The
information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
Subject
to Completion
Preliminary
Prospectus Dated November 24, 2010
70,000,000
Units,
each
consisting of 1 share of Common Stock and
a
Warrant to purchase 1 share of Common Stock
We are
offering up to 70,000,000 units, each consisting of 1 share of our common
stock, par value $0.001 per share, and a warrant to purchase 1 share of our
common stock at an exercise price equal to
[
·
]
of the unit price,
subject to adjustment. The warrants will be exercisable on or after the
applicable closing date of this offering through and including the close of
business on the fifth anniversary of the date of issuance. The units
will not be certificated and the common stock and warrants will be immediately
separable and will be separately transferable immediately upon
issuance.
Our
common stock is currently quoted on the OTC Bulletin Board (“OTCBB”) under the
symbol “SOEN.” On November 23, 2010, the closing price for our common
stock on the OTCBB was $0.10 per share. The offering price and warrant exercise
price will be determined in discussions involving the Company, the placement
agent and potential investors, taking into account apparent demand for the
units, financial market conditions, market conditions for the Company, and other
consideration as deemed to be relevant.
Investing in our securities involves
a high degree of risk and purchasers of our securities may lose their entire
investment. See “Risk Factors” beginning on page 8
of this prospectus for factors you
should consider before buying our securities. You should carefully
read this prospectus before you invest in our securities.
|
|
Per Unit
|
|
|
Total
|
|
Public
Offering Price
|
|
$
|
|
|
|
$
|
|
|
Placement
Agent’s Fees (1)
|
|
$
|
|
|
|
$
|
|
|
Offering
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
(1) The
placement agent will also be entitled to reimbursement of expenses up to
a
maximum of 1.5% of the gross proceeds raised in the offering, but in no event
more than
$35,000 and will receive warrants to purchase 5% of
the aggregate number of shares of our common stock sold in this
offering.
Rodman
& Renshaw, LLC has agreed to act as our placement agent in connection with
this offering. In addition, the placement agent may engage one or more
sub-placement agents or select dealers. The placement agent is not
purchasing or selling any of the units in this offering and is not required to
sell any specific number or dollar amount of securities, but will assist us in
this offering on a “best efforts” basis. We have agreed to indemnify
the placement agent against some liabilities, including liabilities under the
Securities Act of 1933, and to contribute to payments that the placement agent
may be required to make in respect thereof. See “Plan of
Distribution” beginning on page 70 of this prospectus for more information on
this offering and the placement agent arrangement.
We are
not required to sell any specific dollar amount or number of units, but will use
our best efforts to sell all of the units being offered. This
offering expires on the earlier of (i) the date upon which all of the units
being offered have been sold, or (ii) December 7, 2010. We expect
that delivery of the securities being offered pursuant to this prospectus will
be made to purchasers on or before December 10, 2010. In either
event, the offering may be closed without further notice to
you. There is no minimal purchase requirement, no funds are required
to be escrowed and all net proceeds will be available to the Company at closing
for us as set forth in “Use of Proceeds” beginning on page 25.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
Rodman
& Renshaw, LLC
Sole
Placement Agent
The date
of this prospectus is [●], 2010
TABLE
OF CONTENTS
|
|
Page
|
PROSPECTUS
SUMMARY
|
|
1
|
RISK
FACTORS
|
|
8
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
|
24
|
USE
OF PROCEEDS
|
|
25
|
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|
|
26
|
CAPITALIZATION
|
|
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
28
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
30
|
DESCRIPTION
OF BUSINESS
|
|
49
|
MANAGEMENT
|
|
58
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
64
|
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
|
65
|
DESCRIPTION
OF SECURITIES
|
|
66
|
PLAN
OF DISTRIBUTION
|
|
70
|
LEGAL
MATTERS
|
|
72
|
EXPERTS
|
|
72
|
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
|
|
72
|
INDEX
TO FINANCIAL STATEMENTS
|
|
F-1
|
You
should rely only on the information contained in this prospectus. We have not,
and the placement agent has not, authorized anyone to provide you with
information different from that contained in this prospectus. If anyone provides
you with different or inconsistent information, you should not rely on
it. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. You
should assume that the information contained in this prospectus is accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Our business, financial condition,
results of operations, and prospects may have changed since that
date.
Some of
the industry and market data contained in this prospectus are based on
independent industry publications or other publicly available information that
we believe are reliable as of their respective dates, while other information is
based on our internal sources.
Our
trademarks include “Solar EnerTech” and “SolarE.” All other trademarks or
service marks appearing in this prospectus are trademarks or service marks of
their respective owners.
PROSPECTUS
SUMMARY
The
following summary contains basic information about us and the units that
we are offering. For a more complete understanding of the information that
you may consider important in making your investment decision, we
encourage you to read this entire prospectus. Before making an investment
decision, you should carefully read and consider this entire prospectus,
including our financial statements and the related notes included in this
prospectus and the information set forth under the headings “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” Unless otherwise indicated, the terms “Solar
EnerTech,” “Company,” “we,” “us” and “our” refer to Solar EnerTech Corp.
and its subsidiaries.
Our
Business
Solar
EnerTech Corp. is a solar product manufacturer based in Mountain View,
California, with low-cost operations located in Shanghai,
China. Our principal products are monocrystalline silicon and
polycrystalline silicon solar cells and solar modules. Solar cells convert
sunlight to electricity through the photovoltaic effect, with multiple
solar cells electrically interconnected and packaged into solar modules to
form the building blocks for solar power generating systems. We primarily
sell solar modules to solar panel installers who incorporate our modules
into their power generating systems that are sold to end-customers located
in Europe, Australia, North America and China.
We
have established our manufacturing base in Shanghai, China to capitalize
on the cost advantages offered in manufacturing of solar power
products. In our 67,107-square-foot manufacturing facility, we
operate two 25MW solar cell production lines and a 50MW solar module
production facility. We believe that the choice of Shanghai,
China for our manufacturing base provides us with convenient and timely
access to key resources and conditions to support our growth and low-cost
manufacturing operations.
We
have been able to increase sales since our inception in 2006. Although our
efforts to reach profitability have been adversely affected by the global
recession, credit market contraction and volatile polysilicon market,
during fiscal year 2009 we had significantly improved our operational
results by restructuring our management team, with a focus on our sales
team, streamlining our procurement and production process and implementing
various quality control and cost cutting programs. Consequently, gross
margin has significantly improved and operational costs have been
reduced.
Recent
Financial Results
We
have not yet completed preparation of financial statements for the quarter
ended September 30, 2010, but based on preliminary data available to us,
for the three months ended September 30, 2010, we expect to report volume
of solar modules shipped of 9.5MW and net revenue of $17.5 million
compared to volume of solar modules shipped and net revenue of 5.4MW and
$13.2 million, respectively for the same period last year. This
would translate to net revenue of $69.3 million for the full fiscal year
2010 compared to net revenue of $32.8 million in the previous fiscal
year. Given our estimates, quarterly revenue will have grown
32,5% over the prior year’s quarter, while full fiscal year revenue growth
would be in excess of 111% compared to the previous fiscal
year. Our actual performance for the three-month period and the
combined twelve-month period ended September 30, 2010 may differ
materially from our expectations. Additionally, during the
preparation of our financial statements for the quarter ending September
30, 2010, we may identify items that would require us to make adjustments,
which may be material, to the estimates described above. Ernst
& Young Hua Ming has not audited, reviewed, compiled or performed any
procedures with respect to this preliminary financial data and
accordingly, Ernst & Young Hua Ming does not express an opinion or any
other form of assurance with respect thereto. For a discussion
of the risks that may cause our results of operations to differ from our
expectations, see “Risk Factors” elsewhere in this offering
circular.
Our
Industry
Solar
power has emerged as one of the most rapidly growing renewable energy
sources. Through a process known as the photovoltaic (PV) effect,
electricity is generated by solar cells that convert sunlight into
electricity. In general, global solar cell production can be categorized
by three different types of technologies, namely, monocrystalline silicon,
polycrystalline silicon and thin film technologies. Crystalline silicon
technology is currently the most commonly used.
