursuant
to the terms of the JV Agreement, Jiangsu Shunda owns 55% of the Joint Venture
Company, the Company owns 35% of the Joint Venture Company and the
remaining 10% of the Joint Venture Company is owned by the Joint Venture
Company’s management. The Joint Venture Company’s Board of Directors
consist of five directors: three of the directors were nominated by Jiangsu
Shunda and two of whom were nominated by the Company. Furthermore,
Mr. Yunda Ni, the President of Jiangsu Shunda, serves as the Joint Venture
Company’s Chairman of the Board and Mr. Leo Shi Young, the Company’s Chief
Executive Officer serves as the Joint Venture Company’s Vice Chairman of the
Board. Jiangsu Shunda is responsible for managing the Joint
Venture Company in China and the Company is responsible for the
managing the Joint Venture Company in the United States. The JV
Agreement is valid for 18 months. As of September 30, 2009, due to the foreign
currency controls imposed by the PRC government, Jiangsu Shunda and the Company
have not contributed any capital to the Joint Venture Company and no equity
interest has been issued to either party.
The
Company’s goal is to maximize its value through manufacturing and distribution
of photovoltaic products globally. To date, the Company has established a
67,107-square-foot manufacturing facility in Shanghai, China. The Company
currently has two 25MW solar cell production lines and a 50MW solar module
production facility.
The
Company has also established a Joint R&D Lab at Shanghai University to
research and develop higher-efficiency cells and to put the results of that
research to use in its manufacturing processes. Led by one of the industry’s top
scientists, the Company expects its R&D program to help bring Solar EnerTech
to the forefront of advanced solar technology research and
production.
During
fiscal year 2009, the Company has significantly improved its operational
results. The Company restructured its management team, especially the sales
team, and concentrated on leaner productions, our procurement process, improving
efficiency, quality control and various cost cutting programs. Consequently,
gross margin has significantly improved quarter by quarter and operational costs
have been reduced. In January 2010, the Company modified the terms of its
convertible notes, which were subsequently converted into shares of common stock
of the Company. We believe that the successful completion of the debt
restructuring, along with our existing cash resources and the cash expected to
be generated from operations during fiscal year 2010 will be sufficient to meet
our projected operating requirements through at least the next twelve months and
enable us to continue as a going concern
The
public may also read and copy any materials we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The SEC’s Internet website is located at
http://www.sec.gov.
The
Market
Energy
generated from PV cells continues to be researched and the resulting
products deployed. PV technology is relatively a simple concept: harness the
sun’s energy on a solid-state device and generate electricity. In many markets
around the world – especially Japan, Germany, Spain and the U.S. – PV
electricity has already become a favored energy choice, and within this
established base, the technology of PV’s is poised to help transform the energy
landscape within the next decade.
Photovoltaic
Industry and the World
The
photovoltaic industry has made huge improvements in solar cell efficiencies as
well as having achieved significant cost reductions. The global photovoltaic
industry is expanding rapidly: In the last few years, most solar
production has moved and continues to move to Europe and China. Countries like
Germany and Spain have had government-incentive programs that have made solar
systems more attractive. In the United States, the investment tax credits and
production tax credit extensions were passed in October 2008. As the
current administration in the United States pursues a “Green Economy”, we expect
both federal and state incentives to play an important role in boosting the use
of solar electricity in the near future.
The price
of electricity produced from solar cells is still significantly more expensive
than from fossil fuels, such as coal and oil, especially when environmental
costs are not considered. The competitiveness of solar-generated electricity in
grid-connected applications is largely a function of electricity rates, which
are subject to regulations and taxes that vary from country to country across
the world.
With a
solar boom being expected globally in the near future and with renewable energy
laws being implemented as best-practice models often with attractive solar
energy delivery compensation rules as in Germany, solar companies are currently
expanding their activities in Europe (e.g. Spain, Italy, France and Greece, and
Holland). With growing markets in Southern Europe, Asia and the United States,
numerous opportunities exist for competitors in the photovoltaic
market.
Compared
to other energy technologies, solar power’s benefits include:
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Environmental
Superiority. Solar power is one of the most benign electric generation
resources. Solar cells and concentrated solar power (“CSP”) systems
generate electricity without significant air or water emissions, habitat
impact or waste generation;
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Price
Stability. Unlike fossil fuels, solar energy has no fuel price volatility
or delivery risk. Although there is variability in the amount and timing
of sunlight, it is predictable, and a properly configured system can be
designed to be highly reliable while providing long-term, fixed price
electricity;
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Location
Flexibility. Unlike other renewable resources such as hydroelectric or
wind power, solar power can be generated where it is needed. This limits
the expense and energy losses associated with transmission and
distribution of large, centralized power
stations;
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Peak
Generation. Solar power is well-suited to match peak energy needs as
maximum sunlight hours generally correspond to peak demand periods when
electricity prices are at their
highest;
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System
Modularity. Solar power products can be deployed in many sizes and
configurations to meet the specific needs of the user;
and
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Reliability.
With no moving parts or regular required maintenance, photovoltaic systems
are among the most reliable forms of electricity
generation.
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Company’s
Strategy
The
Company’s business strategy includes the acquisition, manufacturing and
marketing of innovative PV cells and modules in order to provide superior
solutions to its customers. In so doing, we believe it will generate substantial
value for its stockholders while contributing to energy security and protection
of ecosystems.
Principal
Products and Services
The
essential component in all solar panel applications is the
photovoltaic solar cell, which converts the sun’s visible light into
electricity. Solar cells are then assembled in modules for specific
applications. The Company manufactures PV solar cells, designs and produces
advanced PV modules for a variety of applications, such as standard panels for
solar power stations, roof panels, solar arrays, and modules incorporated
directly into exterior walls.
Marketing
Strategy
The
primary solar market is currently in Europe and Australia, where significant
government incentive programs are helping fuel high demand for solar products.
The Company’s secondary market is the United States, where the State of
California has launched an ambitious One Million Solar Roof incentive program
for residences and businesses. With a newly set-up marketing and sales office in
the United Sates, the Company is well-positioned to meet incremental market
demand in the United States.
Sales
Strategy
The
Company manufactures high-quality and high-conversion-rate solar products with
outstanding after-sale services. By keeping costs low, the Company expects to
market its panels, to be trademarked as “SolarE”, at prices generally lower than
many of our competitors.
Research
& Development
The
Company has established a joint Research and Development (“R&D”) laboratory
with Shanghai University to facilitate improvements to the Company’s products.
The main focus of this research laboratory is to:
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(1)
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Research
and test theories of photovoltaics, thermo-physics, the physics of
materials and chemistry;
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(2)
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Develop
efficient and ultra-efficient PV cells with light/electricity conversion
rate ranging from 20% to 35%;
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(3)
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Develop
environmentally-friendly high-conversion-rate manufacturing technology for
chemical compound film PV cell
materials;
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(4)
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Develop
highly-reliable, low-cost manufacturing technology and equipment for
thin-film PV cells;
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(5)
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Research
and develop key materials for new low-cost flexible-film PV cells and
non-vacuum technology; and
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Research
and develop key technologies and fundamental theories for third-generation
PV cells.
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Management
believes that the joint R&D laboratory will enable the Company to be at the
forefront of PV research and development, and hopes to create a valuable
comparative advantage over solar cell producers today, with the goal of enabling
the Company to become an important solar-cell manufacturer.
Competition
The solar
energy market is highly competitive. Outside China, the Company’s competitors
include BP Solar, Kyocera Corporation, Mitsubishi Electric Corporation, Motech
Industries Inc., Sharp Corporation, Q-Cells AG, Sanyo Electric Co., Ltd. and
Sunpower Corporation. In China, the Company’s primary competitors are Suntech
Power Holding’s Co., Ltd., Trina Solar Ltd., Baoding Tianwei Yingli New Energy
Resources Co., Ltd. and Nanjing PV-Tech Co., Ltd, Canadian Solar Inc. and
Solarfun Power Holdings Co., Ltd.
The
Company competes primarily on the basis of the power efficiency, quality,
performance and appearance of its products, price, strength of its supply chain
and distribution network, after-sales service and brand image. Many of the
Company’s competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial and marketing
resources than the Company.
Intellectual
Property
The
Company is not, at present, the holder of any patents, trademarks or copyrights
on its products. The Company intends to trademark the trade name “SolarE” in
Asia, Europe and North America in the future and will, if it is successful in
its conduct of research and development activities seek intellectual property
protection for such products. Solar cells are in the public domain and the
Company’s only protection in producing them is in the know-how or experience of
its employees and management in producing its products.
Environmental
Regulations
In its
manufacturing process, the Company will use, generate and discharge toxic,
volatile or otherwise hazardous chemicals and wastes in its manufacturing
activities. The Company is subject to a variety of foreign, federal, state and
local governmental laws and regulations related to the purchase, storage, use
and disposal of hazardous materials. If the Company fails to comply with present
or future environmental laws and regulations, it could be subject to fines,
suspension of production or a cessation of operations. In addition, under some
foreign, federal, state and local statutes and regulations, a governmental
agency may seek recovery and response costs from operators of property
where releases of hazardous substances have occurred or are ongoing, even if the
operator was not responsible for the release or otherwise was not at
fault.
Management
believes that the Company has all environmental permits necessary to conduct its
business and has obtained all necessary environmental permits for its facility
in Shanghai. Management also believes that the Company has properly handled its
hazardous materials and wastes and has appropriately remediated any
contamination at any of its premises. The Company is not aware of any pending or
threatened environmental investigation, proceeding or action by foreign,
federal, state or local agencies, or third parties involving our current
facilities. Any failure by the Company to control the use of or to restrict
adequately the discharge of, hazardous substances could subject the Company to
substantial financial liabilities, operational interruptions and adverse
publicity, any of which could materially and adversely affect its business,
results of operations and financial condition.
Principal
suppliers
We
currently purchase silicon wafer, our key raw material, from the spot
market.
Employees
As of
September 30, 2009, the Company employed approximately 328 people, as
follows: the Company’s California office currently has 3 employees and the
manufacturing plant in Shanghai currently has 325 employees.
ITEM
1A. RISK FACTORS
RISKS
RELATED TO OUR BUSINESS
Investors
should carefully consider the risks described below before deciding whether to
invest in our common stock. The risks described below are not the only ones we
face. Additional risks not presently known to us or that we currently believe
are immaterial may also impair our business operations and financial results. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be adversely affected. In such case, the trading
price of our common stock could decline and you could lose all or part of your
investment. Our filings with the SEC also contain forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks we face described below. See “Special Note
Regarding Forward-Looking Statements.” In assessing these risks, investors
should also refer to the other information contained or incorporated by
reference in this Annual Report on Form 10-K, including our September 30, 2009
consolidated financial statements and related notes.
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
We were
originally incorporated in the State of Nevada in July 2004 and began our
current operations in March 2006. On August 13, 2008, we reincorporated to
the State of Delaware. We have a limited operating history. As such, our
historical operating results may not provide a meaningful basis for evaluating
our business, financial performance and future prospects. Accordingly, you
should not rely on our results of operations for any prior periods as an
indication of our future performance.
We
require a significant amount of cash to fund our future capital expenditure
requirements and working capital needs. If we cannot obtain additional sources
of liquidity when we need it, our growth prospects and future profitability may
be materially adversely affected and we may not be able to continue as a going
concern.
We
generated a net loss of $14.2 million for the fiscal year ended
September 30, 2009. During the same period in fiscal year 2008, we had
negative gross margin due to high manufacturing cost associated with our low
production volume. In order to improve our profitability, we will need to
continue to generate new sales while controlling our costs. As we plan on
continuing the growth of our business while implementing cost control measures,
we may not be able to successfully generate enough revenues to return to
profitability. Failure to increase our revenues and control costs as we pursue
our planned growth would harm our profitability and would likely negatively
affect the market price of our stock.
If
the world-wide financial crisis intensifies, potential disruptions in the
capital and credit markets may adversely affect the Company, including adversely
affecting the availability and cost of short-term funds for the Company’s
liquidity requirements and the Company’s ability to meet its long-term
commitments, which in turn could adversely affect the Company’s results of
operations, cash flows and financial condition.
The
Company relies on its limited cash reserves to fund short-term liquidity needs
if internal funds are not available from the Company’s operations. With a
limited amount of cash reserves, disruptions in the capital and credit markets
could adversely affect the Company’s ability to raise additional cash as may be
needed.
Longer-term
disruptions in the capital and credit markets as a result of uncertainty,
changing or tightened regulation, reduced financing alternatives or failures of
significant financial institutions could adversely affect the Company’s access
to liquidity needed in its businesses. Any disruption could require the Company
to take measures to conserve cash until the markets stabilize or until
alternative credit arrangements or other funding for business needs can be
arranged. Such measures could include deferring capital expenditures, as well as
reducing or eliminating other discretionary uses of cash.
Many of
the Company’s customers and suppliers also have exposure to risks that their
businesses are adversely affected by the current worldwide financial crisis and
resulting potential disruptions in the capital and credit markets. In
the event that any of the Company’s significant customers or suppliers, or a
significant number of smaller customers and suppliers, are adversely affected by
these risks, the Company may face disruptions in supply, significant reductions
in demand for its products and services, inability of customers to pay invoices
when due, and other adverse effects that could negatively affect the Company’s
financial condition, results of operations and/or cash flows.
We
had a history of losses and cash outflow from operations which may continue if
we do not continue to increase our revenue and/or further reduce our
costs.
We
incurred a net operating loss in all financial periods since inception. After
various cost cutting efforts, our operational expenses have been reduced
significantly. Our ability to achieve profitability depends on the growth rate
of the photovoltaic portion of the market, the continued market acceptance of PV
products, the competitiveness of products and services as well as our ability to
provide new products and services to meet the demands of our customers. During
the third quarter of fiscal 2009, we generated positive gross margins for the
first time in the Company’s history. However, there is no guarantee that we
may be profitable in the future.
Due to
the significant fluctuations in our cash levels that result from timing
differences between our payments to vendors and our collections from customers,
our cash levels were at their lowest at the end of fiscal year 2009. If we fail
to reduce the cash consumption from operations and to generate cash from these
other sources on a timely basis, or if the cash requirements of our business
change as the result of changes in terms from vendors or other causes, we could
no longer have the cash resources required to run our business.
The
uncertainty regarding the eventual outcome of the our plan to continue on a
going concern basis and the effect of other unknown adverse factors could
threaten our existence as a going concern
Our
consolidated financial statements have been prepared on the assumption that we
will continue as a going concern, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. The independent
auditor’s report on our financial statements as of and for the fiscal year ended
September 30, 2009 included herein contains an explanatory paragraph stating
that our recurring net losses and negative cash flows from operations raise
substantial doubt about our ability to continue as a going concern.
As of
September 30, 2009, we had outstanding convertible notes with a principal
balance of $11.6 million consisting of $2.5 million in principal amount of
Series A Convertible Notes (the “Series A Notes”) and $9.1 million in principal
amount of Series B Convertible Notes (the “Series B Notes”, and together with
the Series A Notes, the “Notes”), which were recorded at carrying amount at $3.1
million. The Notes bear interest at 6% per annum and are due on March 7,
2010.
Failure
to make payment on the outstanding Notes by March 7, 2010 would have a material
adverse effect on our business, operating results and financial condition. This
may cause us to restructure or cease operations entirely.
Our
ability to repay the Notes when they are due or to refinance or renegotiate our
obligations depends on our financial condition and operating performance, which
is subject to prevailing economic and competitive conditions and certain
financial, business and other factors beyond our control. There can be no
assurance that we will generate a level of cash flows from operating activities
sufficient to permit us to pay the principal and any interest, if any, owed
under the Notes.
As of
September 30, 2009, we only had, $1.7 million in cash and cash equivalents on
hand, a working capital of $106,000 and incurred net loss of $14.2 million for
the fiscal year 2009. Our minimal cash position is mostly due to funding
operational losses in the earlier part of the year. If we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments, or if we fail to comply with the various requirements of our
indebtedness, we may be forced to reduce or delay capital expenditures, sell
assets, seek additional capital, restructure, or refinance our
indebtedness. Failure to generate sufficient income, potentially
raise additional capital, or renegotiate the terms and conditions of the Notes
will be materially negatively impacted and it will be required to take actions
that will harm our business, including ceasing of our
operations.
During
fiscal year 2009, we have significantly improved our operational results. The
Company recruited an experienced sales director from the industry and built up a
strong sales and marketing team, which resulted in new key customers. In fiscal
year 2009, we acquired new key contracts , primarily a 10.00MW contract with a
leading German solar system integrator. Accordingly, our module shipments
increased from 6.67MW in fiscal year 2008 to 10.50MW in fiscal year 2009 and are
expected to increase to at least 22MW in fiscal year 2010. The increased sales
volume also resulted in lower average fixed manufacturing cost. Even though the
average selling price in fiscal year 2009 has decreased approximately 41%
compared to fiscal year 2008, it was offset by the decline in raw material
prices primarily silicon wafers, which decreased by 65%. We have also
restructured our management team and concentrated on lean production, efficiency
improvement in manufacturing and various cost cutting programs. As a result, our
operational costs have significantly decreased quarter by quarter. During the
third quarter of fiscal year 2009, we generated a positive gross margin of 4.8%
for the first time in the Company’s history. We continued this trend by
generating a gross margin of 16% in the fourth quarter of fiscal year
2009.
On
January 7, 2010, we entered into a Series A and Series B Conversion Agreement
(the “Conversion Agreement”) with the holders holding over 75% of the
outstanding principal amounts owed under the Notes to modify the terms of the
Notes. Pursuant to the terms of the Conversion Agreement, the Notes will be
automatically converted into shares of our common stock at a conversion price of
$0.15 per share and shall be amended to eliminate the maximum ownership
percentage restriction prior to such conversion.
In
addition, the Company and the holders of over 50% of each of the outstanding
Series A, Series B and Series C Warrants (collectively the “PIPE Warrants”) have
agreed to enter into an Amendment to the Series A, B, and C Warrants (the
“Warrant Amendment”) upon the closing of the transactions contemplated in the
Conversion Agreement. Pursuant to the terms of the Warrant Amendment, the PIPE
Warrants shall be amended to reduce their exercise prices from $1.21, $0.90 and
$1.00, respectively, to $0.15. The PIPE Warrants shall also be amended to (a)
waive the anti-dilution provisions of the PIPE Warrants that would increase the
number of shares issuable pursuant to the PIPE Warrants in inverse proportion to
the reduction in the exercise price, (b) waive all anti-dilution protections as
to future transactions and (c) eliminate maximum ownership percentage
restrictions.
Pursuant
to the Conversion Agreement, after the closing of the transactions contemplated
by it, we shall issue to our employees additional options to purchase shares of
our common stock equal to approximately 30% of each employee’s pre-closing
option holdings. This is to provide for additional equity incentives to our
employees in order to account for the dilution from the conversion of the Notes
and re-pricing of the PIPE Warrants. These additional options shall be priced at
$0.15 per share.
Continuing
on a going concern basis is dependent upon, among other things, our ability to
improve our operational results and the success of the debt restructuring above.
A forecast of future sales is inherently uncertain and when the sales activities
are not progressing as well as planned, it requires a significant amount of cash
to support our operations and we cannot be sure that our existing cash resources
will be adequate. Having insufficient funds may require us to scale back on our
operations. If we experience a material shortfall versus our plan for fiscal
2010, we have a range of actions we can take to remediate the cash shortage, as
discussed in more detail in “Item 7.Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Liquidity and Capital
Resources.”
Demand
for our PV products has been, and may continue to be, adversely affected by the
global financial crisis. The global credit crisis could also make it difficult
for our customers and end-users to finance the purchases of our
products.
Beginning
in the fourth fiscal quarter 2008, many of our key markets, including Belgium,
Germany, and Australia, has experienced a period of economic contraction or
significantly slower economic growth. In particular, the current credit crises,
weak consumer confidence and diminished consumer and business spending have
contributed to a significant slowdown in the market demand PV products due to
decreased energy requirements.
In
addition, many of our customers and many end-users of our PV products depend on
debt financing to fund the initial capital expenditure required to purchase our
PV products. Due to the global credit crisis, many of our customers and many
end-users of our PV products have experienced difficulties in obtaining
financing, and even if they have been able to obtain financing, the cost of such
financing has increased and they may change their decision or change the timing
of their decision to purchase our PV products. As a result, an increase in the
cost of financing have lowered and may continue to lower demand for our PV
products and reduce our net revenues. We cannot assure you when an economic
recovery may occur, or even when an economic recovery does occur, the demand for
our PV products will increase. A protracted disruption in the ability of our
customers to obtain financing could lead to a significant reduction in their
future orders for our PV products, which in turn could have a material adverse
effect on our business, financial condition and results of
operations.
If
PV technology is not suitable for widespread adoption, or sufficient demand for
PV products does not develop or takes longer to develop than we anticipate,
sufficient sales may not develop, which may have an adverse effect on our
business and results of operations.
The PV
market is at a relatively early stage of development and the extent to which PV
products will be widely adopted is uncertain. Market data in the PV industry is
not as readily available as those in other more established industries where
trends can be assessed more reliably from data gathered over a longer period of
time. If PV technology proves unsuitable for widespread adoption or if the
demand for PV products fails to develop sufficiently, we may not be able to grow
our business or generate sufficient revenues to become profitable or sustain
profitability. In addition, demand for PV products in targeted markets,
including China may not develop or may develop to a lesser extent than we
anticipate. Many factors may affect the viability of widespread adoption of PV
technology and the demand for PV products, including:
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cost-effectiveness
of PV products compared to conventional and other non-solar energy sources
and products;
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performance
and reliability of PV products compared to conventional and other
non-solar energy sources and
products;
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availability
of government subsidies and incentives to support the development of the
PV industry;
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success
of other alternative energy generation technologies, such as fuel cells,
wind power and biomass;
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fluctuations
in economic and market conditions that affect the viability of
conventional and non- solar alternative energy sources, such as increases
or decreases in the prices of oil and other fossil
fuels;
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capital
expenditures by end users of PV products, which tend to decrease when
economy slows down; and
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deregulation
of the electric power industry and broader energy
industry.
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The
failure of the market for PV products to develop as we expect it to would have a
material adverse effect on our business
.
We
face intense competition from other companies producing solar energy and other
renewable energy products and because we are new to this industry, we are
limited in our ability to be competitive.
The PV
market is intensely competitive and rapidly evolving. We compete with many
companies that have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial and marketing resources
than us. They may also have existing relationships with suppliers of silicon
wafers, which may give them an advantage in the event of a silicon shortage. We
do not represent a significant competitive presence in the PV products
industry.
Our
failure to refine technology and develop and introduce new PV products could
render our anticipated products uncompetitive or obsolete, and reduce our sales
and market share, should we develop sales or market share.
The PV
industry is rapidly evolving and competitive. We will need to invest significant
financial resources in research and development to keep pace with technological
advances in the PV industry and to effectively compete in the future. However,
research and development activities are inherently uncertain, and we might
encounter practical difficulties in commercializing our research results. Our
significant expenditures on research and development may not reap corresponding
benefits. A variety of competing PV technologies that other companies may
develop could prove to be more cost-effective and have better performance than
our PV products. Therefore, our development efforts may be rendered obsolete by
the technological advances of others. Breakthroughs in PV technologies that do
not rely in whole or in part on crystalline silicon could mean that companies
such as us that rely entirely on crystalline silicon would encounter a sudden,
sharp drop in sales.
Our
failure to further refine our technology and develop and introduce new PV
products could render our anticipated products uncompetitive or obsolete, and
result in a decline in our market share. We do not have the working capital, at
this time, to make a significant investment in research and development
activities although we have hired personnel who have significant industry and PV
expertise.
Our
future success substantially depends on our ability to expand manufacturing
capacity and output. Our ability to achieve our expansion goals is subject to a
number of risks and uncertainties.
Our
future success depends on our ability to significantly expand manufacturing
capacity and output. If we are unable to do so, we may be unable to expand our
business, decrease our costs per watt, maintain our competitive position and
improve profitability. Our ability to establish manufacturing capacity and
increase output is subject to significant risks and uncertainties,
including:
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the
need to raise significant additional funds to purchase and prepay for raw
materials or to buy equipment for our manufacturing facilities, which we
may be unable to obtain on reasonable terms or at
all;
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delays
and cost overruns as a result of a number of factors, many of which may be
beyond our control, such as increases in raw materials prices and problems
with manufacturing equipment
vendors;
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delays
or denial of required approvals by relevant government
authorities;
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diversion
of significant management attention and other resources;
and
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failure
to execute our plan of operations
effectively.
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If we are
unable to expand our manufacturing capacity or to increase manufacturing output,
or if we encounter any of the risks described above, we may be unable to expand
our business as planned. Moreover, we cannot assure you that if we do establish
or expand our manufacturing capacity and output we will be able to generate
sufficient customer demand for our PV products to support production
levels.
Our
dependence on a spot market and price volatility for key raw materials, and
customized manufacturing equipment could prevent us from timely delivering our
anticipated products to our customers in the required quantities, which could
result in order cancellations and decreased revenues.
If we
fail to obtain silicon wafer, our key raw material from the spot market, due to
the volatility of raw material prices, we may be unable to manufacture our
products or our products may be available at a higher cost or after a long
delay, and we could be prevented from delivering our products to potential
customers in the required quantities and at prices that are profitable. Problems
of this kind could cause us to experience order cancellations and loss of market
share. The failure to obtain materials and components that meet quality,
quantity and cost requirements in a timely manner could impair our ability to
manufacture products or increase our expected costs.
Our
dependence on a limited number of customers may cause significant fluctuations
or declines in our revenues.
We have a
limited number of customers and will be dependent on these customers for our
continued operations. Our dependence on a limited number of customers will
continue for the foreseeable future. Consequently, any one of the following
events may cause material fluctuations or declines in our revenues and have a
material adverse effect on our results of operations:
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reduction,
delay or cancellation of orders from one or more significant
customers;
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selection
by one or more significant distributor customers of products competitive
with ours;
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loss
of one or more significant customers and failure to identify additional or
replacement customers; and
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failure
of any significant customers to make timely payment for
products.
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We
face risks associated with the marketing, distribution and sale of PV products
internationally, and if we are unable to effectively manage these risks, they
could impair our ability to expand our business abroad.
We market
PV products outside of China. The marketing, international distribution and sale
of PV products exposes us to a number of risks, including:
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fluctuations
in currency exchange rates;
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difficulty
in engaging and retaining distributors who are knowledgeable about and,
can function effectively in, oversea
markets;
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increased
costs associated with maintaining marketing efforts in various
countries;
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difficulty
and cost relating to compliance with the different commercial and legal
requirements of the overseas markets in which we offer our anticipated
products;
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inability
to obtain, maintain or enforce intellectual property rights;
and
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trade
barriers such as export requirements, tariffs, taxes and other
restrictions and expenses, which could increase the prices of our
anticipated products and make us less competitive in some
countries.
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A
significant portion of our revenues and expenses are now denominated in foreign
currencies. It has not been our recent practice to engage in the hedging of
foreign currency transactions to mitigate foreign currency risk. Therefore,
fluctuations in the value of foreign currencies could have a negative impact on
the profitability of our global operations, which would seriously harm our
business, results of operations, and financial condition.
Our
business depends to a significant extent on the continuing efforts of our
president and chief executive officer. Our business may be severely disrupted if
we lose his services.
Due to
his extensive experiences in managing businesses in China, our future success
depends to a significant extent on Leo Shi Young, our President and Chief
Executive Officer. We do not maintain key man life insurance on our executive
officers or our directors. If Mr. Young becomes unable or unwilling to
continue in his present position, we may not be able to replace him
readily. In that case our business could be severely disrupted, and we may
incur substantial expenses to recruit and retain new officers.
If
we are unable to attract, train and retain technical personnel, our business may
be materially and adversely affected.
Our
future success depends, to a significant extent, on our ability to attract,
train and retain technical personnel. Recruiting and retaining capable
personnel, particularly those with expertise in the PV industry, are vital to
our success. There is substantial competition for qualified technical personnel,
and there can be no assurance that we will be able to attract or retain our
technical personnel. If we are unable to attract and retain qualified employees,
our business may be materially and adversely affected.
We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely to us, could cause us to pay significant damage
awards.
Our
success also depends largely on our ability to use and develop our technology
and know-how without infringing the intellectual property rights of third
parties. The validity and scope of claims relating to PV technology patents
involve complex scientific, legal and factual questions and analysis and,
therefore, may be highly uncertain. We may be subject to litigation involving
claims of patent infringement or violation of intellectual property rights of
third parties. The defense and prosecution of intellectual property suits,
patent opposition proceedings and related legal and administrative proceedings
can be both costly and time consuming and may significantly divert the efforts
and resources of our technical and management personnel. An adverse
determination in any such litigation or proceedings to which we may become a
party could subject us to significant liability to third parties, require us to
seek licenses from third parties, to pay ongoing royalties, or to redesign our
anticipated products or subject us to injunctions prohibiting the manufacture
and sale of our anticipated products or the use of our technologies. Protracted
litigation could also result in our customers or potential customers deferring
or limiting their purchase or use of our anticipated products until resolution
of such litigation.
Because
the currency we use to do business is generally RMB Yuan, fluctuations in
exchange rates could adversely affect our business.
Our
consolidated financial statements are expressed in U.S. dollars but our
functional currency is RMB Yuan. Our results may be affected by the foreign
exchange rate between U.S. dollars and RMB Yuan. To the extent we hold assets
denominated in U.S. dollars, any appreciation of the RMB Yuan against the U.S.
dollar could result in a change to our income statement and a reduction in the
value of our U.S. dollar denominated assets. On the other hand, a decline in the
value of RMB Yuan against the U.S. dollar could reduce the U.S. dollar
equivalent amounts of our financial results which may have a material adverse
effect on the price of our shares.
We
have limited insurance coverage and may incur losses resulting from product
liability claims or business interruptions.
We may be
exposed to risks associated with product liability claims in the event that the
use of the PV products we sell results in injury. Since our products are
electricity producing devices, it is possible that users may be injured or
killed by our products, whether by product malfunctions, defects, improper
installation or other causes. We are unable to predict whether product liability
claims will be brought against us in the future or the effect of any resulting
adverse publicity on our business. Moreover, we do not have any product
liability insurance and may not have adequate resources to satisfy a judgment in
the event of a successful claim against us. The successful assertion of product
liability claims against us could result in potentially significant monetary
damages and require us to make significant payments. In addition, as the
insurance industry in China is still in an early stage of development, business
interruption insurance available in China offers limited coverage compared to
that offered in many other countries. We do not have any business interruption
insurance. Any business disruption or natural disaster could result in
substantial costs and diversion of resources.
Together,
our directors own a significant number of shares of our common stock. If our
directors act together, they will be able to exert significant influence over,
and possibly control, the outcome of all actions requiring stockholder
approval.
As of
November 30, 2009, our director, President and Chief Executive Officer, Leo Shi
Young, beneficially owns 15,284,286 shares of our common stock, or approximately
13.71%, of our common stock. Shi Jian Yin, an executive officer and a director,
also beneficially owns 11,100,000 shares of our common stock, or approximately
9.95%, of our common stock. Our executive officers and directors as a group have
the ability to control up to 25.45% of our voting stock. As long as management
owns such a significant percentage of our common stock, our other stockholders
may be unable to affect or change the management or the direction of our company
without their support. If they act together, our executive officers and
directors will be able to exert significant influence over the outcome of all
corporate actions requiring stockholder approval, including the election of
directors, amendments to our certificate of incorporation and approval of
significant corporate transactions.
Our
net future income, if any, could be adversely affected based on share-based
compensation granted to employees and consultant, and changes in the fair value
of the Series A and Series B warrants outstanding.
The
Company has granted and will continue to grant options to purchase common stock
of the Company to employees and consultants in accordance with the terms of the
Company’s Amended and Restated 2007 Equity Incentive Plan and 2008 Restricted
Stock Plan. The Company accounts for options and restricted shares granted to
our directors and employees in accordance with the Financial Accounting
Standards Board (“FASB”) ASC 718, “Compensation – Stock Compensation”, formerly
referenced as Statement of Financial Accounting Standards No. 123 (Revised
2004), “Share-Based Payments”, or SFAS 123R, which requires all companies to
recognize, as an expense, the fair value of share options, restricted shares and
other share-based compensation to employees. As a result, we have to account for
compensation costs for all share options and restricted shares using a
fair-value based method and recognize expenses in our consolidated statement of
operations in accordance with the relevant rules under generally accepted
accounting principles in the United States of America ("GAAP"), which may have a
material and adverse effect on our reported earnings. If we try to avoid
incurring these compensation costs, we may not be able to attract and retain key
personnel, as options to purchase common stock are an important employee
recruitment and retention tool. As we grant employee options to purchase common
stock or other share-based compensation, our net income may be adversely
affected by such grants.
During
March 2007, in conjunction with the issuance of $17,300,000 in convertible
debt, the board of directors approved the issuance of Series A and Series B
Warrants to purchase shares of the Company’s common stock. The Series A and
Series B Warrants are classified as a liability, as required by FASB ASC 480,
“Distinguishing Liabilities from Equity”, formerly referenced as SFAS No. 150,
“Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity”, due to the terms of the warrant agreement which
contains a cash redemption provision in the event of a fundamental transaction.
These terms remain unchanged upon the closing of the transactions contemplated
in the Conversion Agreement discussed above. Accordingly, the warrants will
continue to be measured at fair value at each reporting period and the changes
in fair value of the warrants are recorded in the account “gain (loss) on
fair market value of warrant liability” in our accompanying consolidated
statements of operations. As a result, our net income could be adversely
affected if there is a loss on the fair market value of the warrant
liability.
Existing
regulations and changes to such regulations may present technical, regulatory
and economic barriers to the purchase and use of solar power products, which may
significantly reduce demand for our products.
The
market for electricity generation products is heavily influenced by foreign,
federal, state and local government regulations and policies concerning the
electric utility industry, as well as internal policies and regulations
promulgated by electric utilities. These regulations and policies often relate
to electricity pricing and technical interconnection of customer-owned
electricity generation. In the United States and in a number of other countries,
these regulations and policies are being modified and may continue to be
modified. Customer purchases of, or further investment in the research and
development of, alternative energy sources, including solar power technology,
could be deterred by these regulations and policies, which could result in a
significant reduction in the potential demand for our PV products.
The
Company is subject to a variety of foreign, federal, state and local
governmental laws and regulations related to the purchase, storage, use and
disposal of hazardous materials.
In its
manufacturing process, the Company uses, generates and discharges toxic,
volatile or otherwise hazardous chemicals and wastes in its manufacturing
activities. We believe that we have properly handled our hazardous materials and
wastes and have appropriately remediated any contamination at any of our
premises. If the Company fails to comply with present or future environmental
laws and regulations, we could be subject to fines, suspension of production or
a cessation of operations. In addition, under some foreign, federal, state and
local statutes and regulations, a governmental agency may seek recovery and
response costs from operators of property where releases of hazardous substances
have occurred or are ongoing, even if the operator was not responsible for the
release or otherwise was not at fault. Any failure by us to control the use of
or to restrict adequately the discharge of, hazardous substances could subject
us to substantial financial liabilities, operational interruptions and adverse
publicity, any of which could materially and adversely affect our business,
results of operations and financial condition.
Because
a majority of our products are sold with warranties extending for 25 years,
problems with product quality or product performance may cause us to incur
warranty expenses. If these expenses are significant, they could have a material
adverse affect on our business and results of operations.
The
practice in our industry is to offer long product warranties. We offer a product
warranty with a term of 25 years. Due to the long warranty period, we bear
the risk of extensive warranty claims long after we have shipped the product and
recognized the revenues. Because our products are new to the market, we are not
able to evaluate their performance for the entire warranty period before we
offer them for sale. If our products fail to perform as we expect them to and we
are required to cover a significant number of warranty claims, the expenses
related to such claims could have a material adverse affect on our business and
results of operations.
The
reduction or elimination of government economic incentives could prevent us from
achieving sales and market share.
We
believe that the near-term growth of the market for PV products depends in large
part on the availability and size of government and economic incentives. The
reduction or elimination of government economic incentives may adversely affect
the growth of this market or result in increased price competition, which could
prevent us from achieving sales and market share.
Today,
the cost of solar power exceeds the cost of power furnished by the electric
utility grid in many locations. As a result, federal, state and local government
bodies in many countries, most notably Germany, Spain, Japan and the United
States, have provided incentives in the form of rebates, tax credits and other
incentives to end users, distributors, system integrators and manufacturers of
solar power products to promote the use of solar energy in on-grid applications
and to reduce dependency on fossil fuels. These government economic incentives
could be reduced or eliminated altogether, which would significantly harm our
business as we have marketed products in those economies.
We
are subject to new corporate governance and internal control reporting
requirements, and our costs related to compliance with, or our failure to comply
with existing and future requirements, could adversely affect our
business.
We face
new corporate governance requirements under the Sarbanes-Oxley Act of 2002, as
well as new rules and regulations subsequently adopted by the SEC and the Public
Company Accounting Oversight Board. These laws, rules and regulations continue
to evolve and may become increasingly stringent in the future. In particular,
under rules proposed by the SEC, we are required to include management’s report
on internal controls as part of our annual report for the fiscal year ending
September 30, 2008 pursuant to Section 404 of the Sarbanes-Oxley Act.
Furthermore, under the applicable rules, an attestation report on our internal
controls from our independent registered public accounting firm will be included
as part of our annual report for the fiscal year ending September 30, 2010.
The financial cost of compliance with these laws, rules and regulations is
expected to be substantial. We cannot assure you that we will be able to fully
comply with these laws, rules and regulations that address corporate governance,
internal control reporting and similar matters. Failure to comply with these
laws, rules and regulations could materially adversely affect our reputation,
financial condition and the value of our securities.
Our
management discovered material weaknesses in our internal controls over
financial reporting that, if not properly remediated, could result in material
misstatements in our financial statements, which could cause inventors to lose
confidence in our reported financial information and have a negative effect on
the trading price of our stock.
In
connection with our 2009 financial statement audit, our management identified
material weaknesses. The weaknesses were related to the Company’s
lack of a sufficient number of finance personnel with an appropriate level of
knowledge, experience and training in the application of GAAP as well as
inadequate controls over the closing and reporting processes, which resulted in
audit adjustments to our fiscal year 2009 annual consolidated financial
statements. A discussion of the material weaknesses in our internal
control over financial reporting and management’s remediation efforts is
available herein under the subheading “Management’s Report on Internal Control
over Financial Reporting”.
Material
weaknesses in internal control over financial reporting may materially impact
our reported financial results and the market price of our stock could
significantly decline. Additionally, adverse publicity related to a material
failure of internal control over financial reporting could have a negative
impact on our reputation and business.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our anticipated products and materially and adversely
affect our competitive position.
All of
our business operations are conducted in China and most of our sales are made in
China, although we are in the process of attempting to establish US distribution
for our future products. Accordingly, our business, financial condition, results
of operations and prospects are affected significantly by economic, political
and legal developments in China. The Chinese economy differs from the economies
of most developed countries in many respects, including:
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The
amount of government involvement;
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The
level of development;
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The
control of foreign exchange; and
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The
allocation of resources.
|
While the
Chinese economy has grown significantly in the past 20 years, the growth
has been uneven, both geographically and among various sectors of the economy.
The PRC government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall Chinese economy, but may also have a negative effect on us. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the PRC
government. The continued control of these assets and other aspects of the
national economy by the PRC government could materially and adversely affect our
business. The PRC government also exercises significant control over Chinese
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by the PRC
government to slow the pace of growth of the Chinese economy could result in
decreased capital expenditure by solar energy users, which in turn could reduce
demand for our anticipated products.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
renewable energy investments and expenditures in China, which in turn could lead
to a reduction in the demand for our anticipated products and consequently have
a material adverse effect on our businesses.
Uncertainties
with respect to the Chinese legal system could have a material adverse effect on
us.
We
conduct substantially all of our business through a subsidiary in China. This
subsidiary is generally subject to laws and regulations applicable to foreign
investment in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential value. Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
since these laws and regulations are relatively new and the PRC legal system
continues to rapidly evolve, the interpretations of many laws, regulations and
rules are not always uniform and enforcement of these laws, regulations and
rules involve uncertainties, which may limit legal protections available to us.
In addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management.
We
conduct a substantial portion of our operations in China and the majority of our
assets are located in China. In addition, all of our executive officers reside
within China. As a result, it may not be possible to effect service of process
within the United States or in China against us or upon our executive officers,
including with respect to matters arising under United States federal securities
laws or applicable state securities laws. Moreover, there is uncertainty that
the courts of China would enforce judgments of United States courts against us
or our directors and officers based on the civil liability provisions of the
securities laws of the United States or any state, or entertain an original
action brought in China based upon the securities laws of the United States or
any state.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
Foreign
exchange transactions by our Shanghai subsidiary under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of PRC governmental authorities, including the SAFE. We will
need to fund our Shanghai subsidiary by means of capital
contributions. We cannot assure you that we will be able to obtain
government approvals on a timely basis, if at all, with respect to future
capital contributions by the U.S. Company to our Shanghai subsidiary. If we fail
to receive such approvals, our ability to use the proceeds we have received from
our fund raising to capitalize our PRC operations may be negatively affected,
which could materially and adversely affect our liquidity and our ability to
fund and expand our business.
RISKS
RELATED TO AN INVESTMENT IN OUR SECURITIES
Our
stock price is volatile. There is no guarantee that the shares you purchase will
appreciate in value or that you will be able to sell your shares at a price that
is greater than the price you paid for them.
The
trading price of our common stock has been and continues to be subject to
fluctuations. The stock price may fluctuate in response to a number of events
and factors, such as quarterly variations in operating results, the operating
and stock performance of other companies that investors may deem comparable and
news reports relating to trends in the marketplace, among other factors.
Significant volatility in the market price of our common stock may arise due to
factors such as:
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our
developing business;
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•
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a
continued negative cash flow;
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•
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relatively
low price per share;
|
|
•
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relatively
low public float;
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•
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variations
in quarterly operating results;
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•
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general
trends in the industries in which we do
business;
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•
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the
number of holders of our common stock;
and
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•
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the
interest of securities dealers in maintaining a market for our common
stock.
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We cannot
guarantee you that the shares you purchase will appreciate in value or that you
will be able to sell the shares at a price equal to or greater than what you
paid for them.
The
OTC Bulletin Board is a quotation system, not an issuer listing service, market
or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is
not as efficient as buying and selling stock through an exchange. As a result,
it may be difficult for you to sell your common stock or you may not be able to
sell your common stock for an optimum trading price.
The OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices and volume limitations in over-the-counter securities. Because
trades and quotations on the OTC Bulletin Board involve a manual process, the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmations may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.
When
fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Lower trading volumes in a security may
result in a lower likelihood of an individual’s orders being executed, and
current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.
Orders
for OTC Bulletin Board securities may not be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices. The dealer’s spread (the difference between the bid and
ask prices) may be large and may result in substantial losses to the seller of
securities on the OTC Bulletin Board if the common stock or other security must
be sold immediately. Further, purchasers of securities may incur an immediate
“paper” loss due to the price spread. Moreover, dealers trading on the OTC
Bulletin Board may not have a bid price for securities bought and sold through
the OTC Bulletin Board. Due to the foregoing, demand for securities that are
traded through the OTC Bulletin Board may be decreased or
eliminated.
We
are subject to the penny stock rules and these rules may adversely affect
trading in our common stock.
Our
common stock is a “low-priced” security under rules promulgated under the
Securities Exchange Act of 1934. In accordance with these rules, broker-dealers
participating in transactions in low-priced securities must first deliver a risk
disclosure document which describes the risks associated with such stocks, the
broker-dealer duties in selling the stock, the customer’s rights and remedies
and certain market and other information. Furthermore, the broker-dealer must
make a suitability determination approving the customer for low-priced stock
transactions based on the customer’s financial situation, investment experience
and objectives. Broker-dealers must also disclose these restrictions in writing
to the customer, obtain specific written consent from the customer, and provide
monthly account statements to the customer. The effect of these restrictions
probably decreases the willingness of broker-dealers to make a market in our
common stock, decreases liquidity of our common stock and increases transaction
costs for sales and purchases of our common stock as compared to other
securities.
There
may be a limited market for our securities and we may fail to qualify for
another listing.
In the
event that our common stock fails to qualify for continued inclusion on OTC
Bulletin Board our common stock could become quoted in what are commonly
referred to as the “pink sheets.” Under such circumstances, it may be more
difficult to dispose of, or to obtain accurate quotations, for our common stock,
and our common stock would become substantially less attractive to certain
investors, such as financial institutions and hedge funds.
We
have no plans to pay dividends.
We have
not paid any cash dividends to date and do not expect to pay dividends for the
foreseeable future. We intend to retain earnings, if any, as necessary to
finance the operation and expansion of our business.
We
have raised substantial amounts of capital in private placements and if we
inadvertently failed to comply with the applicable securities laws, ensuing
rescission rights or lawsuits would severely damage our financial
position.
Some
securities offered in our private placements were not registered under the
Securities Act of 1933, as amended (the “Securities Act”), or any state “blue
sky” law in reliance upon exemptions from such registration requirements. Such
exemptions are highly technical in nature and if we inadvertently failed to
comply with the requirements or any of such exemptions, investors would have the
right to rescind their purchase of our securities or sue for damages. If one or
more investors were to successfully seek such rescission or prevail in any such
suit, we would face severe financial demands that could materially and adversely
affect our financial position. Financings that may be available to us under
current market conditions frequently involve sales at prices below the prices at
which our common stock currently is reported on the OTC Bulletin Board, as well
as the issuance of warrants or convertible securities at a discount to market
price.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM
2. DESCRIPTION OF PROPERTY
All of
our properties are leased and we do not own any real property.
We lease
a 45,601 square foot manufacturing and research facility in Shanghai’s Jinqiao
Modern Science and Technology Park. The lease expires on February 19, 2011.
The termination clause in the agreement requires a notice of three months.
Monthly costs are $21,000. We leased the second manufacturing facility with
21,506 square feet with monthly rent of $11,000. The lease expires in
August 2012.
The
Company also has an operating lease for 9,588 square foot of office space
in Shanghai, at a monthly cost of $34,000. The lease expires in May 2010,
can be renewed with a three-month advance notice, and cannot be terminated prior
to expiration.
Finally,
the Company leases 678 square feet of office space in Mountain View, in Northern
California’s Silicon Valley, to handle our United States
operations.
We
consider these facilities adequate to meet our current needs.
ITEM
3. LEGAL PROCEEDINGS
From time
to time, we may be engaged in various legal proceedings incidental to our normal
business activities. Although the results of litigation and claims cannot be
predicted with certainty, we believe the final outcome of such matters will not
have a material adverse effect on its financial position, results of operations
or cash flows.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the Over-The-Counter Bulletin Board (“OTCBB”)
operated by the Financial Industry Regulatory Authority (FINRA) under the symbol
“SOEN”. The following table shows, for the periods indicated, the high and low
closing prices of common stock.
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Year Ended September 30,
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Year Ended September 30,
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2009
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2008
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High
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Low
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High
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Low
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First
Quarter
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$
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0.40
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$
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0.17
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$
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1.30
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$
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0.82
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Second
Quarter
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$
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0.26
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$
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0.12
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$
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1.65
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$
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0.47
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Third
Quarter
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$
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0.45
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$
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0.19
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$
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0.86
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$
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0.55
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Fourth
Quarter
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$
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0.44
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$
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0.28
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$
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0.69
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$
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0.40
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As of
January 6, 2010, there were 49 stockholders of record of the common stock (which
does not include the number of persons or entities holding stock in nominee or
street name through various brokerage firms).
Dividends
We have
neither declared nor paid any cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. Our current policy
is to retain any earnings in order to finance the expansion of our operations.
Our Board of Directors will determine future declaration and payment of
dividends, if any, in light of the then-current conditions they deem relevant
and in accordance with applicable corporate law.
Authorized
Shares
On May 5,
2008, the Company’s stockholders approved an increase of the Company’s
authorized capital stock from 200 million common shares with a par value of
$0.001 to 400 million common shares with a par value of $0.001. The increase in
the Company’s authorized capital was effected in conjunction with the Company’s
reincorporation into the State of Delaware.
Amended
and Restated 2007 Equity Incentive Plan
On
September 24, 2007, our Board of Directors approved the adoption of the
2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the
issuance of a maximum of 10 million shares of common stock in connection
with awards under the 2007 Plan. Such awards may include stock options,
restricted stock purchase rights, restricted stock bonuses and restricted stock
unit awards. The 2007 Plan may be administered by the Company’s Board of
Directors or a committee duly appointed by the Board of Directors and has a term
of 10 years. Participation in the 2007 Plan is limited to employees,
directors and consultants of the Company and its subsidiaries and other
affiliates. Options granted under the 2007 Plan must have an exercise price per
share not less than the fair market value of the Company’s common stock on the
date of grant. Options granted under the 2007 Plan may not have a term exceeding
10 years. Awards will vest upon conditions established by the Board of
Directors or it’s duly appointed Committee. Subject to the requirements and
limitations of section 409A of the Internal Revenue Code of 1986, as amended, in
the event of a Change in Control (as defined in the 2007 Plan), the Board of
Directors may provide for the acceleration of the exercisability or vesting
and/settlement of any award, the Board of Directors may provide for a cash-out
of awards or the Acquirer (as defined in the 2007 Plan) may either assume or
continue the Company’s rights and obligations under any awards.
On
February 5, 2008, the Board of Directors adopted the Amended and Restated 2007
Equity Incentive Plan (the “Amended 2007 Plan”), which increases the number of
shares authorized for issuance from 10 million to 15 million shares of common
stock and was to be effective upon approval of the Company’s stockholders and
upon the Company’s reincorporation into the State of Delaware.
On May 5,
2008, at the Company’s Annual Meeting of Stockholders, the Company’s
stockholders approved the Amended 2007 Plan. On August 13, 2008, the Company
reincorporated into 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 2007
Plan to $0.62, determined in accordance with the 2007 Plan as the closing price
for shares of Common Stock on the Over-the-Counter Bulletin Board on the date of
the repricing.
As of
September 30, 2009, the Board of Directors has granted options to purchase
2,940,000 shares of our common stock to our employees, director and consultants
pursuant to the Amended 2007 Plan.
2008
Restricted Stock Plan
On August
19, 2008, Mr. Leo Young, our Chief Executive Officer, entered into a Stock
Option Cancellation and Share Contribution Agreement with Jean Blanchard, a
former officer, to provide for (i) the cancellation of a stock option agreement
by and between Mr. Young and Ms. Blanchard dated on or about March 1, 2006 and
(ii) the contribution to the Company by Ms. Blanchard of the remaining
25,250,000 shares of common stock underlying the cancelled Option
Agreement.
On the
same day, an Independent Committee of the Company’s Board adopted the 2008
Restricted Stock Plan (the “2008 Plan”) providing for the issuance of 25,250,000
shares of restricted common stock to be granted to the Company’s employees
pursuant to forms of restricted stock agreements.
The 2008
Plan provides for the issuance of a maximum of 25,250,000 shares of restricted
stock in connection with awards under the 2008 Plan. The 2008 Plan is
administered by the Company’s Compensation Committee, a subcommittee of our
Board of Directors, and has a term of 10 years. Participation is limited to
employees, directors and consultants of the Company and its subsidiaries and
other affiliates. During any period in which shares acquired pursuant
to the 2008 Plan remain subject to vesting conditions, the participant shall
have all of the rights of a stockholder of the Company holding shares of stock,
including the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares. If a participant
terminates his or her service for any reason (other than death or disability),
or the participant’s service is terminated by the Company for cause, then the
participant shall forfeit to the Company any shares acquired by the participant
which remain subject to vesting Conditions as of the date of the participant’s
termination of service. If a participant’s service is terminated by the Company
without cause, or due to the death or disability of the participant, then the
vesting of any restricted stock award shall be accelerated in full as of the
effective date of the participant’s termination of service.