Although
PV technology has been used for several decades, the solar power market
grew significantly only in the past several years. Despite the contraction
in demand for solar power products during the second half of 2008 and the
first half of 2009 resulting from the global recession, credit market
contraction and volatile polysilicon market, we believe that demand for
solar power products has recovered significantly in response to a series
of factors, including the recovery of the global economy and increasing
availability of financing for solar power projects. Although selling
prices for solar power products, including the average selling prices of
our products, have generally stabilized at levels substantially below
pre-crisis prices, there is no assurance that such prices may not decline
again. In addition, demand for solar power products is significantly
affected by government incentives adopted to make solar power competitive
with conventional fossil fuel power. The widespread implementation of such
incentive policies, as has occurred in many countries in Europe, Asia
Pacific and North America, has significantly stimulated demand, whereas
reductions or limitations on such policies, as have recently been
announced in Germany, Spain and South Korea, can reduce demand for such
products. We have taken mitigating efforts to reduce this risk by
developing customers in other emerging markets and in our established
markets. We are currently expanding our niche market, which are customers
who are often underserved by major manufacturers who prefer to sell solar
product in large volumes. Accordingly, we believe that demand will
continue to grow rapidly in the long term as solar power becomes an
increasingly important source of renewable energy.
1
|
We
believe the following factors will drive demand in the global solar power
industry, including demand for our products:
|
•
|
environmental and other
advantages of solar power;
|
|
•
|
long-term growth in demand for
alternative sources of
energy;
|
|
•
|
government incentives for solar
power; and
|
|
•
|
decreasing costs of producing
solar energy.
|
We
believe the following are the key challenges presently facing the solar power
industry:
|
•
|
higher cost of solar power
compared with other sources of energy to
consumers;
|
|
|
|
|
•
|
difficulties in obtaining
cost-effective financing for solar power
projects;
|
|
|
|
|
•
|
continual reliance on government
subsidies and incentives;
|
|
|
|
|
•
|
volatility
of prices in the polysilicon and solar power product markets;
and
|
|
|
|
|
•
|
need to promote awareness and
acceptance of solar power
usage.
|
Our
Competitive Strengths
We
believe that the following strengths enable us to compete successfully in the
solar power industry:
|
•
|
our focus on niche, “emerging
markets” and “emerging customers” in existing markets not typically
covered by the major solar
manufacturers;
|
|
•
|
our ability to provide
high-quality products enables us to increase our sales and enhance our
brand recognition;
|
|
•
|
our strategic locations provide
us with convenient access to key resources and conditions to support our
low-cost manufacturing operations;
and
|
|
•
|
our modern production equipment
enable us to enhance our
productivity.
|
Our
Strategy
In order
to achieve our goal of becoming a leading supplier of solar power products, we
intend to pursue the following principal strategies:
|
•
|
continuing to diversify our
customer base with a focus on quality, service and competitive pricing,
but with a focus on niche, “emerging markets” and “emerging customers” in
existing markets not typically covered by the major solar
manufacturers;
|
|
|
developing
a vertically integrated business model where we can produce wafers to
capture additional margin;
|
|
|
raising
additional capital or borrowings to continue to prudently invest in the
coordinated expansion of our production capacity to add 50MW, to bring our
total manufacturing capacity to
100MW;
|
|
|
continuing
to enhance our research and development capability with a focus on
improving our manufacturing processes to increase overall cell efficiency,
reduce our average cost and improve the quality of our
products;
|
|
|
establishing
regional sales and support offices and warehouses in Central Europe and
North America to expand our sales and marketing network and enhance our
sales and marketing channels;
and
|
|
|
establishing
strategic alliances with medium and small installers, who also serve as
distributors, and system integrators and securing silicon raw material
supplies at competitive cost.
|
2
Our
Challenges
We
believe that the following are some of the major challenges, risks and
uncertainties that may materially affect us:
|
•
|
we
have a limited amount of cash to fund our operations and we may not be
able to secure external financing when needed; and if available, financing
may not be obtained on terms favorable to us or our
stockholders;
|
|
•
|
we may be adversely affected by
volatile market and industry trends, in particular, the demand for our
solar power products or the price at which we can charge may decline,
which may reduce our sales and
earnings;
|
|
|
a significant reduction in or
discontinuation of government subsidies and economic incentives for
installation of solar energy systems may have a material adverse effect on
our results of
operations;
|
|
|
our limited operating history
makes it difficult to evaluate our results of operations and
prospects;
|
|
|
notwithstanding our continuing
efforts to further diversify our customer base, we derive, and expect to
continue to derive, a significant portion of our
sales
from a limited number of
customers. As a result, the loss of, or a significant reduction in orders
from, any of these customers would significantly reduce our
sales
and harm our results of
operations;
|
|
|
our failure to successfully
execute our business expansion plans would have a material adverse effect
on the growth of our sales and
earnings;
|
|
|
we may not be able to obtain
sufficient silicon raw materials in a timely manner, which could have a
material adverse effect on our results of operations and financial
condition;
|
|
|
volatility in the prices of
silicon raw materials makes our procurement planning challenging and could
have a material adverse effect on our results of operations and financial
condition; and
|
|
|
fluctuations
in exchange rates could adversely affect our results of operations because
the currency we generally do business in is the RMB Yuan, our financial
statements are expressed in U.S. dollars and a significant portion of our
sales and expenses are denominated in foreign
currencies.
|
Please
see “Risk Factors” beginning on page 8 and other information included in this
prospectus for a discussion of these and other risks and
uncertainties.
3
Our
Corporate History and Information
Solar
EnerTech Corp. was originally incorporated under the laws of the State of Nevada
on July 7, 2004. In April 2006, we changed our name to
Solar EnerTech Corp. and in August 2008, we reincorporated to the State of
Delaware. Our principal executive offices are located at 655 West Evelyn
Avenue, Suite #2, Mountain View, CA 94041, and our telephone number
is (650) 688-5800. Our website is located at
www.solarE-power.com. The information on, or accessible through, our
websites does not constitute a part of, and is not incorporated into, this
prospectus.
The
Offering
Securities
Offered by Us
|
|
Up
to 70,000,000 units. Each unit will consist of one
share of our common stock $0.001 par value, and a warrant to
purchase one share of our common stock.
|
|
|
|
Offering
Price
|
|
$[●]
per unit
|
|
|
|
Description
of Warrants
|
|
The
warrants will be exercisable on or after the applicable closing date of
this offering through and including close of business on the fifth
anniversary of the date of issuance at an exercise price equal to [●]% of
the unit price.
|
|
|
|
Common
Stock Outstanding After the Offering
|
|
239,793,496 shares,
based on 169,793,496 shares outstanding as of June 30, 2010 and assuming
the purchase of all of the units being offered herein.
|
|
|
|
Use
of Proceeds
|
|
We
are required to utilize a portion of the net proceeds to repay a portion
of our Series B-1 Note. We intend to use the remaining net
proceeds from this offering for working capital proceeds, capital
expenditures and general corporate purposes. See “Use of Proceeds” on
page 25 for more information on the use of
proceeds.
|
|
|
|
Risk
factors
|
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 8.
|
|
|
|
OTCBB
symbol
|
|
“SOEN”
|
4
The number of shares of our common stock to be
outstanding after the closing of this offering is based on 169,793,496 shares
outstanding as of June 30, 2010 and excludes the following shares potentially
issuable as of that date:
|
·
|
15,000,000
shares of common stock reserved for issuance under our Amended and
Restated 2007 Equity Incentive Plan, including 2,140,000 shares of common
stock issuable upon the exercise of outstanding options with a weighted
average exercise price of $0.49 per
share;
|
|
·
|
12,100,000
shares of common stock available for issuance under our 2008 Restricted
Stock Plan;
|
|
·
|
55,229,796
shares of common stock issuable upon the exercise of outstanding warrants
with a weighted average exercise price of $0.18 per
share.
|
|
·
|
13,343,739
shares of common stock issuable upon the conversion of our outstanding
Series B-1 Note (assumes no repayment of any amounts outstanding under the
Series B-1 Note and that the noteholder has provide notice to increase its
maximum beneficial ownership percentage limit in us to above
4.99%);
|
|
·
|
320,000
shares of common stock that we have committed to issue to our public
relations firm; and
|
|
·
|
the
shares of common stock issuable upon exercise of the warrants included in
the offered units and the shares of common stock issuable upon exercise of
the warrant issued to Rodman & Renshaw, LLC as our placement
agent.
|
Unless we
specially state otherwise, the share information in this prospectus is as of
June 30, 2010 and reflects or assumes no exercise of outstanding options or
warrants to purchase or conversion of convertible securities into shares of our
common stock.
5
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following summary financial information contains consolidated statements
of income data for the three and nine months ended June 30, 2010 and the
years ended September 30, 2009, 2008 and 2007 and the consolidated balance sheet
data as of June 30, 2010 and September 30, 2009, 2008 and 2007. The
consolidated statements of income data and balance sheet data were derived
from the audited consolidated financial statements. Such financial
data should be read in conjunction with the consolidated financial statements
and the notes to the consolidated financial statements starting on page F-1 and
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
For
the Fiscal Years Ended
September 30,
|
|
|
|
Q3
2010
|
|
|
Q1-Q3
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
16,355,000
|
|
|
|
51,799,000
|
|
|
|
32,835,000
|
|
|
|
29,412,000
|
|
|
|
5,573,000
|
|
Cost
of sales
|
|
|
(15,051,000
|
)
|
|
|
(47,637,000
|
)
|
|
|
(33,876,000
|
)
|
|
|
(33,104,000
|
)
|
|
|
(5,934,000
|
)
|
Gross
profit (loss)
|
|
|
1,304,000
|
|
|
|
4,162,000
|
|
|
|
(1,041,000
|
)
|
|
|
(3,692,000
|
)
|
|
|
(361,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,475,000
|
|
|
|
7,243,000
|
|
|
|
9,224,000
|
|
|
|
11,778,000
|
|
|
|
11,865,000
|
|
Research
and development
|
|
|
54,000
|
|
|
|
287,000
|
|
|
|
700,000
|
|
|
|
702,000
|
|
|
|
198,000
|
|
Loss
on debt extinguishment
|
|
|
0
|
|
|
|
18,549,000
|
|
|
|
527,000
|
|
|
|
4,240,000
|
|
|
|
|
|
Impairment
loss on property and equipment
|
|
|
0
|
|
|
|
0
|
|
|
|
960,000
|
|
|
|
0
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,529,000
|
|
|
|
26,079,000
|
|
|
|
11,411,000
|
|
|
|
16,720,000
|
|
|
|
12,063,000
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,225,000
|
)
|
|
|
(21,917,000
|
)
|
|
|
(12,452,000
|
)
|
|
|
(20,412,000
|
)
|
|
|
(12,424,000
|
)
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,000
|
|
|
|
5,000
|
|
|
|
16,000
|
|
|
|
87,000
|
|
|
|
62,000
|
|
Interest
expense
|
|
|
(59,000
|
)
|
|
|
(5,383,000
|
)
|
|
|
(3,998,000
|
)
|
|
|
(1,035,000
|
)
|
|
|
(1,086,000
|
)
|
Loss
on issuance of convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
(15,209,000
|
)
|
Gain
(loss) on change in fair market value of compound embedded
derivative
|
|
|
717,000
|
|
|
|
1,115,000
|
|
|
|
770,000
|
|
|
|
13,767,000
|
|
|
|
(200,000
|
)
|
Gain
(loss) on change in fair market value of warrant liability
|
|
|
1,393,000
|
|
|
|
4,369,000
|
|
|
|
1,344,000
|
|
|
|
13,978,000
|
|
|
|
(290,000
|
)
|
Impairment
loss on investment
|
|
|
(1,000,000
|
)
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(485,000
|
)
|
|
|
(929,000
|
)
|
|
|
139,000
|
|
|
|
(846,000
|
)
|
|
|
(285,000
|
)
|
Net
loss
|
|
|
(658,000
|
)
|
|
|
(23,740,000
|
)
|
|
|
(14,181,000
|
)
|
|
|
5,539,000
|
|
|
|
(29,432,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic
|
|
|
(0.00
|
)
|
|
|
(0.18
|
)
|
|
|
(0.16
|
)
|
|
|
0.07
|
|
|
|
(0.38
|
)
|
Net
loss per share - diluted
|
|
|
(0.00
|
)
|
|
|
(0.18
|
)
|
|
|
(0.16
|
)
|
|
|
(0.18
|
)
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
156,502,573
|
|
|
|
128,327,753
|
|
|
|
87,817,762
|
|
|
|
75,944,461
|
|
|
|
78,396,108
|
|
Weighted
average shares outstanding - diluted
|
|
|
156,502,573
|
|
|
|
128,327,753
|
|
|
|
87,817,762
|
|
|
|
98,124,574
|
|
|
|
78,396,108
|
|
6
Consolidated
Balance Sheets
|
|
June
30, 2010
|
|
|
September
30, 2009
|
|
|
September
30, 2008
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
2,662,000
|
|
|
|
1,719,000
|
|
|
|
3,238,000
|
|
|
|
3,908,000
|
|
Accounts
receivable, net of allowance for doubtful account of $96,000 and
$96,000 at June 30, 2010 and September 30, 2009,
respectively
|
|
|
13,544,000
|
|
|
|
7,395,000
|
|
|
|
1,875,000
|
|
|
|
913,000
|
|
Advance
payments and other
|
|
|
347,000
|
|
|
|
799,000
|
|
|
|
3,175,000
|
|
|
|
6,500,000
|
|
Inventories,
net
|
|
|
4,987,000
|
|
|
|
3,995,000
|
|
|
|
4,886,000
|
|
|
|
5,708,000
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
0
|
|
|
|
1,250,000
|
|
|
|
0
|
|
|
|
0
|
|
VAT
receivable
|
|
|
422,000
|
|
|
|
334,000
|
|
|
|
2,436,000
|
|
|
|
480,000
|
|
Other
receivable
|
|
|
173,000
|
|
|
|
408,000
|
|
|
|
730,000
|
|
|
|
110,000
|
|
Total
current assets
|
|
|
22,135,000
|
|
|
|
15,900,000
|
|
|
|
16,340,000
|
|
|
|
17,619,000
|
|
Property
and equipment, net
|
|
|
9,407,000
|
|
|
|
10,509,000
|
|
|
|
12,934,000
|
|
|
|
3,215,000
|
|
Investment
|
|
|
0
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
0
|
|
|
|
0
|
|
|
|
1,812,000
|
|
|
|
2,540,000
|
|
Deposits
|
|
|
101,000
|
|
|
|
87,000
|
|
|
|
701,000
|
|
|
|
1,741,000
|
|
Other
assets
|
|
|
730,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
assets
|
|
|
32,373,000
|
|
|
|
27,496,000
|
|
|
|
32,787,000
|
|
|
|
25,115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
12,286,000
|
|
|
|
5,794,000
|
|
|
|
1,771,000
|
|
|
|
2,891,000
|
|
Customer
advance payment
|
|
|
420,000
|
|
|
|
27,000
|
|
|
|
96,000
|
|
|
|
1,603,000
|
|
Accrued
interest expense
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
615,000
|
|
Accrued
expenses
|
|
|
2,474,000
|
|
|
|
1,088,000
|
|
|
|
910,000
|
|
|
|
507,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
5,773,000
|
|
|
|
5,646,000
|
|
|
|
5,450,000
|
|
|
|
3,969,000
|
|
Demand
note payable to a related party
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
450,000
|
|
Demand
notes payable
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
700,000
|
|
Derivative
liabilities
|
|
|
0
|
|
|
|
178,000
|
|
|
|
0
|
|
|
|
0
|
|
Short-term
loans
|
|
|
729,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Convertible
notes, net of discount
|
|
|
0
|
|
|
|
3,061,000
|
|
|
|
0
|
|
|
|
0
|
|
Total
current liabilities
|
|
|
21,682,000
|
|
|
|
15,794,000
|
|
|
|
8,227,000
|
|
|
|
10,735,000
|
|
Convertible
notes, net of discount
|
|
|
1,542,000
|
|
|
|
0
|
|
|
|
85,000
|
|
|
|
7,000
|
|
Derivative
liabilities
|
|
|
562,000
|
|
|
|
0
|
|
|
|
980,000
|
|
|
|
16,800,000
|
|
Warrant
liabilities
|
|
|
1,044,000
|
|
|
|
2,068,000
|
|
|
|
3,412,000
|
|
|
|
17,390,000
|
|
Total
liabilities
|
|
|
24,830,000
|
|
|
|
17,862,000
|
|
|
|
12,704,000
|
|
|
|
44,932,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock - 400,000,000 shares authorized at $0.001 par value 169,793,496 and
111,406,696 shares issued and outstanding at June 30, 2010
and September 30, 2009, respectively
|
|
|
170,000
|
|
|
|
111,000
|
|
|
|
112,000
|
|
|
|
79,000
|
|
Additional
paid in capital
|
|
|
96,881,000
|
|
|
|
75,389,000
|
|
|
|
71,627,000
|
|
|
|
39,192,000
|
|
Other
comprehensive income
|
|
|
2,554,000
|
|
|
|
2,456,000
|
|
|
|
2,485,000
|
|
|
|
592,000
|
|
Accumulated
deficit
|
|
|
(92,062,000
|
)
|
|
|
(68,322,000
|
)
|
|
|
(54,141,000
|
)
|
|
|
(59,680,000
|
)
|
Total
stockholders' equity
|
|
|
7,543,000
|
|
|
|
9,634,000
|
|
|
|
20,083,000
|
|
|
|
(19,817,000
|
)
|
Total
liabilities and stockholders' equity
|
|
|
32,373,000
|
|
|
|
27,496,000
|
|
|
|
32,787,000
|
|
|
|
25,115,000
|
|
7
RISK
FACTORS
Any
investment in our common stock involves a high degree of
risk. Investors should carefully consider the risks described below
and all of the information contained in this prospectus before deciding whether
to purchase our common stock. Our business, financial condition or
results of operations could be materially adversely affected by these risks if
any of them actually occur. The trading price could decline due to
any of these risks, and an investor may lose all or part of an investor’s
investment. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting our
company. This prospectus also contains 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 as described below and
elsewhere in this prospectus.