Equity
Compensation Plan Information
Plan Category
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Number of securities to
be
issued upon exercise
of
outstanding options,
warrants and rights (a)
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Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
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Number of securities
remaining available for
future
issuance under
equity
compensation plans
(excluding securities
reflected in column a) (c)
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Equity
compensation plans approved by security holders
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2,940,000
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(1)
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$
|
0.55
|
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12,060,000
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Equity
compensation plans not approved by security holders
|
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—
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$
|
—
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—
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(1)
Represents options to purchase common stock issued pursuant to the terms of 2007
Plan, as amended and restated.
a — Our
common stock is currently quoted by the Over-The-Counter Bulletin Board under
the symbol “SOEN”.
b — We
have approximately 49 record holders on January 6, 2010.
c — No
cash dividend has been declared.
Rules Governing
Low-Price Stocks that May Affect Our Stockholders’ Ability to Resell Shares of
Our Common Stock
Our stock
trades under the symbol “SOEN” on FINRA’s OTCBB.
Quotations
on the OTCBB reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not reflect actual transactions. Our common stock may be
subject to certain rules adopted by the SEC that regulate broker-dealer
practices in connection with transactions in “penny stocks”. Penny stocks
generally are securities with a price of less than $5.00, other than securities
registered on certain national exchanges or quoted on the NASDAQ system,
provided that the exchange or system provides current price and volume
information with respect to transaction in such securities. The additional sales
practice and disclosure requirements imposed upon broker-dealers may discourage
broker-dealers from effecting transactions in our shares which could severely
limit the market liquidity of the shares and impede the sale of our shares in
the secondary market.
The penny
stock rules require broker-dealers, prior to a transaction in a penny stock not
otherwise exempt from the rules, to make a special suitability determination for
the purchaser to receive the purchaser’s written consent to the transaction
prior to sale, to deliver standardized risk disclosure documents prepared by the
SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock. In addition,
the penny stock regulations require the broker-dealer to deliver, prior to any
transaction involving a penny stock, a disclosure schedule prepared by the SEC
relating to the penny stock market, unless the broker-dealer or the transaction
is otherwise exempt. A broker-dealer is also required to disclose commissions
payable to the broker-dealer and the registered representative and current
quotations for the securities. Finally, a broker-dealer is required to send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer’s account and information with respect to the limited
market in penny stocks.
ITEM
6. SELECTED FINANCIAL DATA
As a
Smaller Reporting Company as defined by 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 6.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. 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 involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from
those stated herein. Factors that might cause or contribute to such differences
include, but are not limited to, those discussed in Item 1A, “Risks Related
to Our Business,” “Risks Related to Doing Business in China” and “Risks Related
to an Investment in Our Securities” as well as in Item 1, “Business” and
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this Annual Report on Form 10-K. You should
carefully review these risks and also review the risks described in other
documents we file from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q that we will file. You are
cautioned not to place undue reliance on these forward-looking statements, and
we expressly assume no obligations to update the forward-looking statements in
this report that occur after the date hereof.
Company
Description and Overview
We
originally incorporated under the laws of the State of Nevada on July 7,
2004 and reincorporated to the State of Delaware on August 13, 2008. We 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 consisted of one 25MW solar cell production line and 50MW of solar
module production facility. Our 67,107 square foot manufacturing facility is
located in Shanghai, China.
Our solar
cells and modules are sold under the brand name “SolarE”. Our total
revenue for fiscal year 2009 was $32.8 million and our end users are mainly in
Europe. In anticipation of entering the US market, we had established
a marketing, purchasing and distribution office in Mountain View, California.
Our goal is to become a worldwide supplier of PV cells and modules.
We
purchase our key raw materials, silicon wafer, from the spot
market. We do not have a long term contract with any silicon
supplier. However, on August 21, 2008, we entered into an equity
purchase agreement with 21-Century Silicon, Inc., a polysilicon manufacturer
based in Dallas, Texas (“21-Century Silicon”) to acquire two million shares of
common stock, for $1 million cash. As of September 30, 2009, the two million
shares acquired by us constituted approximately 5.5% of 21-Century Silicon’s
outstanding equity. Related to the equity purchase agreement, we also
signed a memorandum of understanding with 21-Century Silicon for a four-year
supply framework agreement for polysilicon shipments. Through its proprietary
technology, processes and methods, 21-Century Silicon is planning to manufacture
solar-grade polysilicon at a lower manufacturing and plant setup cost, as well
as a shorter plant setup time than those of its major competitors. If 21-Century
Silicon's manufacturing goals are met, 21-Century Silicon’s customers, including
us, will benefit from the cost advantages and will expect to receive a
high-purity product at a price significantly lower than that offered elsewhere
within the industry.
On April
27, 2009, we entered into a Joint Venture Agreement (the “JV Agreement”)
with Jiangsu Shunda Semiconductor Development Co., Ltd. (“Jiangsu Shunda”) to
form a joint venture in the United States by forming a new company, to be
known as Shunda-SolarE Technologies, Inc. (the “Joint Venture Company”), in
order to jointly pursue opportunities in the United States solar market.
After its formation, the Joint Venture Company’s name was later changed to
SET-Solar Corp.
Pursuant
to the terms of the JV Agreement, Jiangsu Shunda owns 55% of the Joint Venture
Company, we own 35% of the Joint Venture Company and the remaining 10% of the
Joint Venture Company is owned by the Joint Venture Company’s
management. The Joint Venture Company’s Board of Directors consist of
five directors: three of the directors are nominated by Jiangsu Shunda and two
of whom were nominated by us. Furthermore, Mr. Yunda Ni, the
President of Jiangsu Shunda, serves as the Joint Venture Company’s Chairman of
the Board and Mr. Leo Shi Young, our Chief Executive Officer serves as the Joint
Venture Company’s Vice Chairman of the Board. Jiangsu Shunda is
responsible for managing the Joint Venture Company in China and we are
responsible for the managing the Joint Venture Company in the United
States. The JV Agreement is valid for 18 months.
SET-Solar
Corp appointed Roland Chu, an experienced Silicon Valley entrepreneur as Chief
Executive Officer. The Joint Venture team had made significant progress during
the fiscal year 2009. It obtained the a California Solar Initiative listing,
which enabled SET-Solar Corp to penetrate multiple sectors of the PV market in
the United States. SET Solar’s strategy with customers has been to move beyond
simply supplying solar panels to offer a more comprehensive service solution
that includes inverters and other accessories, as well as financing and leasing
options. SET-Solar Corp also made a very successful appearance at the Solar
Power International Conference from October 27 to October 29, 2009 at the
Anaheim Convention Center in Anaheim, California. SET-Solar Corp exhibited its
polysilicon material, silicon ingots and wafers produced by Jiangsu Shunda and
high-efficiency solar cells and high-performance solar modules produced by Solar
EnerTech.
In
December 2006, we entered into an agreement with Shanghai University to
jointly operate a research facility to study various aspects of advanced PV
technology. Our collaboration with Shanghai University is for shared investment
in research and development on fundamental and applied technologies 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. It is our responsibility to provide funding,
personnel and facilities for conducting research and testing. Research and
development achievements from this joint research and development agreement will
be available for use by both parties. We are entitled to the intellectual
property rights, including copyrights and patents, obtained as a result of this
research. The research and development we will undertake pursuant to this
agreement includes the following:
|
•
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we
plan to research and test theories of PV, thermo-physics, physics of
materials and chemistry;
|
|
•
|
we
plan to develop efficient and ultra-efficient PV cells with
light/electricity conversion rates ranging from 20% to
35%;
|
|
•
|
we
plan to develop environmentally friendly high conversion rate
manufacturing technology of chemical compound film PV cell
materials;
|
|
•
|
we
plan to develop highly reliable, low-cost manufacturing technology and
equipment for thin film PV cells;
|
|
•
|
we
plan to research and develop key material for low-cost flexible film PV
cells and non-vacuum technology;
and
|
|
•
|
we
plan to research and develop key technology and fundamental theory for
third-generation PV cells.
|
To date,
we have raised money for the development of our business through the sale of our
equity securities. On January 12, 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 original exercise price of the warrants is
$1.00 per share. Pursuant to the Warrant Amendment, the exercise price has been
reduced to $0.15. 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. In
March 2007 we also raised $17.3 million through sales of units
consisting of our Series A and Series B Convertible Notes and
warrants. As discussed elsewhere, the Series A and Series B Convertible Notes
have been converted into shares of our common stock pursuant to the Conversion
Agreement and the Series A and Series B warrants exercise price have been
reduced to $0.15 pursuant to the Warrant Amendment. The proceeds were used to
complete our production line and working capital purpose.
Our
future operations are dependent upon 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.
Results
of Operations
Comparison
of the Fiscal Years Ended September 30, 2009 and 2008
Revenues,
Cost of Sales and Gross Margin
|
|
Year Ended September 30, 2009
|
|
|
Year Ended September 30, 2008
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of change
|
|
Sales
|
|
$
|
32,835,000
|
|
|
|
100.0
|
%
|
|
$
|
29,412,000
|
|
|
|
100.0
|
%
|
|
$
|
3,423,000
|
|
|
|
11.6
|
%
|
Cost
of sales
|
|
|
(33,876,000
|
)
|
|
|
(103.2
|
)%
|
|
|
(33,104,000
|
)
|
|
|
(112.6
|
)%
|
|
|
(772,000
|
)
|
|
|
2.3
|
%
|
Gross
loss
|
|
$
|
(1,041,000
|
)
|
|
|
(3.2
|
)%
|
|
$
|
(3,692,000
|
)
|
|
|
(12.6
|
)%
|
|
$
|
2,651,000
|
|
|
|
(71.8
|
)%
|
For the
fiscal year ended September 30, 2009, the Company reported total revenue of
$32.8 million, representing an increase of $3.4 million or 11.6% compared to
$29.4 million of revenue in the same period of fiscal year 2008. The increase in
revenue resulted from increases in solar module shipments from 6.67 MW in fiscal
year 2008 to 10.50MW in fiscal year 2009, partially offset by a 25% decrease in
average selling prices for solar modules from $4.10 per watt in fiscal year 2008
to $3.07 per watt in fiscal year 2009. In fiscal year 2009, we recruited an
experienced sales director in April 2009 and adjusted the reward system for the
sales team which contributed to higher sales. Further, during the last quarter
of fiscal year 2009, we acquired a new key customer, specifically a 10.00MW
contract with a German system integrator contributing to the increase in sales
volume.
For the
fiscal year ended September 30, 2009, we incurred a negative gross margin of
$1.0 million compared to $3.7 million in the same period of fiscal year 2008.
The gross margin improvement is more apparent if a quarter-by-quarter comparison
is made. We began generating a positive gross margin, 4.8% as percentage of net
sales in the third quarter of fiscal year 2009, and improved our gross margin to
16.0% as percentage of net sales in the fourth quarter of fiscal year 2009,
while the gross margin in the first and second quarters of fiscal year 2009 was
negative 46% and negative 30%, respectively. The improvement in the gross profit
margin was primarily due to the decrease in raw material prices, specifically
the silicon wafer prices which offset the decrease in module sales prices.
Silicon wafer prices decreased approximately 65% from RMB 46/piece during fiscal
year 2008 to RMB16/piece during fiscal year 2009, as compared to module sales
prices that decreased approximately 41% from EUR2.2/watt during fiscal year 2008
to EUR1.3/watt during fiscal year 2009. A special team led by our Chief
Financial Officer spent significant amount of time and efforts on securing high
quality key raw materials on the spot market with favorable credit terms. The
Company also promoted a lean and zero inventory system to control quality and
unqualified products. Further, the Company recruited an experienced sales
director from the industry and built up a strong sales and marketing team, which
resulted in new key customers. The increased sales volume also resulted in lower
average fixed manufacturing cost. In addition, the Company engaged in various
cost cutting programs and renegotiated most of the contracts to reduce operating
expenses.
Selling,
general and administrative
|
|
Year Ended September 30, 2009
|
|
|
Year Ended September 30, 2008
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of change
|
|
Selling,
general and administrative
|
|
$
|
9,224,000
|
|
|
|
28.1
|
%
|
|
$
|
11,778,000
|
|
|
|
40.0
|
%
|
|
$
|
(2,554,000
|
)
|
|
|
(21.7
|
)%
|
For the
fiscal year ended September 30, 2009, we incurred selling, general and
administrative expense of $9.2 million, representing a decrease of $2.6 million
or 21.7% from $11.8 million in the same period of fiscal year 2008. Selling,
general and administrative expense as a percentage of net sales for the fiscal
year ended September 30, 2009 decreased to 28.1% from 40.0% for fiscal year
2008. The decrease in the selling, general and administrative expenses were
primarily due to a decrease of $2.3 million in stock-based compensation expenses
related to employee options and restricted stock from $5.3 million for fiscal
year ended September 30, 2008 to $3.0 million for the fiscal year ended
September 30, 2009, which resulted from termination of several senior executives
and forfeiture rate adjustment as a result of our recent management team
restructuring.
Research
& development
|
|
Year Ended September 30, 2009
|
|
|
Year Ended September 30, 2008
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of change
|
|
Research
and development
|
|
$
|
700,000
|
|
|
|
2.1
|
%
|
|
$
|
702,000
|
|
|
|
2.4
|
%
|
|
$
|
(2,000
|
)
|
|
|
(0.3
|
)%
|
Research
and development expenses in the fiscal years ended September 30, 2009 and 2008
were flat at $0.7 million. Research and development expenses as a percentage of
net sales for the fiscal years ended September 30, 2009 and 2008 were 2.1% and
2.4%, respectively. The research and development expenses primarily relate to
personnel expenses, stock-based compensation expenses and our commitments to
fund our research and development contract with Shanghai
University.
Loss
on debt extinguishment
|
|
Year Ended September 30, 2009
|
|
|
Year Ended September 30, 2008
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of change
|
|
Loss
on debt extinguishment
|
|
$
|
527,000
|
|
|
|
1.6
|
%
|
|
$
|
4,240,000
|
|
|
|
14.4
|
%
|
|
$
|
(3,713,000
|
)
|
|
|
(87.6
|
)%
|
For the
fiscal year ended September 30, 2009, we incurred a loss on debt extinguishment
of $0.5 million. The loss of $0.5 million was related to converting some of the
Series A and B Convertible Notes into common stock. For the fiscal year ended
September 30, 2008, we incurred a loss on debt extinguishment of $4.2 million.
That loss was the result of a loss of $4.6 million related to converting Series
A and B Convertible Notes into common stock, partially offset by a gain of
approximately $0.4 million on the settlement of loan due to Coach Capital LLC
and Infotech Essentials Ltd. The decrease in loss on debt extinguishment
was mainly due to less Series A and B Convertible Notes that were converted into
the Company’s common shares. A total of Series A and B Convertible Notes were
converted into the Company’s common shares for fiscal years ended September 30,
2009 and 2008 were $0.9 million and $4.9 million, respectively.
Impairment
Loss on Property and Equipment
|
|
Year Ended September 30, 2009
|
|
|
Year Ended September 30, 2008
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
%
of change
|
|
Impairment
loss on property and equipment
|
|
$
|
960,000
|
|
|
|
2.9
|
%
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
960,000
|
|
*NM
|
|
*NM=
Not measureable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the fourth quarter of fiscal year 2009 we recognized an impairment loss on
property and equipment of $960,000 on the idle production equipment which was
below standard quality.
Other
income (expense)
|
|
Year Ended September 30, 2009
|
|
|
Year Ended September 30, 2008
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of change
|
|
Interest
income
|
|
$
|
16,000
|
|
|
|
0.0
|
%
|
|
$
|
87,000
|
|
|
|
0.3
|
%
|
|
$
|
(71,000
|
)
|
|
|
(81.6
|
)%
|
Interest
expense
|
|
|
(3,998,000
|
)
|
|
|
(12.2
|
)%
|
|
|
(1,035,000
|
)
|
|
|
(3.5
|
)%
|
|
|
(2,963,000
|
)
|
|
|
286.3
|
%
|
Gain
on change in fair market value of compound embedded
derivative
|
|
|
770,000
|
|
|
|
2.3
|
%
|
|
|
13,767,000
|
|
|
|
46.8
|
%
|
|
|
(12,997,000
|
)
|
|
|
(94.4
|
)%
|
Gain
on change in fair market value of warrant liability
|
|
|
1,344,000
|
|
|
|
4.1
|
%
|
|
|
13,978,000
|
|
|
|
47.5
|
%
|
|
|
(12,634,000
|
)
|
|
|
(90.4
|
)%
|
Other
income (expense)
|
|
|
139,000
|
|
|
|
0.4
|
%
|
|
|
(846,000
|
)
|
|
|
(2.9
|
)%
|
|
|
985,000
|
|
|
|
(116.4
|
)%
|
Total
other income (expense)
|
|
$
|
(1,729,000
|
)
|
|
|
(5.3
|
)%
|
|
$
|
25,951,000
|
|
|
|
88.2
|
%
|
|
$
|
(27,680,000
|
)
|
|
|
(106.7
|
)%
|
For the
fiscal year ended September 30, 2009, total other expenses were $1.7 million,
representing an increase of $27.7 million or 106.7% compared to total other
income of $26.0 million for the prior year. Other expenses as a percentage of
net sales for the fiscal year ended September 30, 2009 changed to negative 5.3%
from positive 88.2%, which is other income as a percentage of net sales for the
fiscal year ended September 30, 2008. In the fiscal year ended September 30,
2009, we recorded a gain on change in fair market value of compound embedded
derivative of $0.8 million and a gain on change in fair market value of warrant
liability of $1.3 million compared to a gain on change in fair market value of
compound embedded derivative of $13.8 million and a gain on change in fair
market value of warrant liability of $14.0 million during the fiscal year ended
September 30, 2008. The decrease in the Company’s stock price is less
significant in the fiscal year ended September 30, 2009 than in the fiscal year
ended September 30, 2008, which resulted in less decrease in the fair value
of the compound embedded derivative and warrant liability and less gains on
change in fair market value of the compound embedded derivative and warrant
liability. We incurred interest expenses of $4.0 million and $1.0 million in the
fiscal years ended September 30, 2009 and 2008, respectively, primarily related
to amortization on discounted convertible notes and deferred financing cost, and
6% interest charges on Series A and B Convertible Notes. Other income of $0.1
million for the fiscal year ended September 30, 2009 and other expense of $0.8
million for the fiscal year ended September 30, 2008 were primarily related to
foreign exchange gain (loss).
Liquidity
and Capital Resources
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,719,000
|
|
|
$
|
3,238,000
|
|
|
$
|
(1,519,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(1,142,000
|
)
|
|
$
|
(10,181,000
|
)
|
|
$
|
9,039,000
|
|
Investing
activities
|
|
|
(383,000
|
)
|
|
|
(10,499,000
|
)
|
|
|
10,116,000
|
|
Financing
activities
|
|
|
-
|
|
|
|
19,887,000
|
|
|
|
(19,887,000
|
)
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
6,000
|
|
|
|
123,000
|
|
|
|
(117,000
|
)
|
Net
decrease in cash and cash equivalents
|
|
$
|
(1,519,000
|
)
|
|
$
|
(670,000
|
)
|
|
$
|
(849,000
|
)
|
As of
September 30, 2009 and 2008, we had cash and cash equivalents of
$1.7 million and $3.2 million, respectively. We will require a significant
amount of cash to fund our operations. 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.
Net cash
used in operating activities were $1.1 million and $10.2 million for the fiscal
years ended September 30, 2009 and 2008, respectively. To present cash flows
from operating activities, net loss for each of the past two years had to be
adjusted for certain significant items. After adjusting for the impact of $1.7
million and $23.4 million for fiscal years 2009 and 2008 respectively resulting
from the change on the fair market value of the compound derivative liabilities
and warrants liabilities, amortization of note discount and deferred financing
cost, and loss on debt extinguishment, the net loss is $12.5 million and $17.8
million for the fiscal year ended September 30, 2009 and September 30, 2008
respectively. The decrease of $9.0 million in net cash used in operating
activities from 2009 to 2008 was mainly attributable to the following
reasons:
|
·
|
The
decrease of $5.3 million in the net loss, after the adjustments related to
the compound derivative liabilities and warrants liabilities, amortization
of note discount and deferred financing cost, and loss on debt
extinguishment, which mainly results from stronger sales generated in the
fiscal year ended September 30,
2009;
|
|
·
|
The
decrease of $0.2 million in the non-cash charges related to depreciation
of property and equipment, stock-based compensation, and the impairment
loss on property and equipment; and
|
|
·
|
Favorable
changes in operating assets of $3.9 million primarily resulting from
higher accounts payable related to inventory, lower VAT receivables, and
lower advance payments for raw material purchases, partially offset by
higher accounts receivable, reflecting the Company’s improved operational
results, coupled with strong reputation and creditability among key raw
material suppliers, which allows us to obtain more favorable payment
terms. Lower advance payments is another change in the industry after the
financial crisis, which changed the previously required 100% cash advance
to secure key raw material (wafer) to zero in the current economic
situation.
|
Net cash
used in investment activities were $0.4 million and $10.5 million in the fiscal
years ended September 30, 2009 and 2008. The decrease of $10.1 million in
net cash used in investing activities was primarily due to lower property and
equipment acquisitions during the fiscal year ended September 30, 2009 compared
to the fiscal year ended September 30, 2008, because our current property and
equipment are adequate to support our productions and we have no plan to expand
our production lines.
There was
no cash provided by financing activities for the fiscal year ended September 30,
2009. Net cash provided by financing activities totaled $19.9 million
for the fiscal year ended September 30, 2008 was mainly due to proceeds in
January 2008 from issuing common stock and warrants, net of financing cost
through a private equity financing.
Future
minimum payments under all non-cancelable lease obligations and payments under
our agreement with Shanghai University are as follows as of September 30,
2009:
|
|
|
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1
to 3 years
|
|
|
4
to 5 year
|
|
|
More than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease
|
|
$
|
1,008,000
|
|
|
$
|
656,000
|
|
|
$
|
352,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Research
and development commitment
|
|
|
3,780,000
|
|
|
|
2,667,000
|
|
|
|
1,113,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
4,788,000
|
|
|
$
|
3,323,000
|
|
|
$
|
1,465,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Our
consolidated financial statements have been prepared on the assumption that the
Company will continue as a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business. The
independent auditor’s report on our financial statements as of and for the
fiscal year ended September 30, 2009 included herein contains an explanatory
paragraph stating that our recurring net losses and negative cash flows from
operations raises substantial doubt about our ability to continue as a going
concern. The fiscal year 2009 consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from uncertainty related to the Company’s ability to continue as a
going concern.
As of
September 30, 2009, we had outstanding convertible notes with a principal
balance of $11.6 million consisting of $2.5 million in principal amount of
Series A Convertible Notes and $9.1 million in principal amount of Series B
Convertible Notes, which were recorded at carrying amount at $3.1 million. These
Notes bear interest at 6% per annum and are due on March 7, 2010.
We only
had $1.7 million in cash and cash equivalents on hand as of September 30, 2009.
On January 7, 2010, we entered into the Conversion Agreement with the holders of
Notes representing at least seventy-five percent of the aggregate principal
amounts outstanding under the Notes to modify the terms of the Notes. Pursuant
to the terms of the Conversion Agreement, the Notes will be automatically
converted into shares of our common stock at a conversion price of $0.15 per
share and shall be amended to eliminate the maximum ownership percentage
restriction prior to such conversion. Under the Conversion Agreement,
the Notes have been amended and election has been taken such that all
outstanding principal, all accrued but unpaid interest, and all accrued and
unpaid Late Charges (as defined in the Notes) with respect to all of the
outstanding Notes have been automatically converted into shares of the Company’s
common stock (the “Conversion”) at a conversion price per share of common stock
of $0.15 effective as of January 7, 2010 (the “Conversion Date”). As
of the Conversion Date, no further payments are owing or payable under the
Notes. As of the Conversion Date, each Note no longer represents a
right to receive any cash payments (including, but not limited to, interest
payments) and only represents a right to receive the shares of common stock into
which such Note has been automatically converted into.
In
connection with the Conversion, on January 7, 2010, we entered into an Amendment
to the Series A, Series B and Series C Warrants (the “Warrant Amendment”) with
the holders of at least a majority of the common stock underlying each of our
outstanding Series A Warrants, Series B Warrants and Series C Warrants
(collectively the “PIPE Warrants”). The Warrant Amendment reduces the exercise
price for all of the PIPE Warrants from $1.21, $0.90 and $1.00, respectively, to
$0.15, removes certain maximum ownership provisions and removes anti-dilution
provisions for lower-priced security issuances.
Historically,
we have incurred operating loss and cash outflows from operations. Since early
fiscal 2009 significant steps were taken to reach operational profitability.
Gross margin has turned into positive territory and expenses have been
significantly reduced. Starting in the third quarter of fiscal year 2009, we
achieved operational profits. Our management expects the current upward trend to
continue and we will generate positive cash flow to support our future
operations in fiscal year 2010.
We
believe that the successful completion of the debt restructuring, along with our
existing cash resources and the cash expected to be generated from sales during
fiscal year 2010 will be sufficient to meet our projected operating requirements
through at least the next twelve months and enable us to continue as a going
concern. If we experience a material shortfall versus our plan for fiscal year
2010, we have a range of actions we can take to remediate the cash shortage,
including but not limited to raising additional funds through debt financing,
including securing a credit facility, entering into secured or unsecured bank
loans, or undertaking equity offerings such a rights offering to existing
shareholders.