RISKS
RELATED TO OUR BUSINESS AND OUR INDUSTRY
We have
a limited amount of cash to fund our operations. To the extent we do
not raise sufficient cash in our offering, our growth prospects and future
profitability may be materially adversely affected and we may not be able to
continue as a going concern.
As of
June 30, 2010, we had cash and cash equivalents of $2.7 million. We will require
a significant amount of cash to fund our operations. In order to
continue as a going concern, in addition to raising capital in the
offering, we will need to continue to generate new sales while controlling our
costs. If we are unable to successfully generate enough revenues to
cover our costs, we only have limited cash resources to bear operating
losses. To the extent our operations are not profitable, we may not
continue as a going concern.
We may be
adversely affected by volatile market and industry trends and, in particular,
the demand or pricing for our solar power products may decline, which may reduce
our
sales
and
earnings.
We are
affected by solar power market and industry trends. Beginning in the fourth
fiscal quarter 2008, many of our key markets, including Belgium, Germany, and
Australia, experienced a period of economic contraction and significantly slower
economic growth. In particular, from late 2008 through mid 2009, the credit
crisis, weak consumer confidence and diminished consumer and business spending
contributed to a significant slowdown in market demand for solar power
products. Meanwhile, manufacturing capacity for solar power products
increased during the same period. This resulted in prices for solar
power products declining significantly. These same trends
continued for the remainder of 2009 and caused prices for solar power products
to continue to decline.
In
addition, many of our customers and end-users of our products depend on debt
financing to fund the initial capital expenditure required to purchase our
products. Due to the global credit crisis, our customers and end-users have
experienced difficulty in obtaining financing or have experienced an increase in
the cost of financing. This may have affected their decision on
whether to purchase our products and/or the timing of their
purchases. The global economy has begun recovering since the first
half of 2009 and this resulted in an increased availability of financing for
solar power projects. Taken in conjunction with decreased average
selling prices for solar power products, demand for solar power products has
increased since the second half of 2009. However, if demand for solar power
products declines again and the supply of solar power products continues to
grow, the average selling price of our products will be materially and adversely
affected.
Also,
demand for solar power products is influenced by available supply and prices for
other energy products, such as oil, coal and natural gas, as well as government
regulations and policies concerning the electric utility industry. A decrease in
oil prices, for example, may reduce demand for investment in alternative energy
like solar. If these negative market and industry trends continue and the prices
of our solar power products continue to decrease as a result, our business and
results of operations may be materially and adversely affected.
A
significant reduction in or discontinuation of government subsidies and economic
incentives for installation of solar energy systems may have a material adverse
effect on our results of operations.
A
majority of our products sold are eventually incorporated into solar power
systems. We believe that the near-term growth of the market for solar power
systems depends substantially on government incentives because the cost of solar
power continues to substantially exceed the cost of conventional power in many
locations around the world. Various governments have used different policy
initiatives to encourage or accelerate the development and adoption of solar
power and other renewable energy sources. Countries in Europe, most notably
Germany and Spain, certain countries in Asia, including China, Japan and South
Korea, as well as Australia and the United States have adopted renewable energy
policies. Examples of government-sponsored financial incentives include capital
cost rebates, feed-in tariffs, tax credits, net metering and other incentives to
end-users, distributors, system integrators and manufacturers of solar power
products to promote the use of solar power in both on-grid and off-grid
applications and reduced dependency on other forms of
energy. However, political changes in a particular country could
result in significant reductions or eliminations of subsidies or economic
incentives, and the effects of the recent global financial crisis may affect the
fiscal ability of governments to offer certain types of incentives, such as tax
credits.
A
significant reduction in the scope or discontinuation of government incentive
programs, especially those in our target overseas markets, could cause demand
for our products and our sales to decline, and have a material adverse
effect on our business, financial condition, results of operations and
prospects. Governments may decide to reduce or eliminate these economic
incentives for political, financial or other reasons. Reductions in, or
eliminations of government subsidies and economic incentives before the solar
power industry reaches a sufficient scale to be cost-effective in a
non-subsidized marketplace could reduce demand for our products and adversely
affect our business prospects and results of operations. A significant reduction
in the scope or discontinuation of government incentive programs, especially
those in the target markets of our major customers, could cause demand for our
products and our sales to decline and have a material adverse effect on our
business, financial condition, results of operations and prospects. We have
taken mitigating efforts to reduce this risk by developing customers in other
emerging markets and in our established markets. We are currently expanding our
niche market, which are customers who are often underserved by major
manufacturers who prefer to sell solar product in large volumes. Accordingly, we
believe that demand will continue to grow rapidly in the long term as solar
power becomes an increasingly important source of renewable energy
We ha
ve
a history of
losses and
negative
operating cash flows,
which may
continue if we do not continue to increase our
sales
and/or further
reduce our costs.
While we
have been able to increase sales since our inception, we have generated an
operating loss in each financial period since inception. After various cost
cutting efforts, our operational expenses have been reduced significantly. In
order to improve our profitability, we will need to continue to generate new
sales while controlling our costs. As we plan on continuing to invest to grow
our business, we may not be able to successfully generate
sufficient sales to reach profitability. Our ability to achieve
profitability also depends on the growth rate of the photovoltaic portion of the
market, the continued market acceptance of photovoltaic products, the
competitiveness of our products as well as our ability to provide new products
and services to meet the demands of our customers. 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.
Our
limited operating history makes it difficult to evaluate our results of
operations and prospects.
We have
only been operating since 2006 and have limited operating
history. Our future success will require us to scale up our
production capacity beyond our existing capacity and further expand our customer
base. Although we have experienced sales growth in certain
periods, we cannot assure you that our sales will increase at previous
rates or at all, or that we will be able to operate profitably in future
periods. Our limited operating history makes the prediction of future results of
operations difficult, and therefore, past sales growth experienced by us
should not be taken as indicative of the rate of sales growth, if any, that
can be expected in the future. We believe that period to period comparisons of
our operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance. You should
consider our business and prospects in light of the risks, uncertainties,
expenses and challenges that we will face as an early-stage company seeking to
manufacture and sell new products in a volatile and challenging
market.
Notwithstanding
our continuing efforts to further diversify our customer base, we derive, and
expect to continue to derive, a significant portion of our
sales
from a limited
number of customers. As a result, the loss of, or a significant reduction in
orders from, any of these customers would significantly reduce our sales and
harm our results of operations.
We expect
that our results of operations will, for the foreseeable future, continue to
depend on the sale of our products to a relatively small number of customers.
For the nine fiscal months ended June 30, 2010 and the fiscal years ended
September 30, 2009 and 2008, sales to three, four and one customers,
respectively, exceeded 10% of our sales and accounted for approximately 76.28%,
70.74% and 38.15%, respectively, of our sales. Consequently,
any one of the following events may cause material fluctuations or declines in
our sales and have a material adverse effect on our results of
operations:
|
·
|
reduction,
delay or cancellation of orders from one or more significant
customers;
|
|
·
|
loss
of one or more significant customers and failure to identify additional or
replacement customers;
|
|
·
|
failure
of any significant customers to make;
and
|
|
·
|
timely
payment for products.
|
We cannot
assure you that these customers will continue to generate significant
sales for us or that we will be able to maintain these customer
relationships. We also cannot assure you that we will be successful
in diversifying our number of customers, which diversification in itself may
create additional financial risk. In addition, our business is
affected by competition in the market for products that many of our major
customers sell, and any decline in the businesses of our customers could reduce
the purchase of our products by these customers. The loss of sales to any of
these customers could also have a material adverse effect on our business,
prospects and results of operations.
Our
failure to successfully execute our business expansion plans would have a
material adverse effect on the growth of our sales and earnings.
Our
future success depends, to a large extent, on our ability to expand our
production capacity, increase vertical integration and continue technological
development of cell efficiencies. If we are able to raise sufficient capital, we
plan to increase our annual silicon solar cell and module production capacity
from 50 MW to approximately 100 MW. If we are unable to do so,
we will not be able to attain the production capacity and desired level of
economies of scale in our operations or cut the marginal production cost to the
level necessary to effectively maintain our pricing and other competitive
advantages. This expansion has required and will continue to require substantial
capital expenditures, significant engineering efforts, timely delivery of
manufacturing equipment and dedicated management attention, and is subject to
significant risks and uncertainties, including:
|
·
|
in
order to finance our production capacity expansion, we will need to raise
additional capital beyond what is raised by this offering through bank
borrowings or the issuance of our equity or debt securities, which may not
be available on reasonable terms or at all, and which could be dilutive to
our existing stockholders;
|
|
·
|
we
will be required to obtain government approvals, permits or documents of
similar nature with respect to any acquisitions or new expansion projects,
and we cannot assure you that such approvals, permits or documents will be
obtained in a timely manner or at
all;
|
|
·
|
we
may experience cost overruns, construction delays, equipment problems,
including delays in manufacturing equipment deliveries or deliveries of
equipment that does not meet our specifications, and other operating
difficulties; and
|
|
·
|
we
may not have sufficient management resources to properly oversee capacity
expansion as currently planned.
|
Any of
these or similar difficulties could significantly delay or otherwise constrain
our ability to undertake our capacity expansion as currently planned, which in
turn would limit our ability to increase sales, reduce marginal manufacturing
costs or otherwise improve our prospects and profitability.
In
addition, we may have limited access to financing to fund working capital
requirements, or may have to adjust the terms of our contracts with our
suppliers or customers to accommodate their requests, or our suppliers and
customers may be unable to perform their obligations under our existing
contracts with them. For example, if we are required to prepay for
raw materials or to buy equipment for our manufacturing facilities, we will need
to maintain sufficient working capital for such payments and we may not be
unable to obtain on reasonable terms to finance such payments or at
all. The occurrence of any of these events would affect our ability
to achieve economies of scale and higher utilization rates, which may in turn
hinder our ability to increase vertical integration and expand our production
capacity as planned.
Volatility
in the prices of raw materials makes our procurement planning challenging and
could have a material adverse effect on our results of operations and financial
condition.
We
procure raw materials primarily through spot market purchases. We
expect that the prices of raw materials may become increasingly volatile, making
our procurement planning challenging. For example, if we refrain from entering
into more fixed-price, long-term supply contracts, we may miss opportunities to
secure long-term supplies of raw materials at favorable prices if the price of
raw materials increases significantly in the future.
On the
other hand, if we enter into more fixed-price, long-term supply contracts, we
may not be able to renegotiate or otherwise adjust the purchase prices under
such long-term supply contracts if the price declines. If we fail to
obtain silicon wafers, our key raw material from the spot market, due to the
volatility of raw material prices, we may be unable to manufacture our
products. If we are able to manufacture our products, our products
may be available at a higher cost or after a long delay in connection with our
efforts to obtain silicon wafers. The inability to obtain silicon
wafers could prevent us from delivering our products to potential customers and
meeting their required quantities and prices that are profitable to us. 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, or could cause us to experience order
cancellations and loss of market share. In each case, our business,
financial condition and results of operations may be materially and adversely
affected.
We currently do
not have sufficient funds to meet the registered capital requirement for our
Yizheng subsidiary and Shanghai subsidiary
.
On
January 15, 2010, we incorporated a wholly-owned subsidiary in Yizheng, Jiangsu
Province of China to supplement our existing production facilities to meet
increased sales demands. The subsidiary was formed with a registered
capital requirement of $33 million, of which $23.4 million is to be funded by
October 16, 2011. As of June 30, 2010, the outstanding registered
capital requirement for the Yizheng subsidiary was $23.4 million. In
addition, our wholly-owned subsidiary in Shanghai, China has a registered
capital requirement of $47.5 million and as of June 30, 2010, our
paid-in-capital was approximately $31.96 million, with the remaining balance of
$15.54 million to be originally funded by September 21, 2010. In August 2010,
the Company received the approval of the Shanghai government to extend the
funding requirement date by nine months to June 2011. In order to fund the
registered capital requirement, we will have to raise funds or otherwise obtain
the approval of local authorities to reduce the amount of registered capital for
each of our subsidiaries. We cannot assure you that we will be able to raise
funds or obtain local authority approval to reduce the amount of registered
capital. See “Note 12 — Commitments and Contingencies”, in the notes to
consolidated financial statements for the quarter ended June 30,
2010.
We
may not have sufficient funds to complete construction of a manufacturing
facility in Yizheng as required.
On
February 8, 2010, we acquired land use rights of a parcel of land at the price
of approximately $0.7 million. This piece of land is 68,025 square meters and is
located in Yizheng, Jiangsu Province of China, which will be used to house our
second manufacturing facility. As part of the acquisition of the land use right,
we are required to complete construction of the facility by February 8, 2012. We
cannot assure you that we will have sufficient funds to complete construction of
the facility by the required date or obtain local authority approval to delay
such required date. See “Note 12 — Commitments and Contingencies”, in the notes
to consolidated financial statements for the quarter ended June 30,
2010.
We
have not fully funded our research and development commitments with Shanghai
University
Pursuant
to a joint research and development laboratory agreement with Shanghai
University, dated December 15, 2006 and expiring on December 15, 2016, we
committed to fund the establishment of laboratories and completion of research
and development activities. We committed to invest no less than RMB 5 million
each year for the first three years and no less than RMB 30 million cumulatively
for the first five years. 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 June 30, 2010, 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 we fail to make such payments when requested, we may be deemed to be in
breach of the agreement. If we are unable to correct the breach within the
requested time frame, Shanghai University could seek compensation of up to an
additional 15% of the total committed amount for approximately $0.7 million. As
of June 30, 2010, the Company is not in breach as it has not received any
additional compensation requests from Shanghai University. We, however, cannot
assure you that we will be able to fund our commitments to Shanghai University
when requested to do so. See “Note 12 — Commitments and Contingencies”, in the
notes to consolidated financial statements for the quarter ended June 30,
2010.
The
terms of one of our debt instruments contains certain requirements and covenants
which limit our ability to raise funds. In addition, if we fail to comply with
our covenants, our debt may be accelerated.
Our
Series B-1 Note contains certain provisions which, under certain circumstances,
require us to redeem certain amounts of the indebtedness in an equity financing.
In connection with certain future equity financings that we may pursue, we would
be required to utilize a portion of the proceeds towards redemption of our
Series B-1 Note, which may make it more difficult for us to raise
capital. In addition, our credit facility with Industrial Bank Co.,
Ltd. (“IBC”) contains provisions whereby IBC can demand repayment of outstanding
debt if we do not comply with any of the covenants, including but not limited
to, maintaining our creditworthiness, complying with all our contractual
obligations, providing true and accurate records as requested by IBC,
fulfillment of other indebtedness (if any), maintaining our business license and
continuing operations, ensuring our financial condition does not deteriorate,
remaining solvent, and other conditions, as defined in the credit facility
agreement. Since certain of the covenants are broadly constructed and subjective
in nature, IBC may have the right to demand repayment of any outstanding debt as
it may determine in its own discretion.
Our dependence on
a limited number of suppliers for a substantial majority of raw materials,
especially our silicon wafers, could prevent us from delivering our products in
a timely manner to our customers in the required quantities, which could result
in order cancellations, decreased
sales
and loss of
market share.
In 2008
and 2009, our five largest suppliers supplied in the aggregate approximately
53.2% and 70.8%, respectively, of our total silicon wafer material purchases by
value. If we fail to develop or maintain our relationships with these or our
other suppliers, we may be unable to manufacture our products, our products may
only be available at a higher cost or after a long delay, or we could be
prevented from delivering our products to our customers in the required
quantities, at competitive prices and on acceptable terms of delivery. Problems
of this kind could cause us to experience order cancellations, decreased sales
and loss of market share. In general, the failure of a supplier to supply
silicon wafer materials that meet our quality, quantity and cost requirements in
a timely manner due to lack of supplies or other reasons could impair our
ability to manufacture our products or could increase our costs, particularly if
we are unable to obtain these materials and components from alternative sources
in a timely manner or on commercially reasonable terms. Some of our suppliers
have a limited operating history and limited financial resources, and the
contracts we entered into with these suppliers do not clearly provide for
remedies to us in the event any of these suppliers is not able to, or otherwise
does not, deliver, in a timely manner or at all, any materials it is
contractually obligated to deliver. Any disruption in the supply of silicon
wafer materials to us may adversely affect our business, financial condition and
results of operations.
We
face intense competition in solar power product markets. If we fail to adapt to
changing market conditions and to compete successfully with existing or new
competitors, our business prospects and results of operations would be
materially and adversely affected.