However, due to the tight
capital and credit markets, we cannot be sure that external financing will be
available when needed or that, if available, financing will be obtained on terms
favorable to us or our stockholders.
Off-Balance
Sheet Arrangements
On August
21, 2008 the Company entered into an equity purchase agreement in which it
acquired two million shares of common stock of 21-Century Silicon, a polysilicon
manufacturer based in Dallas, Texas, for $1.0 million in cash. The Company is
obligated to acquire an additional two million shares at the same per share
price upon the first polysilicon shipment meeting the quality specifications
determined solely by the Company. On August 21, 2008, the two million shares
acquired by the Company constituted approximately 7.8% of 21-Century Silicon’s
outstanding equity. As of September 30, 2009, the two million shares acquired by
the Company have been diluted and constituted approximately 5.5% of 21-Century
Silicon’s outstanding equity. The equity purchase agreement further provides
that the Company will be obligated to acquire an additional two million shares
upon 21-Century Silicon meeting certain milestones. In connection with the
equity purchase agreement, the Company has also signed a memorandum of
understanding with 21-Century Silicon for a four-year supply framework agreement
for polysilicon shipments. As of September 30, 2009, the Company has not yet
acquired the additional two million shares. On March 5, 2009, the Emerging
Technology Fund created by the State of Texas invested $3.5 million in
21-Century Silicon.
Critical
Accounting Policies
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.
Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the probable future resolution of the uncertainties increase, these
judgments become even more subjective and complex. We have identified the
following accounting policies, described below, as the most important to an
understanding of our current financial condition and results of
operations.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined by the
weighted-average method. Market is defined principally as net realizable value.
Raw material cost is based on purchase costs while work-in-progress and finished
goods are comprised 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 it does
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.
Warranty
Cost
The
Company provides product warranties and accrues for estimated future warranty
costs in the period in which the revenue is recognized. Our standard solar
modules are typically sold with a two-year warranty for defects in materials and
workmanship and a 10-year and 25-year warranty against declines of more than
10.0% and 20.0%, respectively, of the initial minimum power generation capacity
at the time of delivery. The Company therefore maintains warranty reserves to
cover potential liabilities that could arise from our warranty obligations and
accrues the estimated costs of warranties based primarily on management’s best
estimate. The Company has not experienced any material warranty claims to date
in connection with declines of the power generation capacity of its solar
modules and will prospectively revise its actual rate to the extent that actual
warranty costs differ from the estimates. As of September 30, 2009
and 2008, the Company’s warrant liability was $515,000 and $252,000,
respectively. The Company’s warranty costs for the fiscal years ended September
30, 2009 and 2008 were $263,000 and $248,000, respectively. The Company did not
make any warranty payments during the fiscal years ended September 30, 2009 and
2008.
Impairment
of Long Lived Assets
The
Company reviews its long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. When such factors and
circumstances exist, management compares the projected undiscounted future cash
flows associated with the future use and disposal of the related asset or group
of assets to their respective carrying values. Impairment, if any, is measured
as the excess of the carrying value over the fair value, based on market value
when available, or discounted expected cash flows, of those assets and is
recorded in the period in which the determination is made. During fiscal year
ended September 30, 2009 the Company recorded an impairment loss on property and
equipment of approximately $960,000 to reflect the idle machinery which could
not meet the quality requirements and cannot be put into mass production. No
loss on property and equipment impairment was recorded during fiscal year ended
September 30, 2008.
Investment
Investment
in an entity where the Company owns less than twenty percent of the voting stock
of the entity and does not exercise significant influence over operating and
financial policies of the entity are accounted for using the cost method.
Investment in the entity where the Company owns twenty percent or more, but not
in excess of fifty percent of the voting stock of the entity or less than twenty
percent and exercises significant influence over operating and financial
policies of the entity are accounted for using the equity method. The Company
has a policy in place to review its investments at least annually, to evaluate
the carrying value of the investments in these companies. The cost method
investment is subject to impairment assessment if there are identified events or
changes in circumstance that may have a significant adverse affect on the fair
value of the investment. If the Company believes that the carrying value of an
investment is in excess of estimated fair value, it is the Company’s policy to
record an impairment charge to adjust the carrying value to the estimated fair
value, if the impairment is considered other-than-temporary.
On August
21, 2008, the Company entered into an equity purchase agreement in which it
acquired two million shares of common stock of 21-Century Silicon for $1.0
million in cash. On August 21, 2008, the two million shares acquired by the
Company constituted approximately 7.8% of 21-Century Silicon’s outstanding
equity.
On March
5, 2009, the Emerging Technology Fund, created by the State of Texas had
invested $3.5million to expedite innovation and commercialization of
research. As of September 30, 2009, the two million shares acquired by the
Company have been diluted and constituted approximately 5.5% of 21-Century
Silicon’s outstanding equity. The company had performed the impairment
assessment during the meeting and determined that the investment was not
impaired. As of September 30, 2009, the Company accounted for the investment in
21-Century Silicon at cost amounting to $1.0 million.
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 FASB ASC 740, “Income Taxes”,
formerly referenced as SFAS No. 109, “Accounting for Income
Taxes”.
Under the
provisions of FASB ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between their
financial statement carrying values 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, the
Company considers all available evidence including past operating results,
estimates of future taxable income, and the feasibility of tax planning
strategies. In the event that the Company changes its determination as to the
amount of deferred tax assets that can be realized, the Company will adjust its
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 related to uncertain tax
positions under FASB ASC 740, “Income Taxes”, formerly referenced as FIN 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109”. Under FASB ASC 740, 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 and penalties to be recognized as a
component of tax expense. 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, this guidance provides guidance on
de-recognition, accounting in interim periods, disclosure and
transition.
Fair
Value of Warrants
The
Company’s management used the binomial valuation model to value the 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. Management
selected the binomial model to value these warrants as opposed to the
Black-Scholes-Merton model primarily because management believes the binomial
model produces a more reliable value for these instruments because it uses an
additional valuation input factor, the suboptimal exercise factor, which
accounts for expected holder exercise behavior which management believes is a
reasonable assumption with respect to the holders of these
warrants.
Stock-Based
Compensation
On
January 1, 2006, Solar EnerTech began recording compensation expense
associated with stock options and other forms of employee equity compensation in
accordance with FASB ASC 718, “Compensation – Stock Compensation”.
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single option 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 U.S. Treasury zero-coupon issues with an equivalent
remaining term.
Estimated
Forfeitures— When estimating forfeitures, the Company takes into consideration
the historical option forfeitures over the expected term.
Revenue
Recognition
The
Company recognizes revenues from product sales in accordance with guidance in
FASB ASC 605, “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, the Company determines if the revenue should
be recorded on a gross or net basis based on criteria discussed in the Revenue
Recognition topic of the FASB Subtopic 605-405,
“Reporting Revenue
Gross as a Principal versus Net as an Agent”. The Company considers the
following factors to 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.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are carried at net realizable value. The Company records its
allowance for doubtful accounts based upon its assessment of various factors.
The Company considers historical experience, the age of the accounts receivable
balances, credit quality of the Company’s customers, current economic
conditions, and other factors that may affect customers’ ability to
pay.
Recent
Accounting Pronouncements
For
recent accounting pronouncements, including the expected dates of adoption and
estimated effects, if any, on our consolidated condensed financial statements,
see “Note 3 – Summary of Significant Accounting Policies” in the Notes to
Consolidated Financial Statements included in this Form 10-K.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a
Smaller Reporting Company as defined by 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 7A.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Item 15 (a) for an index to the Consolidated Financial Statements and
Supplementary Financial Information, which are attached hereto and incorporated
by reference herein.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Solar
EnerTech Corp.
We have
audited the accompanying consolidated balance sheets of Solar Enertech Corp.
(the "Company") as of September 30, 2009 and 2008, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended September 30, 2009. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Solar Enertech
Corp. at September 30, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
September 30, 2009, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 2 to the consolidated financial statements, the Company's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans as to these matters also are
described in Note 2. The fiscal 2009 consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst
& Young Hua Ming
Shanghai,
Peoples Republic of China
January
12, 2010
Solar
EnerTech Corp.
Consolidated
Balance Sheets
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,719,000
|
|
|
$
|
3,238,000
|
|
Accounts
receivable, net of allowance for doubtful account of $96,000 and $21,000
at September 30, 2009 and 2008, respectively
|
|
|
7,395,000
|
|
|
|
1,875,000
|
|
Advance
payments and other
|
|
|
799,000
|
|
|
|
3,175,000
|
|
Inventories,
net
|
|
|
3,995,000
|
|
|
|
4,886,000
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
1,250,000
|
|
|
|
1,812,000
|
|
VAT
receivable
|
|
|
334,000
|
|
|
|
2,436,000
|
|
Other
receivable
|
|
|
408,000
|
|
|
|
730,000
|
|
Total
current assets
|
|
|
15,900,000
|
|
|
|
18,152,000
|
|
Property
and equipment, net
|
|
|
10,509,000
|
|
|
|
12,934,000
|
|
Investment
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Deposits
|
|
|
87,000
|
|
|
|
701,000
|
|
Total
assets
|
|
$
|
27,496,000
|
|
|
$
|
32,787,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,794,000
|
|
|
$
|
1,771,000
|
|
Customer
advance payment
|
|
|
27,000
|
|
|
|
96,000
|
|
Accrued
expenses
|
|
|
1,088,000
|
|
|
|
910,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
5,646,000
|
|
|
|
5,450,000
|
|
Derivative
liabilities
|
|
|
178,000
|
|
|
|
980,000
|
|
Convertible
notes, net of discount
|
|
|
3,061,000
|
|
|
|
85,000
|
|
Total
current liabilities
|
|
|
15,794,000
|
|
|
|
9,292,000
|
|
Warrant
liabilities
|
|
|
2,068,000
|
|
|
|
3,412,000
|
|
Total
liabilities
|
|
|
17,862,000
|
|
|
|
12,704,000
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock - 400,000,000 shares authorized at $0.001 par value 111,406,696 and
112,052,012 shares issued and outstanding at September 30, 2009 and 2008,
respectively
|
|
|
111,000
|
|
|
|
112,000
|
|
Additional
paid in capital
|
|
|
75,389,000
|
|
|
|
71,627,000
|
|
Other
comprehensive income
|
|
|
2,456,000
|
|
|
|
2,485,000
|
|
Accumulated
deficit
|
|
|
(68,322,000
|
)
|
|
|
(54,141,000
|
)
|
Total
stockholders' equity
|
|
|
9,634,000
|
|
|
|
20,083,000
|
|
Total
liabilities and stockholders' equity
|
|
$
|
27,496,000
|
|
|
$
|
32,787,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Solar
EnerTech Corp.
Consolidated
Statements of Operations
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
32,835,000
|
|
|
$
|
29,412,000
|
|
Cost
of sales
|
|
|
(33,876,000
|
)
|
|
|
(33,104,000
|
)
|
Gross
loss
|
|
|
(1,041,000
|
)
|
|
|
(3,692,000
|
)
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
9,224,000
|
|
|
|
11,778,000
|
|
Research
and development
|
|
|
700,000
|
|
|
|
702,000
|
|
Loss
on debt extinguishment
|
|
|
527,000
|
|
|
|
4,240,000
|
|
Impairment
loss on property and equipment
|
|
|
960,000
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
11,411,000
|
|
|
|
16,720,000
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(12,452,000
|
)
|
|
|
(20,412,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
16,000
|
|
|
|
87,000
|
|
Interest
expense
|
|
|
(3,998,000
|
)
|
|
|
(1,035,000
|
)
|
Gain
on change in fair market value of compound embedded
derivative
|
|
|
770,000
|
|
|
|
13,767,000
|
|
Gain
on change in fair market value of warrant liability
|
|
|
1,344,000
|
|
|
|
13,978,000
|
|
Other
income (expense)
|
|
|
139,000
|
|
|
|
(846,000
|
)
|
Net
(loss) income
|
|
$
|
(14,181,000
|
)
|
|
$
|
5,539,000
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - basic
|
|
$
|
(0.16
|
)
|
|
$
|
0.07
|
|
Net
(loss) income per share - diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
87,817,762
|
|
|
|
75,944,461
|
|
Weighted
average shares outstanding - diluted
|
|
|
87,817,762
|
|
|
|
98,124,574
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Solar
EnerTech Corp.
Consolidated
Statements of Stockholders’ Equity
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
Comprehensive
|
|
|
|
Number
|
|
|
Amount
|
|
|
In
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
Loss
|
|
Balance
at September 30, 2007
|
|
|
78,827,012
|
|
|
$
|
79,000
|
|
|
$
|
39,192,000
|
|
|
$
|
592,000
|
|
|
$
|
(59,680,000
|
)
|
|
$
|
(19,817,000
|
)
|
|
$
|
(59,088,000
|
)
|
Issue
of stock to settle outstanding notes
|
|
|
1,038,000
|
|
|
|
1,000
|
|
|
|
871,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
872,000
|
|
|
|
-
|
|
Issue
of stock and warrants for cash
|
|
|
24,318,000
|
|
|
|
24,000
|
|
|
|
19,863,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,887,000
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
5,619,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,619,000
|
|
|
|
-
|
|
Reversal
of interest related to related party loan
|
|
|
-
|
|
|
|
-
|
|
|
|
83,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
83,000
|
|
|
|
-
|
|
Issue
of stock for convertible notes
|
|
|
7,869,000
|
|
|
|
8,000
|
|
|
|
5,999,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,007,000
|
|
|
|
-
|
|
Currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,893,000
|
|
|
|
-
|
|
|
|
1,893,000
|
|
|
|
1,893,000
|
|
Net
income for the year ended September 30, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,539,000
|
|
|
|
5,539,000
|
|
|
|
5,539,000
|
|
Balance
at September 30, 2008
|
|
|
112,052,012
|
|
|
$
|
112,000
|
|
|
$
|
71,627,000
|
|
|
$
|
2,485,000
|
|
|
$
|
(54,141,000
|
)
|
|
$
|
20,083,000
|
|
|
$
|
(51,656,000
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
3,446,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,446,000
|
|
|
|
-
|
|
Issue
of stock for convertible notes
|
|
|
1,454,684
|
|
|
|
1,000
|
|
|
|
314,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
315,000
|
|
|
|
-
|
|
Cancellation
of unvested restricted stock
|
|
|
(2,100,000
|
)
|
|
|
(2,000
|
)
|
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29,000
|
)
|
|
|
-
|
|
|
|
(29,000
|
)
|
|
|
(29,000
|
)
|
Net
loss for the year ended September 30, 2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,181,000
|
)
|
|
|
(14,181,000
|
)
|
|
|
(14,181,000
|
)
|
Balance
at September 30, 2009
|
|
|
111,406,696
|
|
|
$
|
111,000
|
|
|
$
|
75,389,000
|
|
|
$
|
2,456,000
|
|
|
$
|
(68,322,000
|
)
|
|
$
|
9,634,000
|
|
|
$
|
(65,866,000
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Solar
EnerTech Corp.
Consolidated
Statements of Cash Flows
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(14,181,000
|
)
|
|
$
|
5,539,000
|
|
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment
|
|
|
2,308,000
|
|
|
|
1,359,000
|
|
Disposal
loss on property and equipment
|
|
|
15,000
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
3,446,000
|
|
|
|
5,619,000
|
|
Loss
on debt extinguishment
|
|
|
527,000
|
|
|
|
4,240,000
|
|
Impairment
loss on property and equipment
|
|
|
960,000
|
|
|
|
-
|
|
Amortization
of note discount and deferred financing cost
|
|
|
3,298,000
|
|
|
|
144,000
|
|
Gain
on change in fair market value of compound embedded
derivative
|
|
|
(770,000
|
)
|
|
|
(13,767,000
|
)
|
Gain
on change in fair market value of warrant liability
|
|
|
(1,344,000
|
)
|
|
|
(13,978,000
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(5,518,000
|
)
|
|
|
(724,000
|
)
|
Advance
payments and other
|
|
|
2,371,000
|
|
|
|
3,981,000
|
|
Inventories,
net
|
|
|
884,000
|
|
|
|
1,379,000
|
|
VAT
receivable
|
|
|
2,097,000
|
|
|
|
(1,850,000
|
)
|
Other
receivable
|
|
|
321,000
|
|
|
|
(549,000
|
)
|
Accounts
payable, accrued liabilities and customer advance payment
|
|
|
4,132,000
|
|
|
|
(3,055,000
|
)
|
Deposits
|
|
|
116,000
|
|
|
|
-
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
196,000
|
|
|
|
1,481,000
|
|
Net
cash used in operating activities
|
|
|
(1,142,000
|
)
|
|
|
(10,181,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(419,000
|
)
|
|
|
(9,499,000
|
)
|
Proceeds
from sales of property and equipment
|
|
|
36,000
|
|
|
|
-
|
|
Investment
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
Net
cash used in investing activities
|
|
|
(383,000
|
)
|
|
|
(10,499,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock, net of offering cost
|
|
|
-
|
|
|
|
19,887,000
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
|
19,887,000
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
6,000
|
|
|
|
123,000
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,519,000
|
)
|
|
|
(670,000
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
3,238,000
|
|
|
|
3,908,000
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,719,000
|
|
|
$
|
3,238,000
|
|
|
|
|
|
|
|
|
|
|
Cash
paid:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
530,000
|
|
|
$
|
1,138,000
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Warrants
issued to placement agent in connection with convertible
notes
|
|
$
|
-
|
|
|
$
|
1,006,080
|
|
Warrants
issued to note holders
|
|
$
|
-
|
|
|
$
|
19,563,167
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
SOLAR
ENERTECH CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
NOTE
1 — ORGANIZATION AND NATURE OF OPERATIONS
Solar
EnerTech Corp. was originally incorporated under the laws of the State of Nevada
on July 7, 2004 as Safer Residence Corporation and was reincorporated to
the State of Delaware on August 13, 2008 (“Solar EnerTech” or the
“Company”). The Company engaged in a variety of businesses until
March 2006, when the Company began its current operations as a photovoltaic
(“PV”) solar energy cell (“PV Cell”) manufacturer. The Company’s management
decided that, to facilitate a change in business that was focused on the PV Cell
industry, it was appropriate to change the Company’s name. A plan of merger
between Safer Residence Corporation and Solar EnerTech Corp., a wholly-owned
inactive subsidiary of Safer Residence Corporation, was approved on March 27,
2006, under which the Company was to be renamed “Solar EnerTech Corp.” On
April 7, 2006, the Company changed its name to Solar EnerTech
Corp.
The
Company’s management in February 2008 decided that it was in the Company’s and
its shareholders best interests to change the Company’s state of domicile from
Nevada to Delaware (the “Reincorporation”). On August 13, 2008, the
Company, a Nevada entity at the time, entered into an Agreement and Plan of
Merger with Solar EnerTech Corp., a Delaware corporation and wholly-owned
subsidiary of the Nevada entity (the “Delaware Subsidiary”), whereby the Nevada
entity merged with and into the Delaware Subsidiary in order to effect the
Reincorporation. After the Reincorporation, the Nevada entity ceased to exist
and the Company survived as a Delaware 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.
On April
27, 2009, the Company entered into a Joint Venture Agreement (the “JV
Agreement”) with Jiangsu Shunda Semiconductor Development Co., Ltd. (“Jiangsu
Shunda”) to form a joint venture in the United States by forming a new
company, to be known as Shunda-SolarE Technologies, Inc. (the “Joint Venture
Company”), in order to jointly pursue opportunities in the United
States solar market. After its formation, the Joint Venture Company’s name
was later changed to SET-Solar Corp.
Pursuant
to the terms of the JV Agreement, Jiangsu Shunda owns 55% of the Joint Venture
Company, the Company owns 35% of the Joint Venture Company and the
remaining 10% of the Joint Venture Company is owned by the Joint Venture
Company’s management. The Joint Venture Company’s Board of Directors
consist of five directors: three of the directors were nominated by Jiangsu
Shunda and two of whom were nominated by the Company. Furthermore,
Mr. Yunda Ni, the President of Jiangsu Shunda, serves as the Joint Venture
Company’s Chairman of the Board and Mr. Leo Shi Young, the Company’s Chief
Executive Officer serves as the Joint Venture Company’s Vice Chairman of the
Board. Jiangsu Shunda is responsible for managing the Joint
Venture Company in China and the Company is responsible for the
managing the Joint Venture Company in the United States. The JV
Agreement is valid for 18 months. As of September 30, 2009, due to the foreign
currency controls imposed by the PRC government, Jiangsu Shunda and the Company
have not contributed any capital to the Joint Venture Company and no equity
interest has been issued to either Jiangsu Shunda or the Company.
NOTE
2 — LIQUIDITY AND GOING CONCERN ISSUES
The
Company has incurred significant net losses and has had negative cash flows from
operations during each period from inception through September 30, 2009 and has
an accumulated deficit of approximately $68.3 million at September 30, 2009. For
the fiscal year ended September 30, 2009, the Company had negative operating
cash flows of approximately $1.1 million and incurred a net loss of
approximately $14.2 million. As of September 30, 2009, the Company had
outstanding convertible notes with a principal balance of $11.6 million
consisting of $2.5 million in principal amount of Series A Convertible Notes
(the “Series A Notes”) and $9.1 million in principal amount of Series B
Convertible Notes (the “Series B Notes”), which were recorded at carrying amount
at $3.1 million, collectively known as the “Notes”. These Notes bear interest at
6% per annum and are due on March 7, 2010. The Company only had approximately
$1.7 million in cash and cash equivalents on hand as of September 30, 2009. The
conditions described raise substantial doubt about the Company’s ability to
continue as a going concern. The Company’s consolidated financial
statements have been prepared on the assumption that it will continue as a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Since
April 2009, significant steps were taken to reach operational profitability
including securing key new contracts, which will generate increased sales
volumes. In addition, the Company engaged in various cost cutting programs and
renegotiated most of the contacts to reduce operating expenses. Due to the above
and the decrease in raw material prices, specifically silicon wafer prices, the
Company has been generating positive gross margins starting in the third quarter
of fiscal year 2009.
As
discussed in “Note 16-Subsequent Events”, all of the Notes will automatically be
converted into shares and the terms of the warrants issued in conjunction with
the Notes will be amended. The Company believes that the successful completion
of the conversion, along with our existing cash resources and the cash expected
to be generated from operations during fiscal year 2010 will be sufficient to
meet the Company’s projected operating requirements through at least the next
twelve months and enable it to continue as a going concern.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Accounting
Prior to
August 19, 2008, the Company operated its business in the People’s Republic of
China through Infotech Hong Kong New Energy Technologies, Limited (“Infotech
HK”) and Solar EnerTech (Shanghai) Co., Ltd (“Infotech Shanghai” and together
with Infotech HK, “Infotech”). While the Company did not own Infotech, the
Company’s financial statements have included the results of the financials of
each of Infotech HK and Infotech Shanghai since these entities were
wholly-controlled variable interest entities of the Company through an Agency
Agreement dated April 10, 2006 by and between the Company and Infotech (the
“Agency Agreement”). Under the Agency Agreement 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. The Agency Agreement continued through April 10,
2008 and then on a month to month basis thereafter until terminated by either
party.
To
permanently consolidate Infotech with the Company through legal ownership, the
Company acquired Infotech at a nominal amount on August 19, 2008 through a
series of agreements. In connection with executing these agreements, the Company
terminated the original agency relationship with Infotech.
The
Company had previously consolidated the financial statements of Infotech with
its financial statements pursuant to FASB ASC 810-10 “Consolidations”, formerly
referenced as FASB Interpretation No. 46(R), due to the agency
relationship between the Company and Infotech and, notwithstanding the
termination of the Agency Agreement, the Company continues to consolidate the
financial statements of Infotech with its financial statements since Infotech
became a wholly-owned subsidiary of the Company as a result of the
acquisition.
The
Company’s consolidated financial statements include the accounts of Solar
EnerTech Corp. and its subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. These consolidated financial statements
have been prepared in U.S. dollars and in accordance with U.S. generally
accepted accounting principles (“U.S.GAAP”).
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S.GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
Cash and
cash equivalents are defined as cash on hand, demand deposits and short-term,
highly liquid investments that are readily convertible to known amounts of cash
within ninety days of deposit.
Currency
and Foreign Exchange
The
Company’s functional currency is the Renminbi as substantially all of the
Company’s operations are in China. The Company’s reporting currency is the U.S.
dollar.
Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with FASB ASC 830, “Foreign Currency Matters,”
formerly referenced as SFAS No. 52,
“Foreign Currency
Translation”, and are included in determining net income or loss.
For
foreign operations with the local currency as the functional currency, assets
and liabilities are translated from the local currencies into U.S. dollars at
the exchange rate prevailing at the balance sheet date. Revenues and expenses
are translated at weighted average exchange rates for the period to approximate
translation at the exchange rates prevailing at the dates those elements are
recognized in the consolidated financial statements. Translation adjustments
resulting from the process of translating the local currency consolidated
financial statements into U.S. dollars are included in determining comprehensive
loss.
Property
and Equipment
The
Company’s property and equipment are stated at cost net of accumulated
depreciation. Depreciation is provided using the straight-line method over the
related estimated useful lives, as follows:
|
|
Useful Life (Years)
|
Office
equipment
|
|
3
to 5
|
Machinery
|
|
10
|
Production equipment
|
|
5
|
Automobiles
|
|
5
|
Furniture
|
|
5
|
Leasehold
improvement
|
|
the
shorter of the lease term or 5
years
|
Expenditures
for maintenance and repairs that do not improve or extend the lives of the
related assets are expensed to operations. Major repairs that improve or extend
the lives of the related assets are capitalized.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined by the
weighted-average method. Market is defined principally as net realizable value.
Raw material cost is based on purchase costs while work-in-progress and finished
goods are comprised 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 it does
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.