The
markets for solar cells and solar modules are intensely
competitive. As we build up our solar cell and solar module
production capacity and increase the output of our products, we compete with
manufacturers of solar cells and solar modules both outside as well as inside
China. Outside China, our 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, our primary competitors are Suntech Power Holding’s Co., Ltd., Trina
Solar Ltd., Baoding Tianwei Yingli New Energy Resources Co., Ltd., Nanjing
PV-Tech Co., Ltd, Canadian Solar Inc., JA Solar Holdings Co. Ltd. and Solarfun
Power Holdings Co., Ltd. We compete primarily on the basis of the
power efficiency, quality, performance and appearance of our products, price,
strength of supply chain and distribution network, after-sales service and brand
image. Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial and
marketing resources than we do. They may also have existing
relationships with suppliers of silicon wafers, which may give them an advantage
in the event of a silicon shortage.
Moreover,
we expect an increase in the number of competitors entering our markets over the
next few years. The key barriers to entry into our industry at present consist
of availability of financing and availability of experienced technicians and
executives familiar with the industry. If these barriers disappear or become
more easily surmountable, new competitors may successfully enter into our
industry, resulting in loss of our market share and increased price competition,
which could adversely affect our operating and net margins.
We also
compete with alternative solar technologies. Some companies have spent
significant resources in the research and development of proprietary solar
technologies that may eventually produce photovoltaic products at costs similar
to, or lower than, those of monocrystalline or polycrystalline wafers without
compromising product quality. For example, some companies are developing or
currently producing photovoltaic products based on thin film photovoltaic
materials, which require significantly less polysilicon to produce than
monocrystalline or polycrystalline solar power products. These alternative
photovoltaic products may cost less than those based on monocrystalline or
polycrystalline technologies while achieving the same level of conversion
efficiency, and therefore, may decrease the demand for monocrystalline and
polycrystalline wafers, which may adversely affect our business prospects and
results of operations.
In
addition, the solar power market in general also competes with other sources of
renewable energy and conventional power generation. If prices for conventional
and other renewable energy sources decline, or if these sources enjoy greater
policy support than solar power, the solar power market could suffer and our
business and results of operations may be adversely affected.
If
solar power technology is not suitable for widespread adoption, or sufficient
demand for solar power products do 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 solar
power market is at a relatively early stage of development and the extent to
which solar power products will be widely adopted is uncertain. Market data in
the solar power 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 solar power technology proves
unsuitable for widespread adoption or if the demand for solar power products
fails to develop sufficiently, we may not be able to grow our business or
generate sufficient sales to become profitable or sustain profitability. In
addition, demand for solar power 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 solar power
technology and the demand for solar power products, including:
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cost-effectiveness
of solar power products compared to conventional and other non-solar
energy sources and products;
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performance
and reliability of solar power 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
solar power industry;
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success
of other alternative energy generation technologies, such as wind power,
hydroelectric power and biofuels;
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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 solar power 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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If solar
power technology proves unsuitable for wide commercial adoption and application
or if demand for solar power products fails to develop sufficiently, we may not
be able to grow our business or generate sufficient sales to sustain our
profitability.
Technological
changes in the solar power industry could render our products uncompetitive or
obsolete, which could reduce our market share and cause our
sales
and net loss to
increase.
The solar
power industry is characterized by evolving technologies and standards. These
technological evolutions and developments place increasing demands on the
improvement of our products, such as solar cells with higher conversion
efficiency and larger and thinner silicon wafers and solar cells. Other
companies may develop production technologies enabling them to produce silicon
wafers that could yield higher conversion efficiencies at a lower cost than our
products. Some of our competitors are developing alternative and competing solar
technologies that may require significantly less silicon than solar cells and
modules, or no silicon at all. Technologies developed or adopted by others may
prove more advantageous than ours for commercialization of solar power products
and may render our products obsolete. As a result, we may need to invest
significant resources in research and development to maintain our market
position, keep pace with technological advances in the solar power industry and
effectively compete in the future. Our failure to further refine and enhance our
products or to keep pace with evolving technologies and industry standards could
cause our products to become uncompetitive or obsolete, which could in turn
reduce our market share and cause our sales and net loss to
increase.
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, overseas
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 sales 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. For example,
if the Euro depreciates against the RMB Yuan, the currency use to purchase most
of our raw materials, then our profits may be negatively impacted because a
large amount of our sales are in Euros and US dollars. We are attempting to
limit the impact of a declining Euro by quoting our prices in U.S. dollars, but
this exposes us to the fluctuations between the RMB Yuan and the US
dollar. Therefore, fluctuations in the value of foreign currencies
have and can continue to have a negative impact on the profitability of our
global operations, which would seriously harm our business, results of
operations, and financial condition.
We are subject to risks associated
with currency fluctuations, and changes in the exchange rates of applicable
currencies could impact our results of operations.
Historically,
most of our revenues are primarily denominated in Euros and US dollars and
greater than the majority of our operating expenses and costs of sales are
denominated in the RMB Yuan, and we expect that this will remain true in the
future. Because we report our results of operations in U.S. dollars, changes in
the exchange rate between the RMB Yuan and the U.S. dollar and the Euro and the
U.S. dollar could materially impact our reported results of operations and
distort period to period comparisons. In particular, because of the difference
in the amount of our consolidated revenues and expenses that are in U.S. dollars
relative to RMB Yuan, a depreciation in the U.S. dollar relative to the RMB Yuan
could result in a material increase in reported costs relative to revenues, and
therefore could cause our profit margins and operating income to appear to
decline materially, particularly relative to prior periods. The converse is true
if the U.S. dollar were to appreciate relative to the RMB Yuan. Fluctuations in
foreign currency exchange rates also impact the reporting of our receivables and
payables in non-U.S. currencies. As a result of foreign currency fluctuations,
it could be more difficult to detect underlying trends in our business and
results of operations. In addition, to the extent that fluctuations in currency
exchange rates cause our results of operations to differ from our expectations
or the expectations of our investors, the trading price of our stock following
the completion of this offering could be adversely affected.
Existing
regulations and policies and changes to these regulations and policies 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 government
regulations and policies concerning the electric utility industry, as well as
policies adopted by electric utilities companies. These regulations and policies
often relate to electricity pricing and technical interconnection of
customer-owned electricity generation. In a number of 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 demand for our products. For example, without a regulatory mandated
exception for solar power systems, utility customers are often charged
interconnection or standby fees for putting distributed power generation on the
electric utility grid. These fees could increase the cost of solar power and
make it less desirable, thereby decreasing the demand for our products, harming
our business, prospects, results of operations and financial
condition.
In
addition, we anticipate that solar power products and their installation will be
subject to oversight and regulation in accordance with national and local
regulations relating to building codes, safety, environmental protection,
utility interconnection, and metering and related matters. Any new government
regulations or utility policies pertaining to solar power products may result in
significant additional expenses to the users of solar power products and, as a
result, could eventually cause a significant reduction in demand for our
products.
We
require a significant amount of cash to fund our operations and business
expansion; if we cannot obtain additional capital on terms satisfactory to us
when we need it, our growth prospects and future profitability may be materially
and adversely affected.
We
require a significant amount of cash to fund our operations, including payments
to suppliers of our raw materials. We will also need to raise funds for the
expansion of our production capacity and other investing activities, as well as
our research and development activities in order to remain
competitive. Future acquisitions, expansions, market changes or other
developments may cause us to require additional funds. Our ability to obtain
external financing is subject to a number of uncertainties,
including:
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our
future financial condition, results of operations and cash
flows;
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the
state of global credit markets
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general
market conditions for financing activities by companies in our industry;
and
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economic,
political and other conditions in China and
elsewhere.
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If we are
unable to obtain funding in a timely manner or on commercially acceptable terms,
or at all, our growth prospects and future profitability may be materially and
adversely affected.
Our
research and development initiatives may fail to enhance manufacturing
efficiency or quality of our products.
We are
making efforts to improve our manufacturing processes and improve the conversion
efficiency and quality of our products. We plan to focus our research and
development efforts on improving each step of our production process, making us
an industry leader in technological innovation. In addition, we undertake
research and development to enhance the quality of our products. We cannot
assure you that such efforts will improve the efficiency of manufacturing
processes or yield products with expected quality. In addition, the failure to
realize the intended benefits from our research and development initiatives
could limit our ability to keep pace with rapid technological changes, which in
turn would hurt our business and prospects.
Failure
to achieve satisfactory production volumes of our products could result in a
decline in sales.
The
production of solar cells and solar modules involves complex processes.
Deviations in the manufacturing process can cause a substantial decrease in
output and, in some cases, disrupt production significantly or result in no
output. We have from time to time experienced lower-than-anticipated
manufacturing output during the ramp-up of production lines. This often occurs
during the introduction of new products, the installation of new equipment or
the implementation of new process technologies. As we bring additional lines or
facilities into production, we may operate at less than intended capacity during
the ramp-up period. This would result in higher marginal production costs and
lower than expected output, which could have a material adverse effect on our
results of operations.
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.
Our
standard solar modules are typically sold with a two-year warranty for defects
in materials and workmanship and a ten-year and twenty-five-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. Due to the
long warranty period, we bear the risk of extensive warranty claims long after
we have shipped the product and recognized the sale. 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 expected and we experience a significant increase in warranty claims, we may
incur significant repair and replacement costs associated with such claims. In
addition, product defects could cause significant damage to our market
reputation and reduce our product sales and market share, and our failure to
maintain the consistency and quality throughout our production process could
result in substandard quality or performance of our products. If we deliver our
products with defects, or if there is a perception that our products are of
substandard quality, we may incur substantially increased costs associated with
returns or replacements of our products, our credibility and market reputation
could be harmed and our sales and market share may be adversely
affected.
Our
operations are subject to natural disasters, adverse weather conditions,
operating hazards and labor disputes.
We may
experience earthquakes, floods, snowstorms, typhoon, power outages, labor
disputes or similar events beyond our control that would affect our operations.
Our manufacturing processes involve the use of hazardous equipment, and we also
use, store and generate volatile and otherwise dangerous chemicals and wastes
during our manufacturing processes, which are potentially destructive and
dangerous if not properly handled or in the event of uncontrollable or
catastrophic circumstances, including operating hazards, fires and explosions,
natural disasters, adverse weather conditions and major equipment failures, for
which we cannot obtain insurance at a reasonable cost or at
all.
Our
CEO and a significant stockholder collectively hold a controlling interest in
us, they have significant influence over our management and their interests may
not be aligned with our interests or the interests of our other
stockholders.
As of
June 30, 2010, our director, president and chief executive officer, Leo Shi
Young, beneficially owns 15,284,286 shares of our common stock, or approximately
9.0%, of our common stock. As of June 30, 2010, The Quercus
Trust, which nominated David Anthony and David Field to our Board of Directors,
beneficially owns 125,734,189 shares of our common stock, or approximately
59.2%, of our common stock. Therefore, our CEO and The Quercus
Trust have substantial control over our business, including decisions regarding
mergers, consolidations and the sale of all or substantially all of our assets,
election of directors, dividend policy and other significant corporate actions.
They may take actions that are not in the best interest of our company or our
securities holders. For example, this concentration of ownership may discourage,
delay or prevent a change in control of our company, which could deprive our
stockholders of an opportunity to receive a premium for their shares as part of
a sale of our company and might reduce the price of our common stock. On the
other hand, if our chief executive officer and the Quercus Trust are in favor of
any of these actions, these actions may be taken even if they are opposed by our
other stockholders, including you and those who invest in our common
stock.
We have limited
insurance coverage and may incur losses resulting from product liability claims,
business interruption or natural disasters.
We are
exposed to risks associated with product liability claims in the event that the
use of our products results in property damage or personal injury. Since our
products are ultimately incorporated into electricity generating systems, it is
possible that users could be injured or killed by devices that use our products,
whether as a result of product malfunctions, defects, improper installations or
other causes. Due to our limited operating history, we are unable to predict
whether product liability claims will be brought against us in the future or to
predict the impact of any resulting adverse publicity on our business. The
successful assertion of product liability claims against us could result in
potentially significant monetary damages and require us to make significant
payments. We carry limited product liability insurance and may not have adequate
resources to satisfy a judgment in the event of a successful claim against us.
In addition, we do not carry any business interruption insurance. As the
insurance industry in China is still in its early stage of development, even if
we decide to take out business interruption coverage, such insurance available
in China offers limited coverage compared with that offered in many other
countries. Any business interruption or natural disaster could result in
substantial losses and diversion of our resources and materially and adversely
affect our business, financial condition and results of operations.
Our
lack of sufficient patent protection in and outside of China may undermine our
competitive position and subject us to intellectual property disputes with third
parties, both of which may have a material adverse effect on our business,
results of operations and financial condition.
We have
developed various production process related know-how and technologies in the
production of our products. Such know-how and technologies play a critical role
in our quality assurance and cost reduction. In addition, we have implemented a
number of research and development programs with a view to developing techniques
and processes that will improve production efficiency and product quality. Our
intellectual property and proprietary rights arising out of these research and
development programs will be crucial in maintaining our competitive edge in the
solar power industry. However, we do not generally
seek to protect our intellectual property and proprietary knowledge by
applying for patents for them. We use contractual arrangements with employees
and trade secret protections to protect our intellectual property and
proprietary rights. Nevertheless, contractual arrangements afford only limited
protection and the actions we may take to protect our intellectual property and
proprietary rights may not be adequate.
In
addition, others may obtain knowledge of our know-how and technologies through
independent development. Our failure to protect our production process, related
know-how and technologies and/or our intellectual property and proprietary
rights may undermine our competitive position. Third parties may infringe or
misappropriate our proprietary technologies or other intellectual property and
proprietary rights. Policing unauthorized use of proprietary technology can be
difficult and expensive. Litigation, which can be costly and divert management
attention and other resources away from our business, may be necessary to
enforce our intellectual property rights, protect our trade secrets or determine
the validity and scope of our proprietary rights. We cannot assure you that the
outcome of such potential litigation will be in our favor. An adverse
determination in any such litigation will impair our intellectual property and
proprietary rights and may harm our business, prospects and
reputation.
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 photovoltaic 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 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.
Our
business depends substantially on the continuing efforts of our president and
chief executive officer and key technical personnel, as well as our ability to
maintain a skilled labor force. Our business may be materially and adversely
affected if we lose their services.
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. 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. Furthermore, recruiting
and retaining capable personnel, particularly experienced engineers and
technicians familiar with our products and manufacturing processes, is vital to
maintain the quality of our products and improve our production methods. There
is substantial competition for qualified technical personnel, and we cannot
assure you that we will be able to attract or retain qualified technical
personnel. If we are unable to attract and retain qualified employees, key
technical personnel and our executive officers, our business may be materially
and adversely affected.
Compliance
with environmental, safe production and construction regulations can be costly,
while non-compliance with such regulations may result in adverse publicity and
potentially significant monetary damages, fines and suspension of our business
operations.
We use,
store and generate volatile and otherwise dangerous chemicals and wastes during
our manufacturing processes, and are subject to a variety of government
regulations related to the use, storage and disposal of such hazardous chemicals
and waste. We are required to comply with all People’s Republic of China, or
PRC, national and local environmental protection regulations. Under such
regulations, we are prohibited from commencing commercial operations of our
manufacturing facilities until we have obtained the relevant approvals from PRC
environmental protection authorities. In addition, the PRC government may issue
more stringent environmental protection, safe production and construction
regulations in the future and the costs of compliance with new regulations could
be substantial. If we fail to comply with the future environmental, safe
production and construction laws and regulations, we may be required to pay
fines, suspend construction or production, or cease operations. Moreover, any
failure by us to control the use of, or to adequately restrict the discharge of,
dangerous substances could subject us to potentially significant monetary
damages and fines or the suspension of our business operations.
We
are subject to 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
corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well
as 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 SEC
rules, we are required to include management’s report on internal controls as
part of our annual reports pursuant to Section 404 of the Sarbanes-Oxley
Act. 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 conclusion that our disclosure controls and
procedures were not effective was due to the lack of finance and accounting
personnel with an appropriate level of knowledge, experience and training in the
application of U.S. GAAP. Our fiscal 2009 financial reporting close process was
ineffective in recording certain transactions according to the applicable
accounting pronouncement, preventing amounts from being incorrectly classified
in our statement of cash flows and preparing certain critical financial
statement disclosures. Our plan to remediate the material weakness primarily
consisted of hiring finance and accounting personnel with an appropriate level
of knowledge, experience and training in the application of U.S. GAAP and
training, educating and equipping our existing personnel on U.S. GAAP accounting
matters. We have improved the training, education and equipment of our
accounting personnel in U.S. GAAP, hired a new accounting supervisor and engaged
a consulting firm to provide us with professional advice on how to improve our
disclosure controls and procedures. We are, however, still looking to hire
additional finance and accounting personnel. Accordingly, management has
determined that this control deficiency continues to constitute a material
weakness. Management anticipates that such disclosure controls and procedures
will not be effective until the material weaknesses are remediated.