Warranty
Cost
The
Company provides product warranties and accrues for estimated future warranty
costs in the period in which the revenue is recognized. The Company’s standard
solar modules are typically sold with a two-year warranty for defects in
materials and workmanship and a 10-year and 25-year warranty against declines of
more than 10.0% and 20.0%, respectively, of the initial minimum power generation
capacity at the time of delivery. The Company therefore maintains warranty
reserves to cover potential liabilities that could arise from its warranty
obligations and accrues the estimated costs of warranties based primarily on
management’s best estimate. The Company has not experienced any material
warranty claims to date in connection with declines of the power generation
capacity of its solar modules and will prospectively revise its actual rate to
the extent that actual warranty costs differ from the estimates. As of
September 30, 2009 and 2008, the Company’s warrant liability was $515,000 and
$252,000, respectively. The Company’s warranty costs for the fiscal years ended
September 30, 2009 and 2008 were $263,000 and $248,000, respectively. The
Company did not make any warranty payments during the fiscal years ended
September 30, 2009 and 2008.
Impairment
of Long Lived Assets
The
Company reviews its long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. When such factors and
circumstances exist, management compares the projected undiscounted future cash
flows associated with the future use and disposal of the related asset or group
of assets to their respective carrying values. Impairment, if any, is measured
as the excess of the carrying value over the fair value, based on market value
when available, or discounted expected cash flows, of those assets and is
recorded in the period in which the determination is made. During fiscal year
ended September 30, 2009 the Company recorded an impairment loss on property and
equipment of approximately $960,000 to reflect the idle machinery which could
not meet the quality requirements and cannot be put into mass production. No
loss on property and equipment impairment was recorded during fiscal year ended
September 30, 2008.
Investments
Investments
in an entity where the Company owns less than twenty percent of the voting stock
of the entity and does not exercise significant influence over operating and
financial policies of the entity are accounted for using the cost method.
Investments in the entity where the Company owns twenty percent or more but not
in excess of fifty percent of the voting stock of the entity or less than twenty
percent and exercises significant influence over operating and financial
policies of the entity are accounted for using the equity method. The Company
has a policy in place to review its investments at least annually, to evaluate
the carrying value of the investments in these companies. The cost method
investment is subject to impairment assessment if there are identified events or
changes in circumstance that may have a significant adverse affect on the fair
value of the investment. If the Company believes that the carrying value of an
investment is in excess of estimated fair value, it is the Company’s policy to
record an impairment charge to adjust the carrying value to the estimated fair
value, if the impairment is considered other-than-temporary.
On August
21, 2008, the Company entered into an equity purchase agreement in which it
acquired two million shares of common stock of 21-Century Silicon for $1.0
million in cash. On August 21, 2008, the two million shares acquired by the
Company constituted approximately 7.8% of 21-Century Silicon’s outstanding
equity.
As of
September 30, 2009, the Company accounted for the investment in 21-Century
Silicon at cost amounting to $1.0 million. On March 5, 2009, the Emerging
Technology Fund, created by the State of Texas had invested $3.5million in
21-Century Silicon to expedite innovation and commercialization of research. As
of September 30, 2009, the two million shares acquired by the Company have been
diluted and constituted approximately 5.5% of 21-Century Silicon’s outstanding
equity. In October 2009, the Company’s core management team, the Chief Executive
Officer and Chief Financial Officer, visited the new manufacturing site of
21-Century Silicon. The Company performed an impairment assessment during the
meeting and determined that the investment was not impaired.
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 FASB ASC 740, “Income Taxes”,
formerly referenced as SFAS No. 109, “Accounting for Income
Taxes”.
Under the
provisions of FASB ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between their
financial statement carrying values 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, the
Company considers all available evidence including past operating results,
estimates of future taxable income, and the feasibility of tax planning
strategies. In the event that the Company changes its determination as to the
amount of deferred tax assets that can be realized, the Company will adjust its
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 related to uncertain tax
position under FASB ASC 740, “Income Taxes”, formerly referenced as FIN 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109”. Under FASB ASC 740, 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 and penalties to be recognized as a
component of tax expense. 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, this guidance provides guidance on
de-recognition, accounting in interim periods, disclosure and
transition.
Derivative
Financial Instruments
FASB ASC
815,
“Derivatives
and Hedging”, formerly referenced as SFAS No. 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 the Company’s 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.
FASB ASC
815 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 FASB ASC 815 guidance, 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 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 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 on the measurement date, and the expected volatility and risk free
interest rate over the forecast period. Each path is compared against the logic
described 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.
Fair
Value of Warrants
The
Company’s management used the binomial valuation model to value the 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. Management
selected the binomial model to value these warrants as opposed to the
Black-Scholes-Merton model primarily because management believes the binomial
model produces a more reliable value for these instruments because it uses an
additional valuation input factor, the suboptimal exercise factor, which
accounts for expected holder exercise behavior which management believes is a
reasonable assumption with respect to the holders of these
warrants.
Stock-Based
Compensation
On
January 1, 2006, Solar EnerTech began recording compensation expense
associated with stock options and other forms of employee equity compensation in
accordance with FASB ASC 718, “Compensation – Stock Compensation”, formerly
referenced as SFAS 123R, “Share-Based Payment”.
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single option 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, the Company 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 U.S. Treasury zero-coupon issues with an equivalent
remaining term.
Estimated
Forfeitures — When estimating forfeitures, the Company takes into consideration
the historical option forfeitures over the expected term.
Revenue
Recognition
The
Company recognizes revenues from product sales in accordance with guidance in
FASB ASC 605, “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, the Company determines if the revenue should
be recorded on a gross or net basis based on criteria discussed in the Revenue
Recognition topic of the FASB Subtopic 605-405,
“Reporting Revenue
Gross as a Principal versus Net as an Agent”. The Company considers the
following factors to 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.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are carried at net realizable value. The Company records its
allowance for doubtful accounts based upon its assessment of various factors.
The Company considers historical experience, the age of the accounts receivable
balances, credit quality of the Company’s customers, current economic
conditions, and other factors that may affect customers’ ability to
pay.
Shipping
and Handling Costs
The
Company incurred shipping and handling costs of $239,000 and $191,000 for the
fiscal years ended September 30, 2009 and 2008, respectively, which are included
in selling expenses. Shipping and handling costs include costs incurred with
third-party carriers to transport products to customers.
Research
and Development Cost
Expenditures
for research activities relating to product development are charged to expense
as incurred. Research and development cost for the years ended September 30,
2009 and 2008 were $700,000 and $702,000, respectively.
Comprehensive
Loss
Comprehensive
loss is defined as the change in equity of the Company during a period from
transactions and other events and circumstances excluding transactions resulting
from investments by owners and distributions to owners. Comprehensive
loss is reported in the consolidated statements of shareholder’s
equity. Other comprehensive income of the Company consists of
cumulative foreign currency translation adjustments.
Segment
Information
The
Company identifies its operating segments based on its business activities. The
Company operates within a single operating segment - the manufacture of solar
energy cells and modules in China. The Company’s manufacturing operations and
fixed assets are all based in China. The solar energy cells and modules are
distributed to customers, located in Europe, Australia, North America and
China.
During
the fiscal years ended September 30, 2009 and 2008, the Company had four
customers and one customer, respectively that accounted for more than 10% of net
sales.
Reclassifications
Certain
amounts in the prior year consolidated financial statements have been
reclassified to conform to the current year presentation. These
reclassifications have no effect on previously reported results of
operations.
Recent
Accounting Pronouncements
On
September 30, 2009, the Company adopted Statement of Financial Accounting
Standards No. 168,
The
FASB Accounting Standards Codification
TM
and The Hierarchy of Generally
Accepted Accounting Principles
(“ASC” or “Codification” – a replacement
of FASB Statement No.162). The Codification became the source of authoritative
generally accepted accounting principles recognized by the Financial Accounting
Standards Board (“FASB”) to be applied by nongovernmental entities. Rules and
interpretive releases of the U.S. Securities and Exchange Commission (the “SEC”)
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification supersedes all existing non-SEC
accounting and reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the Codification is non-authoritative.
GAAP is not intended to be changed as a result of this statement, but will
change the way the guidance is organized and presented. The Company has
implemented the Codification in the consolidated financial statements by
providing references to the ASC topics.
In
February 2007, the FASB issued FASB ASC 825, “Financial Instruments”,
formerly referenced as Statement of Financial Accounting Standards (“SFAS”) No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
which provides companies with an option to report selected financial assets and
liabilities at fair value. FASB ASC 825 establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities. FASB ASC 825 was effective for fiscal years beginning
after November 15, 2007. The Company did not elect to report any
of its financial assets or liabilities at fair value, and as a result, the
adoption of FASB ASC 825 had no material impact on its financial and results of
operations.
In
December 2007, the FASB issued FASB ASC 805, “Business Combination”, formerly
referenced as SFAS No. 141 (revised), “Business Combinations”. FASB ASC 805
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 pre-acquisition 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. FASB ASC 805 is
effective for the first annual reporting period beginning on or after
December 15, 2008. Thus, FASB ASC 805 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 FASB ASC 805 on its financial position
and results of operations.
In
December 2007, the FASB issued FASB ASC 810, “Consolidation”, formerly
referenced as SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51”. FASB ASC 810 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, FASB ASC 810 revises the accounting for both increases
and decreases in a parent’s controlling ownership interest. FASB ASC 810 is
effective for the first annual reporting period beginning on or after
December 15, 2008. Thus, FASB ASC 810 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 FASB ASC 810 on its financial position
and results of operations.
In
December 2007, an update was made to FASB ASC 808-10, “Collaborative
Arrangements”, formerly referenced as EITF Consensus for Issue No. 07-1,
“Accounting for Collaborative Arrangements” which defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. This guidance also establishes the appropriate
income statement presentation and classification for joint operating activities
and payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2008 and
will be effective for the Company on October 1, 2009. The Company is currently
evaluating the impact of the adoption of this guidance on its consolidated
financial statements.
In
February 2008, an update was made to FASB ASC 860, “Transfers and Servicing”,
formerly referenced as FASB Staff Position No. FAS 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions” that
addresses the issue of whether or not these transactions should be viewed as two
separate transactions or as one linked” transaction. FASB ASC 860 includes a
rebuttable presumption” that presumes linkage of the two transactions unless the
presumption can be overcome by meeting certain criteria. This update will be
effective for fiscal years beginning after November 15, 2008 and will apply only
to original transfers made after that date; early adoption will not be allowed.
This update will be effective to the Company after the beginning of its fiscal
year 2010. The Company is currently evaluating the impact of the adoption
of FASB ASC 860 on the Company’s financial position and results of
operations.
In
March 2008, the FASB issued FASB ASC 815, “Derivatives and Hedging”,
formerly referenced as SFAS No. 161, “Disclosures
about Derivative
Instruments and Hedging Activities”. FASB ASC 815 requires additional
disclosures related to the use of derivative instruments, the accounting for
derivatives and how derivatives impact financial statements. FASB ASC 815
is effective for fiscal years and interim periods beginning after
November 15, 2008. Thus, the Company adopted this standard on January
1, 2009. Since FASB ASC 815 only required additional disclosures, the
adoption did not impact the Company’s financial position and results of
operations
.
In May
2008, an update was made to the FASB ASC 470, “Debt”, formerly referenced
as FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt
Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash
Settlement)”. FASB ASC 470 requires that the liability and equity
components of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlement) be separately accounted for in a
manner that reflects an issuer's nonconvertible debt borrowing rate. As a
result, the liability component would be recorded at a discount reflecting its
below market coupon interest rate, and the liability component would
subsequently be accreted to its par value over its expected life, with the rate
of interest that reflects the market rate at issuance being reflected in the
results of operations. This change in methodology will affect the calculations
of net income and earnings per share, but will not increase the Company's cash
interest payments. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years and will be effective for the Company on October 1,
2009. Retrospective application to all periods presented is required and early
adoption is prohibited. The Company is evaluating the potential impact of the
implementation of FASB ASC 470 on its financial position and results of
operations.
In June
2008, an update was made to the FASB ASC 718, “Compensation – Stock
Compensation”, which concluded that all unvested share-based payment awards that
contain rights to receive non-forfeitable dividends (whether paid or unpaid) are
participating securities, and should be included in the two-class method of
computing basic and diluted earnings per share. This guidance is effective for
fiscal years beginning after December 15, 2008. This guidance will be effective
to the Company on October 1, 2009.The Company is currently evaluating the
requirement of this guidance as well as the impact of the adoption on its
consolidated financial statements.
In
November 2008, an update was made to the FSAB ASC 323, “Investments – Equity
Method and Joint Ventures”, which addresses the impact that FASB ASC 805,
“Business Combination” and FASB ASC 810, “Consolidation” might have on the
accounting for equity method investments, including how the initial carrying
value of an equity method investment should be determined, how an impairment
assessment of an underlying indefinite lived intangible asset of an equity
method investment should be performed and how to account for a change in an
investment from the equity method to the cost method. This guidance is
effective in fiscal periods beginning on or after December 15, 2008. This
guidance will be effective to the Company on October 1, 2009.The Company is
currently assessing the impact of the adoption of the provisions of this
guidance on its consolidated financial statements.
In
April 2009, an update was made to the FASB ASC 820, “Fair Value
Measurements and Disclosures”, that provides additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have
significantly decreased. This update is effective for interim and annual periods
ending after June 15, 2009 with early adoption permitted for periods ending
after March 15, 2009. During the quarter ended June 30, 2009, the
Company adopted this guidance and did not have a significant impact on its
consolidated financial statements.
In April
2009, an update was made to the FASB ASC 825, “Financial Instruments”, which
requires a publicly traded company to include disclosures about the fair value
of its financial instruments whenever it issues summarized financial information
for interim reporting periods. This update is effective for interim reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. The Company adopted this guidance during
the quarter ended June 30, 2009. There was no significant impact on its
consolidated financial statements as a result of adoption.
In April
2009, an update was made to the FASB ASC 320, “Investments – Debt and Equity
Securities”, which introduced new disclosure requirements affecting both
debt and equity securities and extend the disclosure requirements to interim
periods including disclosure of the cost basis of securities classified as
available-for-sale and held-to-maturity and provides further specification of
major security types. This update is effective for fiscal years and interim
periods beginning after June 15, 2009. The Company adopted the
guidance during the quarter ended June 30, 2009. The adoption of this guidance
did not have a significant impact on the Company’s financial
statements.
In May
2009, the FASB issued FASB ASC 855, “Subsequent Events”, formerly referenced as
SFAS No. 165, “Subsequent Events” to establish general standards of accounting
for and disclosure of subsequent events. FASB ASC 855 renames the two types of
subsequent events as recognized subsequent events
or non-recognized subsequent events and to modify the definition of
the evaluation period for subsequent events as events or transactions that occur
after the balance sheet date, but before the financial statements are issued.
This will require entities to disclose the date, through which an entity has
evaluated subsequent events and the basis for that date (the issued date
for public companies). FASB ASC 855 is effective for interim or annual financial
periods ending after June 15, 2009. The Company adopted FASB ASC 855
during the quarter ended June 30, 2009. The adoption of FASB ASC 855 did not
have a significant impact on the Company's financial statement disclosures (see
Note 16 – Subsequent Events).
In
June 2009, the FASB issued FASB ASC 810-10, “Consolidation”, formerly
referenced as SFAS No. 167, “Amendments to FASB Interpretations
No. 46(R)”. FASB ASC 810-10 revises the approach to determining the primary
beneficiary of a variable interest entity (“VIE”) to be more qualitative in
nature and requires companies to more frequently reassess whether they must
consolidate a VIE. FASB ASC 810 is effective for interim and annual periods that
begin after November 15, 2009. This guidance will be effective to the
Company on January 1, 2010. The Company does not expect the adoption of FASB ASC
810-10 will have any impact on its results of operations and financial position
as the Company does not have any VIEs.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, an update to
ASC 820. This update provides amendments to reduce potential ambiguity in
financial reporting when measuring the fair value of liabilities. Among other
provisions, this update provides clarification that in circumstances, in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the valuation techniques described in ASU 2009-05. ASU 2009-05 is
effective for the first interim or annual reporting period beginning after its
issuance. This guidance will be effective to the Company on October 1, 2009. The
Company does not expect the adoption of ASU 2009-05 to have a material effect on
its financial statements.
NOTE
4 — FINANCIAL INSTRUMENTS
Concentration
of Credit risk
The
Company’s assets that are potentially subject to significant concentration of
credit risk are primarily cash and cash equivalents, advance payments to
suppliers and accounts receivable.
The
Company maintains cash deposits with financial institutions, which from time to
time may exceed federally insured limits. The Company has not experienced any
losses in connection with these deposits and believes it is not exposed to any
significant credit risk from cash. At September 30, 2009 and 2008, the
Company had approximately $144,000 and $869,000, respectively in excess of
insured limits.
Advance
payments to suppliers are typically unsecured and arise from deposits paid in
advance for future purchases of raw materials. During the financial crisis in
2008, the Company was generally required to make prepayments for some of its raw
materials. The Company does not require collateral or other security against the
prepayments to suppliers for raw materials. In the event of a failure
by the Company’s suppliers to fulfill their contractual obligations and to the
extent that the Company is not able to recover its prepayments, the Company
would suffer losses. The Company’s prepayments to suppliers have been steadily
decreasing due to the change in the industry practice from requiring full cash
advance to secure key raw material (silicon wafers) as a result of the financial
crisis in 2008 to requiring less or no cash advance during fiscal year 2009 as
the economy is recovering from the crisis. The economic crisis may affect the
Company’s customers’ ability to pay the Company for its products that the
Company has delivered. If the customers fail to pay the Company for
its products and services, the Company’s financial condition, results of
operations and liquidity may be adversely affected.
Other
financial instruments that potentially subject the Company to concentration of
credit risk consist principally of accounts
receivables. Concentrations of credit risk with respect to accounts
receivables are limited because a number of geographically diverse customers
make up the Company’s customer base, thus spreading the trade credit
risk. The Company controls credit risk through credit approvals,
credit limits and monitoring procedures. The Company performs credit
evaluations for all new customers but does not require collateral to support
customer receivables. All of the Company’s customers have gone through a
very strict credit approval process. The Company diligently monitors
the customers’ financial position. Certain key customers have also been insured
by China Export & Credit Insurance Company. Therefore, the credit risk in
accounts receivable is controllable even though the Company has a relatively
high accounts receivable balance. During the fiscal years ended September
30, 2009 and 2008, the Company had four customers and one customer, respectively
that accounted for more than 10% of net sales.
Foreign
exchange risk and translation
The
Company may be subject to significant currency risk due to the fluctuations of
exchange rates between the Chinese Renminbi, Euro and the United States
dollar.
The local
currency is the functional currency for the China subsidiary. Assets
and liabilities are translated at end of period exchange rates while revenues
and expenses are translated at the average exchange rates in effect during the
period. Equity is translated at historical rates and the resulting
cumulative translation adjustments, to the extent not included in net income,
are included as a component of accumulated other comprehensive income (loss)
until the translation adjustments are realized. Included in other accumulated
comprehensive income was a cumulative foreign currency translation adjustment
loss of $29,000 and a cumulative foreign currency translation adjustment gain of
$1.9 million at September 30, 2009 and 2008,
respectively. Foreign currency transaction gains and losses are
included in earnings. For fiscal years ended September 30, 2009 and 2008, the
Company recorded foreign exchange gain of $0.1 million and foreign exchange loss
of $0.8 million, respectively.
NOTE
5 — ADVANCE PAYMENTS AND OTHER
At
September 30, 2009 and 2008, advance payments and other consist of:
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
Prepayment
for raw materials
|
|
$
|
698,000
|
|
|
$
|
2,959,000
|
|
Others
|
|
|
101,000
|
|
|
|
216,000
|
|
Total
advance payments and other
|
|
$
|
799,000
|
|
|
$
|
3,175,000
|
|
NOTE
6 — INVENTORY
At
September 30, 2009 and 2008, inventory consists of:
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
Raw
materials
|
|
$
|
1,708,000
|
|
|
$
|
2,111,000
|
|
Work
in process
|
|
|
945,000
|
|
|
|
145,000
|
|
Finished
goods
|
|
|
1,342,000
|
|
|
|
2,630,000
|
|
Total
inventories
|
|
$
|
3,995,000
|
|
|
$
|
4,886,000
|
|
NOTE
7 — PROPERTY AND EQUIPMENT
The
Company depreciates its assets over their estimated useful lives. A summary of
property and equipment at September 30, 2009 and 2008 is as
follows:
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
Production
equipment
|
|
$
|
7,383,000
|
|
|
$
|
5,564,000
|
|
Leasehold
improvements
|
|
|
3,620,000
|
|
|
|
3,201,000
|
|
Automobiles
|
|
|
496,000
|
|
|
|
542,000
|
|
Office
equipment
|
|
|
342,000
|
|
|
|
339,000
|
|
Machinery
|
|
|
2,749,000
|
|
|
|
2,170,000
|
|
Furniture
|
|
|
39,000
|
|
|
|
39,000
|
|
Construction
in progress
|
|
|
22,000
|
|
|
|
2,915,000
|
|
Total
property and equipment
|
|
|
14,651,000
|
|
|
|
14,770,000
|
|
Less: accumulated
depreciation
|
|
|
(4,142,000
|
)
|
|
|
(1,836,000
|
)
|
Total
property and equipment, net
|
|
$
|
10,509,000
|
|
|
$
|
12,934,000
|
|
Total
depreciation expenses for the years ended September 30, 2009 and 2008 were $2.3
million and $1.4 million, respectively.
NOTE
8 — INCOME TAXES
The
Company has no taxable income and no provision for federal and state income
taxes is required for 2009 and 2008, except certain state minimum
tax.
The
Company conducts its business in the United States and in various foreign
locations and generally is subject to the respective local countries’ statutory
tax rates.
A
reconciliation of the statutory federal rate and the Company’s effective tax
rate for the fiscal years ended September 30, 2009 and 2008 are as
follows:
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
U.S.
federal taxes (benefit)
|
|
|
|
|
|
|
At
statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Gain
(loss) on derivative/warrant and other permanents
|
|
|
(5
|
)%
|
|
|
(89
|
)%
|
Stock-based
compensation
|
|
|
(7
|
)%
|
|
|
29
|
%
|
Tax
rate differences
|
|
|
(3
|
)%
|
|
|
6
|
%
|
Change
in valuation allowance
|
|
|
(19
|
)%
|
|
|
20
|
%
|
Total
|
|
|
0
|
%
|
|
|
0
|
%
|
Significant
components of the Company’s deferred tax assets and liabilities as of
September 30, 2009 and 2008 are as follows:
|
|
Year Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
5,678,000
|
|
|
$
|
3,622,000
|
|
Stock-based
compensation
|
|
|
1,093,000
|
|
|
|
390,000
|
|
Allowances
and reserve
|
|
|
1,779,000
|
|
|
|
1,704,000
|
|
Depreciation
and amortization
|
|
|
151,000
|
|
|
|
282,000
|
|
Total
deferred tax assets
|
|
|
8,701,000
|
|
|
|
5,998,000
|
|
Less
valuation allowance
|
|
|
(8,701,000
|
)
|
|
|
(5,998,000
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of
September 30, 2009 and 2008, the Company had United States federal net
operating loss carry forwards of approximately $5.7 million and $4.6
million, respectively. These net operating loss carry forwards will expire at
various dates beginning in 2026 if not utilized. In addition, the Company had
U.S. state net operating loss carry forwards of approximately $4.5 million
and $0.3 million as of September 30, 2009 and 2008, respectively, and
these losses will begin to expire at various dates beginning in 2018 if not
utilized. In addition, the Company had foreign net operating loss carry forwards
of approximately $14.0 million and $8.3 million as of
September 30, 2009 and 2008, respectively. These net operating loss
carryforwards will begin to expire in 2012 if not utilized. The
Company has no tax credit carry forwards.
As of
September 30, 2009, due to the history of losses the Company has generated,
the Company believes that it is more-likely-than-not that the deferred tax
assets will not be realized. Therefore, the Company has a full valuation
allowance on the Company’s deferred tax assets of $8.7 million, an increase
of $2.7 million from September 30, 2008. The current year change
in valuation allowance is mainly due to (1) the increase of net operating loss
and (2) an increase in the U.S. state tax rate after apportionment.
Utilization
of the U.S. federal and state net operating loss carry forwards may be subject
to substantial annual limitation due to certain limitations resulting from
ownership changes provided by U.S. federal and state tax laws. The annual
limitation may result in the expiration of net operating losses carryforwards
and credits before utilization.
The
Company has no undistributed foreign earnings as of September 30,
2009.
Under the
New Income Tax Law, a "resident enterprise," which includes an enterprise
established outside of the PRC with management located in the PRC, will be
subject to PRC income tax. If the PRC tax authorities determine that the Company
and its subsidiaries registered outside PRC should be deemed a resident
enterprise, the Company's PRC tax resident entities will be subject to the PRC
income tax at a rate of 25%.
The
Company’s operations are subject to income and transaction taxes in the United
States and in certain foreign jurisdictions. Significant estimates and judgments
are required in determining the Company’s worldwide provision for income taxes.
Some of these estimates are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be uncertain as a
result.
There are
no ongoing examinations by taxing authorities at this time. The Company’s tax
years starting from 2006 to 2008 remain open in various tax jurisdictions. The
Company has not undertaken tax positions for which a reserve has been recorded.
The Company does not anticipate any significant change within the next 12 months
of its uncertain tax positions.
NOTE
9 — CONVERTIBLE NOTES
On
March 7, 2007, Solar EnerTech entered into a securities purchase agreement
to issue $17.3 million of secured convertible notes (the “Notes”) and detachable
stock purchase warrants the “Series A and Series B Warrants”). Accordingly,
during the quarter ended March 31, 2007, Solar EnerTech sold units
consisting of:
|
•
|
|
$5.0
million 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;
|
|
|
|
•
|
|
$3.3
million 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
|
|
•
|
|
$9.0
million 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. Under their original
terms, 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). Under their original terms, 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 Series A and Series B 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.
As of
September 30, 2009, the Company had outstanding convertible notes with a
principal balance of $11.6 million consisting of $2.5 million in principal
amount of Series A Convertible Notes and $9.1 million in principal amount of
Series B Convertible Notes. These outstanding notes were recorded at carrying
value at $3.1 million as of September 30, 2009 and are due on March 7,
2010.
The
Company evaluated the notes for derivative accounting considerations under FASB
ASC 815 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
Series A and Series B Warrants (including the Advisor Warrants) are classified
as a liability, as required by FASB ASC 480, “Distinguishing Liabilities from
Equity”, formerly referenced as SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity”, 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 Series A and Series B
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
|
|
$
|
-
|
|
|
|
|
|
|
Carrying
amount of notes at September 30, 2007
|
|
$
|
7,000
|
|
Amortization
of note discount and conversion effect
|
|
|
78,000
|
|
Carrying
amount of notes at September 30, 2008
|
|
|
85,000
|
|
Amortization
of note discount and conversion effect
|
|
|
2,976,000
|
|
Carrying
amount of notes at September 30, 2009
|
|
$
|
3,061,000
|
|
|
|
|
|
|
Fair
value of warrant liability at September 30, 2007
|
|
$
|
17,390,000
|
|
Gain
on fair market value of warrant liability
|
|
|
(13,978,000
|
)
|
Fair
value of warrant liability at September 30, 2008
|
|
|
3,412,000
|
|
Gain
on fair market value of warrant liability
|
|
|
(1,344,000
|
)
|
Fair
value of warrant liability at September 30, 2009
|
|
$
|
2,068,000
|
|
|
|
|
|
|
Fair
value of compound embedded derivative at September 30,
2007
|
|
$
|
16,800,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(13,767,000
|
)
|
Conversion
of Series A and B Notes
|
|
|
(2,053,000
|
)
|
Fair
value of compound embedded derivative at September 30,
2008
|
|
|
980,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(770,000
|
)
|
Conversion
of Series A and B Notes
|
|
|
(32,000
|
)
|
Fair
value of compound embedded derivative at September 30,
2009
|
|
$
|
178,000
|
|
The value
of the Series A and Series B Warrants (including the Advisor Warrants) was
estimated using a binomial valuation model with the following
assumptions:
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
Implied
term (years)
|
|
|
2.43
|
|
|
|
3.43
|
|
Suboptimal
exercise factor
|
|
|
2.5
|
|
|
|
2.5
|
|
Volatility
|
|
|
106
|
%
|
|
|
84
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk
free interest rate
|
|
|
1.15
|
%
|
|
|
2.58
|
%
|
In
conjunction with March 2007 financing, the Company 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 September 30, 2009 and 2008, total unamortized deferred
financing cost was $1.3 million and $1.8 million, respectively.
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 option related to each component
of the CED were analyzed and spreadsheet models of the net expected proceeds
resulting from exercise (or non-exercise) of the CED 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 on the measurement date and 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:
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
Starting
stock price (closing price on date preceding valuation
date)
|
|
$
|
0.28
|
|
|
$
|
0.40
|
|
Annual
volatility of stock
|
|
|
106.0
|
%
|
|
|
84.2
|
%
|
Risk
free rate
|
|
|
0.18
|
%
|
|
|
1.89
|
%
|
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.
The
material terms of the Notes are as follows:
Interest
Payments
The Notes
bear interest at 6% per annum and are due in 2010. Accrued interest is payable
quarterly in arrears on each of January 1, April 1, July 1 and October
1
,
beginning
on the first such date after issuance, in cash or registered shares of common
stock at the option of the Company. If the Company elects to pay any interest
due in registered shares of the Company’s common stock
:
(i) the issuance price
will be 90% of the 5-day weighted average price of the common stock ending on
the day prior to the interest payment due date, (ii) the common stock shall
have traded an average of at least 500,000 shares per day for each of the five
trading days prior to the applicable due date, and (iii) a trigger event
shall not have occurred.
Registration
Rights (Series A Convertible Notes)
The
Company and the holders of the Series A Convertible Notes entered into a
“Registration Rights Agreement” on March 7, 2007. Among other things, the
Company was obligated to do the following or incur liquidated damages upon
failure:
|
•
|
|
File
an initial registration statement within 45 days after closing (1.0%
per month of the aggregate purchase price until such failure is
cured);
|
|
|
|
•
|
|
Cause
effectiveness of the registration statement within 120 days after
closing (1.0% per month of the aggregate purchase price until such failure
is cured);
|
|
|
|
•
|
|
Maintain
effectiveness of the registration statement for the period in which the
Notes and Warrants are issued and outstanding (1.0% per month of the
aggregate purchase price until such failure is cured);
or
|
|
|
|
•
|
|
File
additional registration statements, as required for any shares cutback
from the initial registration statement as a result of Rule 415(a)
limitations (0.25% per month of the aggregate purchase price until such
failure is cured commencing after 150 days after
closing).
|
However,
in no event shall the aggregate amount of all registration delay payments listed
above (other than registration delay payments payable pursuant to events that
are within the control of the Company) exceed, in the aggregate, 24% of the
aggregate purchase price.
Failure
to comply with the Registration Rights Agreement constitutes a trigger event and
at the election of the holder may require redemption of the Series A
Convertible Notes (see the discussion titled “Redemptions” below).
The
Company has accounted for the Registration Rights Agreements related to the
Series A Convertible Notes in accordance with FASB ASC 450,
“Contingencies”, wherein the probability that a contingent obligation to make
future payments or otherwise transfer consideration shall be recognized and
measured separately.
The
offering of the Series A convertible notes closed on March 7, 2007.
According to the Registration Rights Agreement the Company signed in conjunction
with this offering, a registration statement that included the common stock
underlying the Series A convertible notes and the warrants issued in
connection therewith was to be declared effective by the SEC no later than
July 5, 2007. The registration statement the Company filed was declared
effective in November 2007. However, this delay constitutes a triggering
event which allows the holders, at their election, to require redemption of the
notes. On December 14 and 17, 2007, the Company obtained waivers from
Series A holders to waive the redemption rights relating to the delay of
the SB-2 effective date.
Voting
Rights
The
holders of the Notes do not have voting rights under these
agreements.
Dividends
Until all
of the Notes have been converted, redeemed or otherwise satisfied in accordance
with their terms, the Company shall not, directly or indirectly, redeem,
repurchase or declare or pay any cash dividend or distribution on its capital
stock without the prior express written consent of the required
holders.
Conversion
1)
|
|
At
any time or times on or after the issuance date of the Notes, the holder
is entitled to convert, at the holder’s sole discretion, any portion of
the outstanding and unpaid conversion amount (principal, accrued and
unpaid interest and accrued and unpaid late charges) into fully paid and
non-assessable shares of common stock, at the conversion rate (as defined
below).
|
|
|
2)
|
|
Forced
Conversion. Upon thirty (30) days prior written notice to all of the
holders, the Company shall have the right to call all, but not less than
all, of the Notes for conversion at the conversion price (as defined
below) provided that for each of the twenty (20) trading days
immediately preceding the forced conversion
date:
|
|
•
|
|
The
Company’s common stock has closed at a price equal to or greater than 300%
of the then applicable Series A conversion price, as described
below;
|
|
|
|
•
|
|
There
is either an effective registration statement providing for the resale of
the shares of common stock underlying the Notes or all of the shares of
common stock underlying the Notes may be resold pursuant to Rule 144(k) of
the Securities Act without restriction; and
|
|
|
|
•
|
|
The
common stock has traded an average of 500,000 shares per
day.
|
Conversion
Rate
The
number of shares of common stock issuable upon conversion of the Notes is
determined by dividing (x) the conversion amount (principal, interest and
late charges accrued and unpaid), by (y) the then applicable conversion
price (initially $0.69 for Series A Convertible Notes and $0.57 for
Series B Convertible Notes, subject to adjustment as provided in the
agreement). No adjustment in the conversion price of the Notes will be made in
respect of the issuance of additional shares of common stock unless the
consideration per share of an additional share of common stock issued or deemed
to be issued by the Company is less than the conversion price of the Notes in
effect on the date of, and immediately prior to, such issuance. Should the
outstanding shares of common stock increase (by stock split, stock dividend, or
otherwise) or decrease (by reclassification or otherwise), the conversion price
of the Notes in effect immediately prior to the change shall be proportionately
adjusted.
Redemptions
Each of
the following events shall constitute a trigger event, permitting the holder the
right of redemption
:
1)
|
|
Series A Only
– A
failure relating to the registration statement (such as failure to file
the registration statement within 45 days after the closing, the
failure to have the registration statement declared effective within
150 days after the closing, or the failure to maintain the
registration statement during the period which the securities are
outstanding) that cannot be cured for a period of ten
(10) consecutive days or for more than an aggregate of thirty (30)
days in any 365-day period (other than days during an allowable grace
period);
|
2)
|
|
The
suspension from trading or failure of the common stock to be listed on the
principal market or an eligible market for a period of five
(5) consecutive trading days or for more than an aggregate of ten
(10) trading days in any 365-day
period;
|
3)
|
|
The
Company’s (A) failure to cure a conversion failure by delivery of the
required number of shares of common stock within ten (10) trading
days after the applicable conversion date or (B) notice, written or
oral, to any holder of the Notes, including by way of public announcement
or through any of its agents, at any time, of its intention not to comply
with a request for conversion of any Notes into shares of common stock
that is tendered in accordance with the provisions of the
Notes;
|
|
|
4)
|
|
At
any time following the tenth (10th ) consecutive business day that the
holder’s authorized share allocation is less than the number of shares of
common stock that the holder would be entitled to receive upon a
conversion of the full conversion amount of the Notes (without regard to
any limitations on conversion);
|
|
|
5)
|
|
The
Company’s failure to pay to the holder any amount of principal (including,
without limitation, any redemption payments), interest, late charges or
other amounts when and as due under the Notes or any other transaction
document (as defined in the securities purchase agreement) or any other
agreement, document, certificate or other instrument delivered in
connection with the transactions to which the holder is a party, except,
in the case of a failure to pay any interest and late charges when and as
due, in which case only if such failure continues for a period of at least
five (5) business days;
|
|
|
6)
|
|
A)
The occurrence of any payment default or other default under any
indebtedness of the Company or any of its subsidiaries that results in a
redemption of or acceleration prior to maturity of $100,000 or more of
such indebtedness in the aggregate, or (B) the occurrence of any
material default under any indebtedness of the Company or any of its
subsidiaries having an aggregate outstanding balance in excess of $100,000
and such default continues uncured for more than ten (10) business days,
other than, in each case (A) or (B) above, or a default with
respect to any other notes;
|
|
|
7)
|
|
The
Company or any of its subsidiaries, pursuant to or within the meaning of
Title 11, U.S. Code, or any similar Federal, foreign or state law for the
relief of debtors (A) commences a voluntary case, (B) consents
to the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official
,
(D) makes a
general assignment for the benefit of its creditors or (E) admits in
writing that it is generally unable to pay its debts as they become
due;
|
|
|
8)
|
|
A
court of competent jurisdiction enters an order or decree under any
bankruptcy law that (A) is for relief against the Company or any of
its subsidiaries in an involuntary case, (B) appoints a custodian of
the Company or any of its subsidiaries or (C) orders the liquidation
of the Company or any of its subsidiaries;
|
|
|
9)
|
|
A
final judgment or judgments for the payment of money aggregating in excess
of $250,000 are rendered against the Company or any of its subsidiaries
and which judgments are not, within sixty (60) days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay;
provided, however, that any judgment which is covered by insurance or an
indemnity from a credit worthy party shall not be included in calculating
the $250,000 amount set forth above so long as the Company provides the
holder with a written statement from such insurer or indemnity provider
(which written statement shall be reasonably satisfactory to the holder)
to the effect that such judgment is covered by insurance or an indemnity
and the Company will receive the proceeds of such insurance or indemnity
within thirty (30) days of the issuance of such
judgment;
|
|
|
10)
|
|
The
Company breaches any representation, warranty, covenant or other term or
condition of any transaction document, except, in the case of a breach of
a covenant which is curable, only if such breach continues for a period of
at least ten (10) consecutive business days;
|
|
|
11)
|
|
Any
breach or failure in any respect to comply with the terms of the Notes;
or
|
|
|
12)
|
|
Any
trigger event that occurs with respect to any other obligations of the
Company.
|
At any
time after becoming aware of a trigger event, the holder may require the Company
to redeem all or any portion of the Notes at an amount equal to any accrued and
unpaid liquidated damages, plus the greater of (A) the conversion amount to
be redeemed multiplied by the redemption premium (125% for trigger events
described above in subparagraphs 1) to 4) and 9) to 12) above or 100% for other
events), or (B) the conversion amount to be redeemed multiplied by the
quotient of (i) the closing sale price at the time of the trigger event (or
at the time of payment of the redemption price, if greater) divided by
(ii) the conversion price
,
provided, however,
(B) shall be applicable only in the event that a trigger event of the type
specified above in subparagraphs 1), 2), 3) or 4) has occurred and remains
uncured or the conversion shares otherwise could not be received or sold by the
holder without any resale restrictions.
Change
of Control
1)
|
|
Assumption.
The Company
may not enter into or be party to a Fundamental Transaction (as defined
below) unless:
|
|
•
|
|
The
successor entity assumes in writing all of the obligations of the Company
under the Notes and related documents; and
|
|
•
|
|
The
successor entity (including its parent entity) is a publicly traded
corporation whose common stock is quoted on or listed for trading on an
eligible market.
|
2)
|
|
Redemption Right.
At any
time during the period beginning on the date of the holder’s receipt of a
change of control notice and ending twenty (20) trading days after
the consummation of such change of control, the holder may require the
Company to redeem all or any portion of the Notes in cash for an amount
equal to any accrued and unpaid liquidated damages, plus the greater of
(i) the product of (x) the conversion amount being redeemed and
(y) the quotient determined by dividing (A) the greater of the
closing sale price of the common stock immediately prior to the
consummation of the change of control, the closing sale price immediately
following the public announcement of such proposed change of control and
the closing sale price of the common stock immediately prior to the public
announcement of such proposed change of control by (B) the conversion
price and (ii) 125% of the conversion amount being redeemed
.
|
The
material terms of the Series A and Series B Warrants are as
follows:
Exercise
of Series A and Series B Warrant and Exercise Price
The
Series A and Series B Warrants may be exercised by the holder on any day on or
after issuance, at the holder’s election in cash or, as to the Series A
Warrants, the holder may decide to elect to receive upon such exercise the net
number of shares of common stock pursuant to a cashless exercise based on a
formula, considering the then current market value of the Company’s common
stock, only if such shares issuable have not been registered.
If the
Company issues or sells, or is deemed to have issued or sold, any shares of
common stock for a consideration per share less than a price equal to the
exercise price in effect immediately prior to such issue or sale or deemed
issuance or sale
,
then
immediately after such dilutive issuance, the exercise price then in effect
shall be reduced to an amount equal to the new issuance price. Upon each such
adjustment of the exercise price, the number of warrant shares shall be adjusted
to the number of shares of common stock determined by multiplying the exercise
price in effect immediately prior to such adjustment by the number of warrant
shares acquirable upon exercise of the warrants immediately prior to such
adjustment and dividing the product thereof by the exercise price resulting from
such adjustment. In addition, the Company shall reduce the exercise price and
increase the number of warrant shares proportionately in the event of a stock
split, stock dividend or recapitalization.
In the
event that the Company directly or indirectly consolidates, merges into another
entity or allows another person to purchase more than 50% of the outstanding
shares of common stock and that entity is a publicly traded corporation that
does not assume the Series A and Series B Warrants (the “Fundamental
Transaction”), then the holder may request the successor entity to pay cash to
the holder equal to the Black-Scholes value of the remaining unexercised portion
of warrants on the date of the Fundamental Transaction.
For the
fiscal year ended September 30, 2009, $0.9 million of Series A and B Convertible
Notes were converted into the Company’s common shares. The Company recorded a
loss on debt extinguishment of $0.5 million as a result of the conversion based
on the quoted market closing price of its common shares on the conversion
dates.
For the
fiscal year ended September 30, 2008, $4.9 million of Series A and B Convertible
Notes were converted into the Company’s common shares. The Company recorded $4.6
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. The net amount of
$4.2 million loss on debt extinguishment is included in the Consolidated
Statements of Operations.
The loss
on debt extinguishment is computed at the conversion dates as
follow:
|
|
Fiscal Years Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
Fair
value of the common shares
|
|
$
|
316,000
|
|
|
$
|
6,009,000
|
|
Unamortized
deferred financing costs associated with the converted
notes
|
|
|
140,000
|
|
|
|
712,000
|
|
Fair
value of the CED liability associated with the converted
notes
|
|
|
(33,000
|
)
|
|
|
(2,053,000
|
)
|
Accreted
amount of the notes discount
|
|
|
104,000
|
|
|
|
(54,000
|
)
|
Loss
on debt extinguishment
|
|
$
|
527,000
|
|
|
$
|
4,614,000
|
|
As
discussed in “Note 2 – Liquidity and Going Concern Issue” and “Note 16 –
Subsequent Events”, the terms of the Series A and Series B Convertible
Notes have been amended.
NOTE
10 — STOCKHOLDERS’ EQUITY
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 the Company 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 the Company to Coach Capital
LLC.
On
December 20, 2007, the Company 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 approximately $0.4 million.
Warrants
During
March 2007, in conjunction with the issuance of $17,300,000 in convertible
debt, the board of directors approved the issuance of Warrants to purchase
shares of the Company’s common stock. Under their original terms, 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.
The
Series A and Series B Warrants (including the Advisor Warrants) are classified
as a liability in accordance with FASB ASC 480, “Distinguishing Liabilities from
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.
Additionally,
in connection with the offering all of the Company’s Series A and
Series B warrant holders waived their full ratchet anti-dilution and price
protection rights previously granted to them in connection with the Company’s
March 2007 convertible note and warrant financing.
On
January 12, 2008, the Company sold 24,318,181 shares of its common stock and
24,318,181 Series C warrants (the “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. Under its original terms, the
exercise price of the Series C Warrants is $1.00 per share. The warrants are
exercisable for a period of 5 years from the date of issuance of the Series C
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 stock and Series C warrants in January 2008 after all the
financing costs were $19.9 million and were recorded in additional paid in
capital and common stock. Neither the shares of common stock nor the shares of
common stock underlying the warrants sold in this offering were granted
registration rights.
There
were no warrant activities during the fiscal year ended September 30, 2009,
therefore the total outstanding warrant as of September 30, 2009 remains the
same as of September 30, 2008. A summary of outstanding warrant as of
September 30, 2009 is as follows:
|
|
Number
of
Shares
|
|
|
Exercise
Price
($)
|
|
Recognized
as
|
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
|
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
|
Outstanding
at September 30, 2009
|
|
|
56,377,190
|
|
|
|
|
|
|
At
September 30, 2009, 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
|
|
|
|
2.46
|
|
$0.88-$1.00
|
|
|
47,113,038
|
|
|
$
|
0.95
|
|
|
|
2.91
|
|
$1.21
|
|
|
7,246,377
|
|
|
$
|
1.21
|
|
|
|
2.44
|
|
As
discussed in “Note 2 – Liquidity and Going Concern Issue” and “Note 16 –
Subsequent Events”, the terms of the Series A, Series B and Series C Warrants
have been amended.
Restricted
Stock
On August
19, 2008, Mr. Leo Young, the Company’s Chief Executive Officer, entered into a
Stock Option Cancellation and Share Contribution Agreement with Jean Blanchard,
a former officer, to provide for (i) the cancellation of a stock option
agreement by and between Mr. Young and Ms. Blanchard dated on or about March 1,
2006 and (ii) the contribution to the Company by Ms. Blanchard of the remaining
25,250,000 shares of common stock underlying the cancelled option
agreement.
On the
same day, an Independent Committee of the Company’s Board adopted the 2008
Restricted Stock Plan (the “2008 Plan”) providing for the issuance of 25,250,000
shares of restricted common stock to be granted to the Company’s employees
pursuant to forms of restricted stock agreements.
The 2008
Plan provides for the issuance of a maximum of 25,250,000 shares of restricted
stock in connection with awards under the 2008 Plan. The 2008 Plan is
administered by the Company’s Compensation Committee, a subcommittee of the
Company’s Board of Directors, and has a term of 10 years. Restricted stock
vest over a three year period and unvested restricted stock are forfeited and
cancelled as of the date that employment terminates. Participation is limited to
employees, directors and consultants of the Company and its subsidiaries and
other affiliates. During any period in which shares acquired pursuant to the
2008 Plan remain subject to vesting conditions, the participant shall have all
of the rights of a stockholder of the Company holding shares of stock, including
the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares. If a participant
terminates his or her service for any reason (other than death or disability),
or the participant’s service is terminated by the Company for cause, then the
participant shall forfeit to the Company any shares acquired by the participant
which remain subject to vesting Conditions as of the date of the participant’s
termination of service. If a participant’s service is terminated by the Company
without cause, or due to the death or disability of the participant, then the
vesting of any restricted stock award shall be accelerated in full as of the
effective date of the participant’s termination of service.
The
following table summarizes the activity of the Company’s unvested restricted
stock units as of September 30, 2009 and changes during the fiscal years
ended September 30, 2009, is presented below:
|
|
Restricted
Stocks
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
average grant-
|
|
|
|
shares
|
|
date
fair value
|
|
Unvested
as of September 30, 2008
|
|
|
25,250,000
|
|
|
$
|
0.62
|
|
Restricted
stocks canceled
|
|
|
(2,100,000
|
)
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
|
Unvested
as of September 30, 2009
|
|
|
23,150,000
|
|
|
$
|
0.62
|
|
The total
unvested restricted stock as of September 30, 2009 and 2008 were 23,150,000 and
25,250,000 shares, respectively.
Stock-based
compensation expense for restricted stock for the fiscal years ended September
30, 2009 and 2008 were $2.5 million and $0.6 million, respectively. As of
September 30, 2009, the total unrecognized compensation expense net of
forfeitures relate to unvested awards not yet recognized is $5.3 million and is
expected to be amortized over a weighted average period of 1.9
years.
Options
Amended
and Restated 2007 Equity Incentive Plan
In
September 2007, the Company adopted the 2007 Equity Incentive Plan (the
“2007 Plan”) that allows the Company to grant non-statutory stock options to
employees, consultants and directors. A total of 10 million shares of the
Company’s common stock are authorized for issuance under the 2007 Plan. The
maximum number of shares that may be issued under the 2007 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.
On
February 5, 2008, the Board of Directors of the Company adopted the Amended and
Restated 2007 Equity Incentive Plan (the “Amended 2007 Plan”), which increases
the number of shares authorized for issuance from 10 million to 15 million
shares of common stock and was to be effective upon approval of the Company’s
stockholders and upon the Company’s reincorporation into the State of
Delaware.
On May 5,
2008, at the Company’s Annual Meeting of Stockholders, the Company’s
stockholders approved the Amended 2007 Plan. On August 13, 2008, the
Company reincorporated into the State of Delaware. As of September 30, 2009 and
2008, 12,060,000 and 7,339,375 shares of common stock, respectively remain
available for future grants under the Amended 2007 Plan.
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 the Amended 2007 Plan
is as follows:
|
|
Option Available For
Grant
|
|
|
Number of Option
Outstanding
|
|
|
Weighted Average
Fair Value Per
Share
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
Balance
at September 30, 2007
|
|
|
2,700,000
|
|
|
|
7,300,000
|
|
|
$
|
0.66
|
|
|
$
|
1.20
|
|
Additional
shares reserved
|
|
|
5,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options
granted
|
|
|
(870,000
|
)
|
|
|
870,000
|
|
|
$
|
0.37
|
|
|
$
|
0.61
|
|
Options
cancelled
|
|
|
509,375
|
|
|
|
(509,375
|
)
|
|
$
|
0.42
|
|
|
$
|
0.85
|
|
Balance
at September 30, 2008
|
|
|
7,339,375
|
|
|
|
7,660,625
|
|
|
$
|
0.39
|
|
|
$
|
0.62
|
|
Options
granted
|
|
|
(500,000
|
)
|
|
|
500,000
|
|
|
$
|
0.13
|
|
|
$
|
0.20
|
|
Options
cancelled
|
|
|
5,220,625
|
|
|
|
(5,220,625
|
)
|
|
$
|
0.39
|
|
|
$
|
0.62
|
|
Balance
at September 30, 2009
|
|
|
12,060,000
|
|
|
|
2,940,000
|
|
|
$
|
0.32
|
|
|
$
|
0.55
|
|
The total
fair value of shares vested during fiscal years 2009 and 2008 were $246,000 and
$726,000, respectively.
At
September 30, 2009 and 2008, 2,940,000 and 7,660,625 options were outstanding,
respectively and had a weighted-average remaining contractual life of 6.98 years
and 9.03 years, respectively. Of these options, 2,333,127 and 3,477,506 shares
were vested and exercisable on September 30, 2009 and 2008, respectively.
The weighted-average exercise price and weighted-average remaining contractual
term of options currently exercisable were $0.62 and 6.36 years,
respectively.
The fair
values of employee stock options granted during the fiscal years ended September
30, 2009 and 2008 were estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Volatility
|
|
|
97.0
|
%
|
|
|
99.2
|
%
|
Expected
dividend
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free
interest rate
|
|
|
1.68
|
%
|
|
|
2.42
|
%
|
Expected
term in years
|
|
|
3.9
|
|
|
|
2.8
|
|
Weighted-average
fair value
|
|
$
|
0.13
|
|
|
$
|
0.35
|
|
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 2007
Plan to $0.62, determined in accordance with the 2007 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 the Company’s stock on the dates of original grant. As
a result of the recent sharp reduction in the Company’s 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 FASB ASC 718, the Company has recorded
stock-based compensation expense of $3.4 million and $5.6 million for the fiscal
years ended September 30, 2009 and 2008, respectively, which include the
compensation effect for the options repriced and restricted stock. The
stock-based compensation expense is based on the fair value of the options at
the grant date. The Company recognized compensation expense for
share-based awards based upon their value on the date of grant amortized over
the applicable service period, less an allowance estimated future forfeited
awards.
NOTE
11 — FAIR VALUE OF FINANCIAL INSTRUMENTS
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, codified in
FASB ASC 820, “Fair Value Measurements and Disclosures”, which 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.
FASB ASC 820 is applicable whenever another accounting pronouncement requires or
permits assets and liabilities to be measured at fair value. FASB ASC 820 does
not expand or require any new fair value measures. FASB ASC 820 is effective for
fiscal years beginning after November 15, 2007. In December 2007, the FASB
agreed to a one year deferral of FASB ASC 820’s fair value measurement
requirements for nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. The Company adopted
FASB ASC 820 on October 1, 2008, which had no effect on the Company’s financial
position, operating results or cash flows.
FASB ASC
820 defines fair value and establishes a hierarchal framework which prioritizes
and ranks the market price observability used in fair value measurements. Market
price observability is affected by a number of factors, including the type of
asset or liability and the characteristics specific to the asset or liability
being measured. Assets and liabilities with readily available, active, quoted
market prices or for which fair value can be measured from actively quoted
prices generally are deemed to have a higher degree of market price
observability and a lesser degree of judgment used in measuring fair value.
Under FASB ASC 820, the inputs used to measure fair value must be classified
into one of three levels as follows:
Level 1 -
|
Quoted
prices in an active market for identical assets or
liabilities;
|
Level 2 -
|
Observable
inputs other than Level 1, quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets and
liabilities in markets that are not active, and model-derived prices whose
inputs are observable or whose significant value drivers are observable;
and
|
|
|
Level 3 -
|
Assets
and liabilities whose significant value drivers are
unobservable.
|
Observable
inputs are based on market data obtained from independent sources, while
unobservable inputs are based on the Company’s market assumptions. Unobservable
inputs require significant management judgment or estimation. In some cases, the
inputs used to measure an asset or liability may fall into different levels of
the fair value hierarchy. In those instances, the fair value measurement is
required to be classified using the lowest level of input that is significant to
the fair value measurement. Such determination requires significant management
judgment.
The
Company’s liabilities measured at fair value on a recurring basis consisted of
the following types of instruments as of September 30, 2009:
|
|
Fair Value at
September 30,
2009
|
|
|
Quoted prices
in
active
markets
for
identical
assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilites
|
|
$
|
178,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
178,000
|
|
Warrant
liabilities
|
|
|
2,068,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,068,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
2,246,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,246,000
|
|
The
Company’s valuation techniques used to measure the fair values of the derivative
liabilities and warrant liabilities were derived from management’s assumptions
or estimations and are discussed in Note 9 – Convertible Notes.
The
carrying values of cash and cash equivalents, accounts receivable, accrued
expenses, accounts payable, accrued liabilities and amounts due to related party
approximate fair value because of the short-term maturity of these instruments.
The Company does not invest its cash in auction rate securities. The
carrying values of the Company’s derivative liabilities and warrant liabilities
approximate fair value (see Note 9 – Convertible Notes) for the methods and
assumptions used in the fair value estimation.
At
September 30, 2009 and 2008, the carrying value of the Company’s convertible
notes was $3.1 million and $0.1 million, respectively. These notes bear interest
at 6% per annum and are due on March 7, 2010. Warrants were issued in connection
with the issuance of the notes, and the warrants are measured at fair value both
initially and in subsequent periods. 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”), which
are measured at fair value both initially and in subsequent periods (see Note 9
– Convertible Notes). The fair value of the convertible notes can be determined
based on the fair value of the entire financial instrument. However, it was not
practicable to estimate the fair value of the convertible notes because the
Company has to incur excessive costs to estimate the fair
value.
NOTE
12 — NET (LOSS) INCOME PER SHARE
The
following table presents the computation of basic and diluted net (loss) income
per share applicable to common stockholders:
|
|
Year
Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Calculation
of net (loss) income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(14,181,000
|
)
|
|
$
|
5,539,000
|
|
Weighted-average
number of common shares outstanding
|
|
|
87,817,762
|
|
|
|
75,944,461
|
|
Net
(loss) income per share - basic
|
|
$
|
(0.16
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
Calculation
of net (loss) income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(14,181,000
|
)
|
|
$
|
5,539,000
|
|
Less: Gain
on change in fair market value of compound embedded
derivative
|
|
|
-
|
|
|
|
(13,767,000
|
)
|
Interest
expense on convertible notes
|
|
|
-
|
|
|
|
1,035,000
|
|
Less:
Gain on change in fair market value of advisor warrants
|
|
|
-
|
|
|
|
(982,000
|
)
|
Less:
Gain on change in fair market value of Series B
warrants
|
|
|
-
|
|
|
|
(9,870,000
|
)
|
Net
(loss) income assuming dilution
|
|
$
|
(14,181,000
|
)
|
|
$
|
(18,045,000
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding
|
|
|
87,817,762
|
|
|
|
75,944,461
|
|
Effect
of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
Warrants
issued to advisors
|
|
|
-
|
|
|
|
388,866
|
|
Convertible
notes
|
|
|
-
|
|
|
|
20,962,588
|
|
Series
B Warrants
|
|
|
-
|
|
|
|
828,659
|
|
Weighted-average
number of common shares outstanding assuming dilution
|
|
|
87,817,762
|
|
|
|
98,124,574
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share - diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.18
|
)
|
NOTE
13 — COMMITMENTS AND CONTINGENCIES
Operating
lease
The
Company leases several of its facilities under operating leases.
Minimum
payments under these leases are as follows:
Fiscal
Year Ended September 30,
|
|
Amount
|
|
2010
|
|
$
|
656,000
|
|
2011
|
|
|
234,000
|
|
2012
|
|
|
118,000
|
|
2013
|
|
|
-
|
|
2014
|
|
|
-
|
|
After
2014
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,008,000
|
|
Rent
expense under operating leases was $0.8 million and $0.8 million in
fiscal years 2009 and 2008, respectively.
Research
and development commitment
Pursuant
to a joint research and development laboratory agreement with Shanghai
University, dated December 15, 2006 and expiring on December 15, 2016,
Solar EnerTech 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. dollars based upon a translation of the
RMB amounts into U.S. dollars at an exchange rate of 6.8290 as of September 30,
2009.
Year
|
|
Amount
|
|
2010
|
|
$
|
2,667,000
|
|
2011
|
|
|
1,113,000
|
|
|
|
|
|
|
Total
|
|
$
|
3,780,000
|
|
The
Company intends to increase research and development spending as it
grows its business. The payment to Shanghai University will be used to
fund program expenses and equipment purchase. Due to the delay in the progress
of research and development activities, the amount of $1.7 million originally
committed to be paid during fiscal years 2009 and 2008 has not been paid as of
September 30, 2009, as Shanghai University has not incurred the additional costs
to meet its research and development milestones and therefore has not made the
request for payments. If the Company fails to make payments, when requested, it
is deemed to be a breach of the agreement. If the Company is unable to correct
the breach within the requested time frame, Shanghai University could seek
compensation up to an additional 15% of the total committed amount. As of
September 30, 2009, the Company is not in breach as it has not received any
compensation 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 this agreement will be accounted for as research and development
expenditures under FASB ASC 730, "Research and Development” and expensed as
incurred.
NOTE
14 — RELATED PARTY TRANSACTIONS
At
September 30, 2009 and September 30, 2008, the accounts payable and accrued
liabilities, related party balance was $5.6 million and $5.5 million,
respectively. The $5.6 million accrued liability represents $4.6 million of
compensation expense related to the Company’s obligation to withhold tax upon
exercise of stock options by Mr. Young in the fiscal year 2006 and the related
interest and penalties, and $1.0 million of indemnification provided by the
Company to Mr. Young for any liabilities he may incur as a result of
previous stock options granted to him by Ms. Blanchard, a former officer, in
conjunction with the purchase of Infotech on August 19, 2008.
On April
27, 2009, the Company entered into a Joint Venture Agreement with Jiangsu
Shunda Semiconductor Development Co., Ltd. to form a joint venture in the United
States by forming a new company, to be known as Shunda-SolarE Technologies,
Inc., in order to jointly pursue opportunities in the United States solar
market. After its formation, the Joint Venture Company’s name was later changed
to SET-Solar Corp. As of September 30, 2009, the Company had advanced
SET-Solar Corp $136,000 in cash.
NOTE
15 — FOREIGN OPERATIONS
The
Company identifies its operating segments based on its business activities. The
Company operates within a single operating segment, the manufacture of solar
energy cells and modules in China.
The
Company’s manufacturing operations and fixed assets are all based in China. The
Company’s sales occurred in Europe, Australia, North America and
China.
NOTE 16 — SUBSEQUENT
EVENTS
On
January 7, 2010, the Company entered into a Series A and Series B Notes
Conversion Agreement with the holders of Notes representing at least
seventy-five percent of the aggregate principal amounts outstanding under the
Notes to restructure the terms of the Notes. Pursuant to the terms of the
Conversion Agreement, the Notes will be automatically converted into shares of
the Company’s common stock at a conversion price of $0.15 per share and be
amended to eliminate the maximum ownership percentage restriction prior to such
conversion. Under the Conversion Agreement, the Notes have been
amended and election has been taken such that all outstanding principal, all
accrued but unpaid interest, and all accrued and unpaid Late Charges (as defined
in the Notes) with respect to all of the outstanding Notes have been
automatically converted into shares of the Company’s common stock at a
conversion price per share of common stock of $0.15 effective as of January 7,
2010. As of the Conversion Date, no further payments are owing or
payable under the Notes. As of the Conversion Date, each Note no
longer represents a right to receive any cash payments (including, but not
limited to, interest payments) and only represents a right to receive the shares
of common stock into which such Note has been automatically converted
into.
In
connection with the Conversion, on January 7, 2010, the Company entered into an
Amendment to the Series A, Series B and Series C Warrants with the holders of at
least a majority of the common stock underlying each of its outstanding Series A
Warrants, Series B Warrants and Series C Warrants (collectively the “PIPE
Warrants”). The Warrant Amendment reduces the exercise price for all of the PIPE
Warrants from $1.21, $0.90 and $1.00, respectively, to $0.15, removes certain
maximum ownership provisions and removes anti-dilution provisions for
lower-priced security issuances.
Pursuant
to the Conversion Agreement after the closing Conversion, the Company shall
issue to its employees additional options to purchase shares of its common stock
equal to approximately 30% of each employee’s pre-closing option holdings to
provide for additional equity incentive on account for the dilution upon
conversion of the Notes and re-pricing of the PIPE Warrants. These additional
options shall be priced at $0.15 per share.
This
Conversion Agreement resulted in modifications or exchanges of Notes and PIPE
Warrants, which should be accounted for pursuant to FASB ASC 470-50,
"Debt/Modifications and Extinguishment" formerly referenced as EITF Consensus
for Issue No. 96-19, "Debtor's Accounting for a Modification (or Exchange) of
Convertible Debt Instruments", and FASB ASC 470-50, "Debt/Modifications and
Extinguishment" formerly referenced as EITF Consensus for Issue No.06-06,
"Debtor's Accounting for a Modification (or Exchange) of Convertible Debt
Instruments". Given the significant reduction on the exercise price from $0.57
and $0.69, respectively per share to $0.15 per share, the modification is likely
to be considered substantial, and therefore the Notes are considered
extinguished. Given the significant reduction on the exercise price from $1.21,
$0.90 and $1.00, respectively, per share to $0.15 per share, the modification is
likely to be considered substantial, and therefore the liability associated with
the PIPE Warrants at the pre Conversion Agreement exercise price is considered
extinguished and will be replaced with the liability associated with the PIPE
Warrants at the post Conversion Agreement exercise price, which will be recorded
at fair value. As of the date of the annual report, we have not performed the
valuation of the Notes and their related compound embedded derivatives and
warrants immediately before the modification, and therefore cannot compute the
gain or loss for the extinguishment of the Notes. However, assuming that the
assumptions for the valuation of the compound embedded derivatives and warrants
remain the same as of the date immediately before the modification, the
Company’s preliminary estimation of the potential loss from the extinguishment
of the Notes and the amendment of the PIPE Warrants is to be at least $7.8
million (unaudited).
Pursuant
to SFAS 165, as codified in ASC 855, “
Subsequent Events
”, the
Company has reviewed all subsequent events and transactions that occurred
through January 12, 2010, which is the date the Company's Annual Report (Form
10-K) was filed with the Securities and Exchange Commission.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No events
or disagreements occurred which are requiring disclosure under Item 304 of
Regulation S-K.
ITEM
9A (T). CONTROLS AND PROCEDURES
Management’s
Evaluation of Disclosure Controls and Procedures
We
conducted an evaluation required by Rule 13a-15 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of September 30, 2009.
The
evaluation of our disclosure controls and procedures included a review of our
processes and implementation and the effect on the information generated for use
in this Annual Report on Form 10-K. In the course of this evaluation, we
sought to identify any significant deficiencies or material weaknesses in our
disclosure controls and procedures, to determine whether we had identified any
acts of fraud involving personnel who have a significant role in our disclosure
controls and procedures and to confirm that any necessary corrective action,
including procedure improvements, was documented. Based on our evaluation as of
September 30, 2009, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were not effective
solely because of the material weakness in management’s report on internal
control over financial reporting described below to ensure that the information
required to be disclosed by us in our reports filed or submitted under the
Exchange Act (i) is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms and (ii) is accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for
external purposes in accordance with generally accepted accounting principles
(“GAAP”). Internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and or our Board of Directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the interim or annual consolidated financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
A
deficiency in internal control over financial reporting exists when the design
or operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
Under the
supervision of our Chief Executive Officer and Chief Financial Officer,
management conducted an assessment of the effectiveness of the Company’s
internal control over financial reporting as of September 30, 2009, using the
criteria established in
Internal Control — Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”).
We
maintain our primary accounting books and records under PRC GAAP, and we prepare
our consolidated financial statements under U.S. GAAP through the use of
memorandum entries. As described in more detail below, our fiscal 2009 financial
reporting close process was ineffective in: (i) recording certain
transactions according to the applicable accounting pronouncement,
(ii) preventing amounts from being incorrectly classified in our statement
of cash flows and (iii) preparing certain critical financial statement
disclosures.
|
(i)
|
It
was determined that we inappropriately accounted for our contract
manufacturing transactions , and as such we were required to record an
audit adjustment to reduce sales and the corresponding cost of sales by
approximately $1.5 million.
|
|
|
|
|
(ii)
|
Our
auditors identified several items in the consolidated cash flow statement
that were not classified and presented in a manner consistent with the
requirements of the applicable accounting and reporting standards.
Accordingly, we corrected the cash flow statement to conform to the
classification and presentation requirements of FASB ASC 230, “Statement
of Cash Flows”, formerly referenced as SFAS 95, “Statement of Cash
Flows”.
|
|
(iii)
|
Our
auditors also identified that there were a number of missing required
footnote disclosures related to new accounting pronouncements and footnote
disclosures that were inaccurate or inadequate specifically surrounding
liquidity and going concern, share-based payments, and subsequent
events.
|
The
material weakness described above could result in a material misstatement of the
Company’s consolidated financial statements that would not be prevented or
detected. Based on this assessment, management concluded that our
internal control over financial reporting was not effective as of September 30,
2009.
Remediation
of Material Weakness
We have
engaged in, and will continue to engage in, substantial efforts to address the
material weakness in our internal control over financial reporting. The audit
committee will continue to monitor the remediation plan to address the material
weakness noted in prior periods and which remains at the completion of this
evaluation of the Company’s internal controls over financial
reporting.
To
remediate the material weakness described above, the Company has implemented or
plans to implement the remedial measures described below.
|
|
¨
|
Employ
resources with sufficient U.S. GAAP competence to improve our finance and
accounting department and the quality of our US GAAP accounting books and
records;
|
|
|
¨
|
Provide
additional training and cross-training to our existing personnel,
including areas of new and emerging accounting standards;
and
|
|
|
¨
|
Enhance
our accounting and finance policy and procedure manuals to provide
guidance to our finance and accounting staff and develop tools or
checklists to improve the completeness and accuracies of financial
disclosures.
|
Changes
in Internal Control Over Financial Reporting
There was
no change in our internal control over financial reporting during our fourth
quarter of fiscal 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
following table sets forth certain information regarding our directors and
executive officers. There are no family relationships among our executive
officers and directors.
Name
|
Age
|
Position
|
Leo
Shi Young
|
55
|
Director,
President and Chief Executive Officer
|
Shi
Jian Yin
|
53
|
Director,
Vice-President, Chief Operating Officer
|
Robert
Coackley
|
74
|
Director
|
Philip
Fei Yun
|
48
|
Director
|
Kevin
Koy
|
50
|
Director
|
Steve
Ye
|
33
|
Chief
Financial Officer
|
LEO SHI
YOUNG, Director, President and Chief Executive Officer since April
2006
Prior to
becoming our President and Chief Executive Officer, Mr. Young was the
co-founder, President and Chief Executive Officer of InfoTech Essentials Inc.,
an energy-saving technology company in China from 2001 to 2006. Mr. Young was a
senior member of the California trade delegation to China in 2005, headed by
Governor Arnold Schwarzenegger, and currently serves as an organizing committee
member of China’s National Renewable Energy Forum. Mr. Young holds an MBA from
Fordham University, New York (2005); an MA from the School of the Art Institute
of Chicago (1985); and a BA from Tsinghua University of Beijing
(1982).
SHI JIAN
YIN, Director, Vice President and Chief Operating Officer since May
2006
Prior to
joining us in May 2006, Mr. Yin was the founder and General Manager of Shanghai
TopSolar Inc. Mr. Yin’s business experience includes management positions at
Shanghai Jiaotong University Gofly Group Co., Ltd., Shanghai Fenghuang Co.,
Ltd., Beijing Green Environment Technology Co., Ltd., as well as a number of
senior positions at Shanghai Fenghuang Co., Ltd. Mr. Yin was awarded two Science
and Technology Awards by the Chinese government for his research
accomplishments. Mr. Yin earned his MBA (1992) and BA (1988) from Shanghai
University of Communications, majoring in Engineering and Material
Science.
ROBERT
COACKLEY, Director since February 2008
Mr.
Coackley joined our board in February 2008. Mr. Coackley has been President and
Chief Executive Officer at several public and private technology companies. He
is currently Chief Executive Officer and a member of the board of directors of
IP Video Networks, Inc., based in San Diego, California. Mr. Coackley is also
President of CEO Excel. Mr. Coackley also currently serves as the Chairman of
the board of directors at OFID Micro Devices, Inc. as a director of DirectNu
Energy Corporation and as a director at Swapstar, Inc., all are private
companies. Mr. Coackley teaches Business Finance and Business Valuation at UC
Berkeley Extension. Mr. Coackley holds a B. Sc. Honors Degree in Electrical
Engineering from City University, London, England.
Philip
Fei Yun, Director since December 2008
Mr. Yun
joined our board in December 2008. Mr. Yun has engaged in solar industry to many
years and is an experienced cell production expert. Prior to joining Solar
EnerTech, he worked as Director of Technology at Solarfun Power Holding Co.,
Ltd., a major solar cell and module producer in China from 2005 to 2007. He also
served as Vice President of Green Acres Photolithographic Co., Ltd., Singapore.
Before that, he was a research engineer and PhD candidate at the Center for
Photovoltaic Devices and Systems, University of New South Wales in Australia.
Mr. Yun holds a master degree in Photovoltaics from Asian Institute of
Technology in Bangkok, Thailand and a Bachelor degree from Jinan University in
China.
KEVIN
KOY, Director since September 2007
Mr. Koy
joined our board in September 2007. Mr. Koy has over 20 years experience in
business management and development. Since 2004, Mr. Koy has been managing Old
World Homes, LLC, an innovative construction firm that he co-founded. From 2002
to 2004, Mr. Koy was the Director of Corporation Development, Business School,
University of Chicago and Director, External Affairs, Chemistry, of Northwestern
University. These positions were supported by his entrepreneur background and
experience which includes positions as CEO of Northfield Consulting Group; CEO
of Dauphin Technologies, Inc., the first hand-held computer company; CEO of
VictorMaxx technologies, Inc., a virtual reality computing company, and Market
Logic Group Ltd. Mr. Koy holds a BA degree from Grinnell College in Grinnell,
Iowa.
STEVE YE,
Chief Financial Officer, Treasurer and Secretary since
April 2009
Mr. Ye
joined us in April 2009. Mr. Ye has many years of experience in corporate
finance, especially in financial planning and analysis. Before joining the
Company, Mr. Ye worked at ABN AMRO Bank, GE and Wells Fargo bank for the last
ten years and advanced his career progressively in different financial
leadership roles. Mr. Ye holds an MBA from University of Rochester, Simon
Business School in 2004 and Bachelor from Shanghai International Studies
University with major in International Accounting in 1998. In addition, Mr. Ye
is a registered certified public accountant in State of Delaware and a Chartered
Financial Analyst.
Audit
Committee
The
members of the Audit Committee are Messrs. Coackley (Acting Chair) and Koy.
The Board of Directors has determined that each current member of the Audit
Committee is “independent”, as such term is defined under the rules and
regulations of the Securities and Exchange Commission (“SEC”) as they apply to
audit committee members. The Board of Directors has also determined that each
member of the Audit Committee is financially literate, and that
Mr. Coackley is an “audit committee financial expert”, as such term is
defined by the applicable regulations of the SEC.
The
functions of the Audit Committee include retaining our independent auditors,
reviewing their independence, reviewing and approving the planned scope of our
annual audit, reviewing and approving any fee arrangements with our auditors,
overseeing their audit work, reviewing and pre-approving any non-audit services
that may be performed by them, reviewing the adequacy of accounting and
financial controls, reviewing our critical accounting policies and reviewing and
approving any related party transactions.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities and Exchange Act of 1934 requires any person who is our
director or executive officer or who beneficially holds more than 10% of any
class of our securities which have been registered with the SEC, to file reports
of initial ownership and changes in ownership with the SEC. These persons are
also required under the regulations of the SEC to furnish us with copies of all
Section 16(a) reports they file.
Based
solely on a review of copies of such reports furnished to us and written
representations that no other reports were required during the fiscal year ended
September 30, 2009, we believe that all persons subject to the reporting
requirements of Section 16(a) filed the required reports on a timely basis with
the SEC, except as follows:
Insider
|
|
Filing
|
|
Date
of
Transaction
|
|
Filing
Date
|
The
Quercus Trust
|
|
Form
4
|
|
Apr.
9, 2009
|
|
Apr.
14, 2009
|
The
Quercus Trust
|
|
Form
4
|
|
June
16, 2009
|
|
June
19, 2009
|
Code
of Business Conduct and Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to all of our
employees, officers and directors. The Code of Business Conduct and
Ethics is available on our website at
www.solarenertech.com
and was filed with SEC on February 11, 2008 as Exhibit 14.1 to our Form
8-K.
ITEM
11. EXECUTIVE COMPENSATION
The
following table and discussion sets forth information with respect to all
compensation awarded to, earned by or paid to our Chief Executive Officer and to
any executive officer whose annual salary and bonus exceeded $100,000 during our
last completed fiscal year.
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
Option Awards($)
|
|
|
Other Compensation
|
|
|
|
|
Name
and
principal
position
|
|
Year
|
|
Salary
($)
|
|
|
|
(1)
|
|
|
($)
|
|
|
Total
($)
|
|
Leo
Shi Young,(6)
|
|
2009
|
|
|
200,000
|
|
|
|
2,428,000
|
(3)
|
|
|
22,000
|
(2)
|
|
|
2,650,000
|
|
President
and Chief Executive Officer
|
|
2008
|
|
|
132,000
|
|
|
|
279,000
|
(3)
|
|
|
18,000
|
(2)
|
|
|
429,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Jian Yin,
|
|
2009
|
|
|
103,000
|
|
|
|
1,175,000
|
(4)
|
|
|
|
|
|
|
1,278,000
|
|
Chief
Operating Officer
|
|
2008
|
|
|
74,000
|
|
|
|
181,000
|
(4)
|
|
|
|
|
|
|
255,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve
Ye
|
|
2009
|
|
|
38,000
|
|
|
|
8,000
|
(5)
|
|
|
|
|
|
|
46,000
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Option
award values reflect the amortization expense recognized by the Company in
accordance with FASB ASC 718, “Compensation - Stock Compensation" ("ASC
718"), during fiscal years 2007 and 2008 for unvested and outstanding
stock option grants. The total value to be expensed over the amortization
or vesting period for each award was determined using the Black-Scholes
option pricing model with assumptions as disclosed in this Form 10-K in
Item 7 Financial Statements, Note 3. Summary of Significant
Accounting Policies under the heading “Stock-Based
Compensation.”
|
|
(2)
|
The
Company provided an apartment to Mr. Young while he was working in the
Shanghai office.
|
|
(3)
|
On
August 19, 2008, Mr. Young was granted 11.75 million restricted
shares. These shares were issued pursuant to the Company's 2008
Restricted Stock Plan. The amount shown reflect the grant date
fair value computed in accordance with ASC
718.
|
|
(4)
|
On
August 19, 2008, Mr. Yin was granted 7.6 million restricted shares. These
shares were issued pursuant to the Company's 2008 Restricted Stock
Plan. The amount shown reflect the grant date fair value
computed in accordance with ASC
718.
|
|
(5)
|
Represents
option granted to Mr. Ye for 500,000 shares under the terms of the
Company’s Amended and Restated 2007 Equity Incentive Plan with an exercise
price of $0.20.
|
|
(6)
|
Under
the terms of the Executive Incentive Agreement, Change of Control
Retention and Severance Agreement entered into between the Company and Mr.
Young dated August 19, 2008, Mr. Young is entitled to receive salary and
other benefits as set forth in the Executive Incentive Agreement
below.
|
AGREEMENT
WITH PRINCIPAL EXECUTIVE OFFICER
Executive
Incentive, Change of Control Retention and Severance Agreement with Mr. Leo Shi
Young
Under the
terms of the Executive Incentive, Change of Control Retention and Severance
Agreement entered into between the Company and Mr. Young dated August 19, 2008
(the “Executive Incentive Agreement”), Mr. Young is entitled to:
(i) receive an annual base salary
of $200,000, increased to $250,000 for the calendar year 2009 if the Company
reaches certain operating and financial metrics agreed upon between the Board of
Director and Mr. Young and increased to $300,000 for the calendar year 2010 if
the Company reaches certain operating and financial metrics agreed upon between
the Board of Director and Mr. Young (to be revisited if 2009 metrics are not
met). Pursuant to a cost reduction effort by Mr. Young, Mr. Young
agreed to not increase his salary for calendar 2009 and that for it to remain at
his calendar 2008 salary;
(ii) options for up to 1.5 million
shares of the Company’s common stock if the Company reaches certain operating
and financial metrics agreed upon between the Board of Director and Mr. Young,
which would vest twelve (12) months after the date of the grant with an exercise
price equal to the market price of the Company’s common stock on the date of the
grant;
(iii) severance arrangement of a lump
sum payment in an amount equal to eighteen (18) months of Mr. Young’s then
effective base salary if he is involuntarily terminated for reasons other than
“Cause” (as such term is defined in the Executive Incentive
Agreement);
(iv) if a
“Termination Upon a Change of Control” (as such term is defined in the Executive
Incentive Agreement):
|
(a)
|
the
full receipt of all salary and accrued vacation (less applicable
withholding) earned through the termination date and benefits that he is
entitled to;
|
|
(b)
|
the
full vesting and immediate exercisability of all of his stock options and
restricted stock prior to the effective date of the Termination
Upon a Change of Control provided that he executes a satisfactory release
of claims to the Company; and
|
|
(c)
|
a
lump sum cash payment in an amount equal to eighteen (18) months of his
then effective base salary (less applicable withholding) provided that he
executes a satisfactory release of claims to the
Company;
|
and (v)
other benefits as set forth in the Executive Incentive Agreement.
Outstanding
Equity Awards at Fiscal Year-End
OUTSTANDING
EQUITY AWARDS AT SEPTEMBER 30, 2009
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Number of Shares
or Units of
Stock(#) That
Have Not Vested
(#)
|
|
|
Market Value of
Shares or units of
Stock That have
Not
Vested ($) (1)
|
|
Leo
Shi Young
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,750,000
|
(2)
|
|
|
3,290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shi
Jian Yin
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,600,000
|
(3)
|
|
|
2,128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve
Ye
|
|
|
-
|
|
|
|
500,000
|
(4)
|
|
|
0.20
|
|
|
4/2/2019
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Based
on a closing price of Solar EnerTech's common stock of $0.28 on September
30, 2009.
|
(2)
|
On
August 19, 2008, Mr. Young was granted 11.75 million shares of restricted
stocks. These shares were issued pursuant to the Company’s 2008
Restricted Stock Plan and will be vested 20% on August 19, 2010 and 80% on
August 19, 2011. Please see our discussion below in Item 12
regarding the 2008 Restricted Stock
Plan.
|
(3)
|
On
August 19, 2008, Mr. Yin was granted 7.6 million shares of restricted
stocks. These shares were issued pursuant to the Company’s 2008
Restricted Stock Plan and will be vested 20% on August 19, 2010 and 80% on
August 19, 2011. Please see our discussion below in Item 12
regarding the 2008 Restricted Stock
Plan.
|
(4)
|
Represents
options granted to Mr. Ye effective April 2,2009 under the terms of
the Company’s Amended and Restates 2007 Equity Incentive Plan with an
exercise price of $0.20 per share. These shares vest 25%
annually over 4 years beginning on April 2,
2009
|
DIRECTOR
COMPENSATION
Name
|
|
Oprtion Awards
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
Leo
Shi Young (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shi
Jian Yin (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Robert
Coackley
|
|
|
-
|
|
|
|
2,700
|
(2)
|
|
|
2,700
|
|
Kevin
Koy
|
|
|
-
|
|
|
|
1,200
|
(2)
|
|
|
1,200
|
|
Philip
Fei Yun
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Please
see the Summary Compensation Table above with respect to compensation
earned by Messrs Young and Yin as executive officers of the
Company.
|
(2)
|
Cash
compensation received by each board
member.
|
Compensation
of Directors
Narrative
to Director Compensation Table
On
February 22, 2008, the Compensation Committee of the Board of Directors
recommended and the Board adopted the following compensation arrangements for
our non-employee directors:
|
|
Attendance Fees
|
|
Stock Option Award
|
|
|
|
All
Board Members
|
|
$1,500
per Board meeting attended in person; $300 per Board meeting attended
telephonically
|
|
25,000
shares vesting ratably over one year
|
|
|
|
|
|
|
Audit
Committee
|
|
$1,500
per committee meeting attended in person; $300 per committee meeting
attended telephonically (1)
|
|
—
|
Audit
Committee Chair
|
|
—
|
|
Additional
award of 175,000 shares vesting ratably over one year
|
|
|
|
Compensation
Committee
|
|
$1,500
per committee meeting attended in person; $300 per committee meeting
attended telephonically (1)
|
|
—
|
|
|
|
Compensation
Committee Chair
|
|
—
|
|
Additional
award of 75,000 shares vesting ratably over one year
|
|
|
|
Nominating
and Governance Committee
|
|
$1,500
per committee meeting attended in person; $300 per committee meeting
attended telephonically (1)
|
|
—
|
|
|
|
Nominating
and Governance Committee Chair
|
|
—
|
|
Additional
award of 75,000 shares vesting ratably over one
year
|
(1)
|
Attendance
of committee meetings that are held on the same day with a general Board
meeting do not result in receiving additional attendance fees for
attendance of the committee
meeting.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
EQUITY COMPENSATION
PLAN INFORMATION
Equity
Compensation Plan Information
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights (a)
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights (b)
|
|
|
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities
reflected in column a) (c)
|
|
Equity
compensation plans approved by security holders
|
|
|
2,940,000
|
(1)
|
|
$
|
0.55
|
|
|
|
12,060,000
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
(1)
Represents options to purchase common stock issued pursuant to the terms of the
2007 Equity Incentive Plan, as amended and restated.
a — Our
common stock is currently quoted by the Over-The-Counter Bulletin Board under
the symbol “SOEN”.
b — We
have approximately 49 record holders on January 6, 2010.
c — No
cash dividend has been declared.
Amended
and Restated 2007 Equity Incentive Plan
On
September 24, 2007, our Board of Directors approved the adoption of the
2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the
issuance of a maximum of 10 million shares of common stock in connection
with awards under the 2007 Plan. Such awards may include stock options,
restricted stock purchase rights, restricted stock bonuses and restricted stock
unit awards. The 2007 Plan may be administered by the Company’s Board of
Directors or a committee duly appointed by the Board of Directors and has a term
of 10 years. Participation in the Plan is limited to employees, directors
and consultants of the Company and its subsidiaries and other affiliates.
Options granted under the 2007 Plan must have an exercise price per share not
less than the fair market value of the Company’s common stock on the date of
grant. Options granted under the 2007 Plan may not have a term exceeding
10 years. Awards will vest upon conditions established by the Board of
Directors or it’s duly appointed Committee. Subject to the requirements and
limitations of section 409A of the Internal Revenue Code of 1986, as amended, in
the event of a Change in Control (as defined in the 2007 Plan), the Board of
Directors may provide for the acceleration of the exercisability or vesting
and/settlement of any award, the Board of Directors may provide for a cash-out
of awards or the Acquirer (as defined in the 2007 Plan) may either assume or
continue the Company’s rights and obligations under any awards.
On
February 5, 2008, the Board of Directors adopted the Amended and Restated 2007
Equity Incentive Plan (the “Amended 2007 Plan”), which increases the number of
shares authorized for issuance from 10 million to 15 million shares of common
stock and was to be effective upon approval of the Company’s stockholders and
upon the Company’s reincorporation into the State of Delaware. On May
5, 2008, at the Company’s Annual Meeting of Stockholders, the Company’s
stockholders approved the Amended 2007 Plan. On August 13, 2008, the
Company reincorporated into 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 2007
Plan to $0.62, determined in accordance with the 2007 Plan as the closing price
for shares of Common Stock on the Over-the-Counter Bulletin Board on the date of
the repricing.
As of
September 30, 2009, the Board of Directors granted options to purchase
2,940,000 shares of our common stock to our employees, director and
consultants.
2008
Restricted Stock Plan
On August
19, 2008, Mr. Leo Young, our Chief Executive Officer, entered into a Stock
Option Cancellation and Share Contribution Agreement with Jean Blanchard, a
former officer, to provide for (i) the cancellation of a stock option agreement
by and between Mr. Young and Ms. Blanchard dated on or about March 1, 2006 and
(ii) the contribution to the Company by Ms. Blanchard of the remaining
25,250,000 shares of common stock underlying the cancelled Option
Agreement.
On the
same day, an Independent Committee of the Company’s Board adopted the 2008
Restricted Stock Plan (the “2008 Plan”) providing for the issuance of 25,250,000
shares of restricted common stock to be granted to the Company’s employees
pursuant to forms of restricted stock agreements.
The 2008
Plan provides for the issuance of a maximum of 25,250,000 shares of restricted
stock in connection with awards under the 2008 Plan. The 2008 Plan is
administered by the Company’s Compensation Committee, a subcommittee of our
Board of Directors, and has a term of 10 years. Restricted stock vest over
a three year period and unvested restricted stock are forfeited and cancelled as
of the date that employment terminates. Participation is limited to employees,
directors and consultants of the Company and its subsidiaries and other
affiliates. During any period in which shares acquired pursuant to
the 2008 Plan remain subject to vesting conditions, the participant shall have
all of the rights of a stockholder of the Company holding shares of stock,
including the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares. If a participant
terminates his or her service for any reason (other than death or disability),
or the participant’s service is terminated by the Company for cause, then the
participant shall forfeit to the Company any shares acquired by the participant
which remain subject to vesting Conditions as of the date of the participant’s
termination of service. If a participant’s service is terminated by the Company
without cause, or due to the death or disability of the participant, then the
vesting of any restricted stock award shall be accelerated in full as of the
effective date of the participant’s termination of service.
Options
Non-Plan
Options
Pursuant
to an option agreement dated March 1, 2006 between Ms. Blanchard, a former
officer and director, and Mr. Young, the President of the Company, the President
had 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 fiscal 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
stock compensation charge of $10,695,000 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 with Ms. Blanchard, a former
officer and director, and Mr. Xie, a former director of the Company, Mr. Xie had
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.
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 vested in March
2008.
Effective
August 19, 2008 the Company, purchased Infotech through a series of agreements.
As part of the purchase, the Company terminated the original agency relationship
with Infotech, terminated a management agreement with Mr. Leo Young, the
Company’s current President and Chief Executive Officer, and signed a new
incentive compensation agreement with Mr. Young in to replace the management
agreement. In addition, an option to purchase 25,250,000 shares of the Company’s
common stock at a price of $0.0001 per share held by Mr. Young was cancelled,
with the underlying shares contributed to the Company.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables sets forth security information as of November 30, 2009, as to
each person or group who is known to us to be the beneficial owner of more than
5% of our outstanding voting securities, each of our executive officers and
directors and of all of our executive officers and directors as a group. On
November 30, 2009, we had 111,506,696 shares of common stock
outstanding.
Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power over securities.
Except in cases where community property laws apply or as indicated in the
footnotes to this table, we believe that each shareholder identified in the
table possesses sole voting and investment power over all shares of common stock
shown as beneficially owned by the shareholder.
Shares of
common stock subject to options or warrants that are currently exercisable or
exercisable within 60 days after November 30, 2009 are considered
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person.
Security
Ownership of Certain Beneficial Owners
|
|
Number of
Shares
|
|
|
|
|
Name and Address
|
|
Beneficially Owned
|
|
|
Percentage Owned
|
|
The
Quercus Trust (1)
|
|
|
22,604,936
|
(2)
(3)
|
|
|
20.27
|
%
|
(1)
Information based on Amendment No. 4 to Schedule 13D dated November 12, 2009.
The address for The Quercus Trust is 1835 Newport Blvd., A109-PMB 467, Costa
Mesa, CA 92627. Each of David Gelbaum and Monica Chavez Gelbaum, acting alone,
has the power to exercise voting and investment control over the shares of
Common Stock owned by The Quercus Trust.
(2)
According to the form 13D/A filed on November 12, 2009, The Quercus Trust holds
warrants to purchase 39.59 million shares and convertible notes convertible into
15.47 million shares.
(3)
Pursuant to the terms of the Series A Convertible Note, Series B Convertible
Note, Series A warrants and Series B warrants held by The Quercus Trust, The
Quercus Trust is prohibited from converting or exercising such derivative
securities to the extent that after giving effect to such conversion or
exercise, The Quercus Trust would beneficially own in excess of 4.99% or 9.99%,
as the case may be, of the shares of Common Stock outstanding immediately after
giving effect to such conversion or exercise. Consequently, in accordance with
Rule 13D of the Exchange Act (“Rule 13D”), the beneficial ownership of The
Quercus Trust does not take into account the conversion or exercise of such
derivative securities into shares of Common Stock in excess of the limitation
contained therein. Further, The Quercus Trust is prohibited from exercising
their Series C warrants to the extent that after giving effect to such exercise,
The Quercus Trust would beneficially own in excess of 9.99% or 19.99% of the
shares of Common Stock outstanding immediately after giving effect to such
exercise. Therefore, in accordance with Rule 13D, The Quercus Trust
is deemed to beneficial owners of only a certain number of shares of Common
Stock equal to 20.27% of the total issued and outstanding shares of Common
Stock, after giving effect to the exercise of a small portion of Series C
warrants to allow for The Quercus Trust's beneficial ownership to reach
20.27%.
Security
Ownership of Management
|
|
Number
of
Shares
|
|
|
|
|
Name
and
Address
(1)
|
|
Beneficially
Owned
|
|
|
Percentage
Owned
|
|
Leo
Shi Young
|
|
|
15,284,286
|
(2)
|
|
|
13.71
|
%
|
|
|
|
|
|
|
|
|
|
Shi
Jian Yin
|
|
|
11,100,000
|
(3)
|
|
|
9.95
|
%
|
|
|
|
|
|
|
|
|
|
Philip
Fei Yun
|
|
|
2,000,000
|
(4)
|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
Kevin
Koy
|
|
|
100,000
|
(5)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Robert
Coackley
|
|
|
100,000
|
(6)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group
|
|
|
28,584,286
|
|
|
|
25.45
|
%
|
*
|
Beneficially
owns less than 1% of our outstanding common shares and
options.
|
(1)
|
The
address for our officers and directors is 444 Castro Street, Suite #707,
Mountain View, CA 94041
|
(2)
|
Mr.
Young was granted 11.75 million of restricted shares on August 19,
2008. 20% of these shares will be vested on August 19, 2010 and
80% will bested on August 19, 2011. As of September 30, 2009,
none of the shares have been vested. These restricted shares
bear voting rights and therefore are included in this
calculation.
|
(3)
|
Mr. Yin
was granted 7.6 million of restricted shares on August 19,
2008. 20% of these shares will be vested on August 19, 2010 and
80% will bested on August 19, 2011. As of September 30, 2009,
none of the shares have been vested. These restricted shares
bear voting rights and therefore are included in this
calculation.
|
(4)
|
Mr. Yun
was granted 3.0 million of restricted shares on August 19,
2008. 20% of these shares will be vested on August 19, 2010 and
80% will bested on August 19, 2011. As of September 30, 2009,
none of the shares have been vested. These restricted shares
bear voting rights and therefore are included in this
calculation.
|
(5)
|
Represents
the vested and exercisable of an option granted to Mr. Koy effective
September 25, 2007 and February 22, 2008 under the terms of the Company’s
Amended and Restated 2007 Equity Incentive
Plan.
|
(6)
|
Represents
the vested and exercisable of an option granted to Mr. Coackley
effective February 5, 2008 under the terms of the Company’s Amended and
Restated 2007 Equity Incentive
Plan.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
At
September 30, 2009 and September 30, 2008, the accounts payable and accrued
liabilities, related party balance was $5.6 million and $5.5 million,
respectively. The $5.6 million accrued liability represents $4.6 million of
compensation expense related to the Company’s obligation to withhold tax upon
exercise of stock options by Mr. Young in the fiscal year 2006 and the related
interest and penalties, and $1.0 million of indemnification provided by the
Company to Mr. Young for any liabilities he may incur as a result of
previous stock options granted to him by Ms. Blanchard, a former officer, in
conjunction with the purchase of Infotech on August 19, 2008.
DIRECTOR
INDEPENDENCE
The Board
of Directors is presently comprised of Leo Shi Young, Shi Jian Yin, Philip Fei
Yun, Kevin Koy, and Robert Coackley. Of such directors, Robert Coackley and
Kevin Koy are each an “independent director” as such term is defined in NASDAQ
Manual Rule 5605 (a)(2) of the listing standards of the NASDAQ
Stock Market. The Company was not a party to any transaction, relationship or
other arrangement with any of its “independent directors” that was considered by
our Board of Directors under NASDAQ Manual Rule 5605 (a)(2) in
the determination of such director’s independence.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
aggregate fees billed by our auditors for professional services rendered for the
audit of our annual consolidated financial statements and the review of our
quarterly financial statements for the fiscal years ended September 30,
2009 and 2008 were as follows:
|
|
Fiscal
Year
2009
|
|
|
Fiscal
Year
2008
|
|
Ernst
& Young Hua Ming — Audit fee
|
|
$
|
371,000
|
|
|
$
|
420,000
|
|
Ernst
& Young Hua Ming — Audit related fees
|
|
|
-
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
371,000
|
|
|
$
|
442,000
|
|
Tax
Fees
We paid
no fees to auditors for tax compliance, tax advice or tax compliance services
during the fiscal year ended September 30, 2009 and 2008,
respectively.
All
Other Fees
We did
not incur any other fees billed by auditors for services rendered to our
Company, other than the services covered in “Audit Fees” for the fiscal year
ended September 30, 2009 and in “Audit Fees” and “Audit Related Fees” for
the fiscal year ended September 30, 2008. Audit Related Fees for the fiscal year
ended September 30, 2008 was related to Form SB-2 filing.
Pre-Approval
Policies Regarding Audit and Permissible Non-Audit Services
Our Board
of Directors’ policy is to pre-approve all audit and permissible non-audit
services provided by our independent auditors. These services may include audit
services, audit-related services, tax services and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed as to
the particular service or category of services. The independent auditor and
management are required to periodically report to the Audit Committee regarding
the extent of services provided by the independent auditor in accordance with
this pre-approval.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The
following documents are being filed as part of this report on
Form 10-K:
(a) Index
to Consolidated Financial Statements:
|
Page
|
|
|
Reports of Independent Registered Public
Accounting Firm
|
29
|
Consolidated Balance Sheets as of September 30,
2009 and 2008
|
30
|
Consolidated Statements of Income for the years
ended September 30, 2009 and 2008
|
31
|
Consolidated Statements of Stockholders’ Equity
for the years ended September 30, 2009 and 2008
|
32
|
Consolidated Statements of Cash Flows for the
years ended September 30, 2009 and 2008
|
33
|
Notes to Consolidated Financial
Statements
|
34
|
(b)
Exhibits
2.1
|
|
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.
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3.1
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Certificate
of Incorporation, incorporated by reference from Exhibit 3.1 to our
Form 8-K filed on August 14, 2008.
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3.2
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By-laws,
incorporated by reference from Exhibit 3.2 to our Form 8-K filed
on August 14, 2008.
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4.1
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Specimen
Common Stock Certificate, incorporated by reference from Exhibit 4.1
to our Form 8-K filed on August 14, 2008.
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4.2
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Form
of Notice of Repricing, incorporated by reference from Exhibit 4.1 to
our Form 8-K filed on May 13, 2008.
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10.1
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Management
Agreement by and between the Company and Steve Ye dated April 2, 2009,
incorporated by reference from Exhibit 10.1 to our Form 8-K filed on April
7, 2009.
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10.2
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Stock
Purchase Agreement, dated August 19, 2008, incorporated by reference from
Exhibit 10.1 to our Form 8-K filed on August 19, 2008.
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10.3
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Executive
Incentive, Change of Control Retention and Severance Agreement entered
into between the Company and Mr. Young dated August 19, 2008, incorporated
by reference from Exhibit 10.2 to our Form 8-K filed on August 19,
2008.
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10.4
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2008
Restricted Stock Plan established effective as of August 19, 2008,
incorporated by reference from Exhibit 10.3 to our Form 8-K filed on
August 19, 2008.
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10.5
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Forms
of Restricted Stock Agreement, incorporated by reference from Exhibit 10.4
to our Form 8-K filed on August 19, 2008.
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10.6
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Form
of Indemnity Agreement, incorporated by reference from Exhibit 10.1
to our Form 8-K filed on August 14, 2008.
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10.7
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Amended
and Restated 2007 Equity Incentive Plan, incorporated by reference from
Exhibit 10.2 to our Form 8-K filed on August 14,
2008.
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10.8
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Notice
of Grant and Stock Option Agreement (For Participant Resident in the
United States of America), incorporated by reference from
Exhibit 10.3 to our Form 8-K filed on September 27,
2007.
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10.9
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Notice
of Grant and Stock Option Agreement (For Participant Resident in The
Peoples Republic of China), incorporated by reference from
Exhibit 10.4 to our Form 8-K filed on September 27,
2007.
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10.10
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Form
of Securities Purchase Agreement between the Company and certain Buyers
(as defined therein) dated as of January 11, 2008, incorporated by
reference from Exhibit 10.29 to our Form 8-K filed on January 16,
2008.
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10.11
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Form
of Series C Warrant dated as of January 11, 2008, incorporated by
reference from Exhibit 10.30 to our Form 8-K filed on January 16,
2008.
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10.12
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Form
of Securities Purchase Agreement between the Company and certain Buyers
(as defined therein) dated as of March 7, 2007, incorporated by
reference from Exhibit 10.1 to our Form 8-K filed on March 8,
2007.
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10.13
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Form
of Series A Convertible Note dated as of March 7, 2007,
incorporated by reference from Exhibit 10.2 to our Form 8-K
filed on March 8, 2007.
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10.14
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Form
of Series B Convertible Note dated as of March 7, 2007,
incorporated by reference from Exhibit 10.3 to our Form 8-K
filed on March 8, 2007.
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10.15
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Form
of Series A Warrant dated as of March 7, 2007, incorporated by
reference from Exhibit 10.4 to our Form 8-K filed on March 8,
2007.
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10.16
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Form
of Series B Warrant dated as of March 7, 2007, incorporated by
reference from Exhibit 10.5 to our Form 8-K filed on March 8,
2007.
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10.17
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Form
of Registration Rights Agreement dated as of March 7, 2007,
incorporated by reference from Exhibit 10.6 to our Form 8-K
filed on March 8, 2007.
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10.18
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Joint
R&D Laboratory Agreement between Solar EnerTech (Shanghai) Co., Ltd.
and Shanghai University dated December 15, 2006, incorporated by
reference from Exhibit 10.19 to our Form SB-2 filed on April 23,
2007.
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10.19
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Management
Agreement between the Company and Qizhuang Cai dated effective
April 6, 2007, incorporated by reference from Exhibit 10.27 to
our Form SB-2 filed on April 23, 2007.
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10.20
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Lease
Agreement between Solar EnerTech, Ltd. and Shanghai Jin Qiao Technology
Park, Ltd. commenced on February 20, 2006, incorporated by reference from
Exhibit 4.1 to our Form 8-K filed on May 12, 2006.
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10.21
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Supply-Purchase
Contract between Solar EnerTech (Shanghai) Co., Ltd. and Jiangsu
Photavaltaic Industry Development Co., Ltd. dated 2007, incorporated by
reference from Exhibit 10.22 to our Form SB-2 filed on April 23,
2007.
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10.22
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Joint
Venture Agreement between the Company and Jiangsu Shunda Semiconductor
Development Co., Ltd. effective April 27, 2009, incorporated by reference
from Exhibit 10.1 to our Form 8-K filed on May 1, 2009.
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14.1
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Code
of Business Conduct and Ethics, incorporated by reference from Exhibit
14.1 to our Form 8-K filed on February 11, 2008.
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21.1
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Subsidiaries
of the Registrant*
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23.1
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Consent
of Independent Registered Accounting
Firm*
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31.1
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Section
302 Certification – Chief Executive Officer*
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31.2
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Section
302 Certification – Chief Financial Officer*
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32.1
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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.*
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32.2
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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.*
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
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SOLAR
ENERTECH CORP.
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Date:
January 12, 2010
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By:
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/s/ Leo Shi Young
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Leo
Shi Young
President
and Chief Executive Officer
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POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Leo Shi Young and Steve Ye, and each of them
individually, as his attorney-in-fact, each with full power of substitution, for
him in any and all capacities to sign any and all amendments to this Report on
Form 10-K, and to file the same with, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or his or her
substitute, may do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
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By:
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/s/ Leo Shi Young
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Date:
January 12, 2010
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Leo
Shi Young
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
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By:
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/s/ Steve Ye
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Date:
January 12, 2010
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Steve
Ye
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
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By:
|
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/s/ Kevin Koy
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Date:
January 12, 2010
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Kevin
Koy
Director
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By:
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/s/ Robert Coackley
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Date:
January 12, 2010
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Robert
Coackley
Director
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