We
are in the process of implementing the following measures to remediate these
material weaknesses: (a) hiring additional financial reporting and accounting
personnel with relevant account experience, skills, and knowledge in the
preparation of financial statements under the requirements of U.S. GAAP; and (b)
continuing to work with internal and external consultants to improve the process
for collecting and reviewing information required for the preparation of
financial statements. 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. 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:
|
·
|
the
amount of government involvement;
|
|
·
|
the
level of development;
|
|
·
|
the
control of foreign exchange; and
|
|
·
|
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 which benefit us and some of
which may 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 reduced
state ownership of productive assets, 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
sales
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 State Administration of
Foreign Exchange (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:
|
·
|
our
developing business;
|
|
·
|
a
continued negative cash flow;
|
|
·
|
relatively
low price per share;
|
|
·
|
relatively
low public float;
|
|
·
|
variations
in quarterly operating results;
|
|
·
|
general
trends in the industries in which we do
business;
|
|
·
|
the
number of holders of our common stock;
and
|
|
·
|
the
interest of securities dealers in maintaining a market for our common
stock.
|
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 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, 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.
RISKS
RELATED TO THIS OFFERING
You
will experience immediate and substantial dilution if you invest in this
offering.
You will
incur immediate and substantial dilution as a result of this
offering. After giving effect to the sale by us of up to 70,000,000
units offered in this offering at a public offering price of $[
Ÿ
] per unit, and after
deducting placement agent commissions and estimated offering expenses payable by
us, investors in this offering can expect an immediate dilution of $[
Ÿ
] per share, assuming no
exercise of the warrants. In addition, in the past, we issued options
and warrants to acquire shares of common stock. To the extent these
options are ultimately exercised, you will sustain future dilution.
Our
management team will have immediate and broad discretion over the use of the net
proceeds from this offering.
There is
no minimum offering amount required as a condition to closing this offering and
therefore, other than the proceeds to repay a portion of our Series B-1 Note,
the net proceeds from this offering will be immediately available to our
management to use at their discretion. The decisions made by our management may
not result in positive returns on your investment and you will not have an
opportunity to evaluate the economic, financial or other information upon which
our management bases its decisions.
Future
sales by our stockholders may adversely affect our stock price and our ability
to raise funds in new stock offerings.
Sales of
our common stock in the public market following this offering could lower the
market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at
all.
You may
experience additional dilution in the future
.
We have
issued options and warrants to acquire shares of common stock. In
addition, under the Series A and Series B Notes Conversion Agreement entered
into by us and certain holders of our former Series A Convertible Notes and
Series B Convertible Notes, these note holders agreed to take all necessary
actions required to: (i) increase the number of shares of common stock
authorized to be issued under our equity incentive plans to equal 20% of our
fully-diluted outstanding stock (including the conversion of all of notes and
warrants) and (ii) provide for the grants of additional stock options equal to
approximately 30% of the current option holding of each of our employees in good
standing, which options shall have an exercise price of $0.15 per
share. We have not yet undertaken these actions but plan to in the
future and this will dilute our stockholders.
The
offering may not be fully subscribed and, even if the offering is fully
subscribed, we will likely need additional capital in the future. If
additional capital is not available, we may not be able to continue to operate
our business pursuant to our business plan or we may have to discontinue our
operations entirely.
The
placement agent in this offering will offer the units on a “best-efforts” basis,
meaning that we may raise substantially less than the total maximum offering
amounts. No refund will be made available to investors if less than
all of the units are sold. We will likely need additional
financing, which we may seek to raise through, among other things, public and
private equity offerings and debt financing. Any equity financing
will be dilutive to existing stockholders, and any debt financings will likely
involve covenants restricting our business activities. Additional
financing may not be available on acceptable terms, or at all.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements, which include information
relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation, and availability of
resources. These forward-looking statements include, without
limitation, statements concerning projections, predictions, expectations,
estimates, or forecasts as to our business, financial and operational results,
and future economic performance; and statements of management’s goals and
objectives and other similar expressions concerning matters that are not
historical facts. Words such as may, should, could, would, predicts,
potential, continue, expects, anticipates, future, intends, plans, believes,
estimates, and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by, which
such performance or results will be achieved. Forward-looking
statements are based on information available at the time those statements are
made or management’s good faith belief as of that time with respect to future
events, and are subject to risks and uncertainties that could cause actual
performance or results to differ materially from those expressed in or suggested
by the forward-looking statements
Forward-looking
statements speak only as of the date the statements are made. You
should not put undue reliance on any forward-looking statements. We
assume no obligation to update forward-looking statements to reflect actual
results, changes in assumptions, or changes in other factors affecting
forward-looking information, except to the extent required by applicable
securities laws. If we do update one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect to those or other forward-looking statements.
USE
OF PROCEEDS
We
estimate that we will receive up to $[●] in net proceeds from the sale of the
units in this offering (assuming that this offering is fully subscribed), based
on a price of $[
●
]
per unit and after deducting placement agent fees and estimated offering
expenses payable by us. We are required to use a portion of the proceeds in the
offering to repay a portion of our Series B-1 Note. The amount that
we will be required to repay is determined by dividing the amount of proceeds
raised by us by $15,000,000 and then multiplying such product by the outstanding
principal owed under the Series B-1 Note. We intend to use the
remaining net proceeds of the offering for working capital needs, capital
expenditures and other general corporate purposes.
Other
than with respect to the required repayment of a portion of our Series B-1 Note,
we cannot specify with certainty the particular uses for the net proceeds. The
amounts and timing of our actual expenditures will depend on numerous factors,
including the status of our development efforts, sales and marketing activities,
the amount of cash generated or used by our operations and competition. We may
find it necessary or advisable to use portions of the proceeds for other
purposes, and we will have broad discretion in the application of the net
proceeds. We have no current intentions to acquire any other businesses. Pending
these uses, the proceeds will be invested in short-term, investment grade,
interest-bearing securities.
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE
RANGE OF OUR COMMON STOCK
Our
common stock has traded on the OTCBB under the symbol “SOEN” since March 2006.
Prior to that, there was no public market for our common stock. The following
table lists, for the periods indicated below, quarterly information on the price
range of our common stock based on the high and low reported intraday sale
prices for our common stock as reported by the OTCBB. These prices do not
include retail markups, markdowns or commissions.
|
|
Prices
|
|
|
|
Low
|
|
|
High
|
|
Year
ended September 30, 2010
|
|
|
|
|
|
|
2010
Third Quarter (through June 30, 2010)
|
|
$
|
0.11
|
|
|
$
|
0.25
|
|
2010
Second Quarter (through March 31, 2010)
|
|
$
|
0.19
|
|
|
$
|
0.32
|
|
2010
First Quarter (through December 31, 2009)
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
Year
ended September 30, 2009
|
|
|
|
|
|
|
|
|
2009
Fourth Quarter (through September 30, 2009)
|
|
$
|
0.28
|
|
|
$
|
0.44
|
|
2009
Third Quarter (through June 30, 2009)
|
|
$
|
0.19
|
|
|
$
|
0.45
|
|
2009
Second Quarter (through March 31, 2009)
|
|
$
|
0.12
|
|
|
$
|
0.26
|
|
2009
First Quarter (through December 31, 2008)
|
|
$
|
0.17
|
|
|
$
|
0.40
|
|
Year
ended September 30, 2008
|
|
|
|
|
|
|
|
|
2008
Fourth Quarter (through September 30, 2008)
|
|
$
|
0.40
|
|
|
$
|
0.69
|
|
2008
Third Quarter (through June 30, 2008)
|
|
$
|
0.55
|
|
|
$
|
0.86
|
|
2008
Second Quarter (through March 31, 2008)
|
|
$
|
0.47
|
|
|
$
|
1.65
|
|
2008
First Quarter (through December 31, 2007)
|
|
$
|
0.82
|
|
|
$
|
1.30
|
|
The last
reported sale price for our common stock on OTCBB was $0.10 per share on
November 23, 2010. We have approximately 50 registered holders of our common
stock as of June 30, 2010.
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 the 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.
DIVIDEND
POLICY
We do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in its
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant. We did not pay cash dividends for the years ended
September 30, 2009, 2008, and 2007.
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following summary financial information contains consolidated statement
of income data for three-months ended June 30, 2010, the nine-months ended
June 30, 2010, and the years ended September 30, 2009, 2008, and 2007 and the
consolidated balance sheet data as of June 30, 2010 and September 30, 2009, 2008
and 2007. The consolidated statement of income data and balance
sheet data were derived from the audited consolidated financial
statements. Such financial data should be read in conjunction with
the consolidated financial statements and the notes to the consolidated
financial statements starting on page F-1 and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
For
the
Fiscal
Years
Ended
September
30,
|
|
|
|
Q3
2010
|
|
|
Q1-Q3
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
16,355,000
|
|
|
|
51,799,000
|
|
|
|
32,835,000
|
|
|
|
29,412,000
|
|
|
|
5,573,000
|
|
Cost
of sales
|
|
|
(15,051,000
|
)
|
|
|
(47,637,000
|
)
|
|
|
(33,876,000
|
)
|
|
|
(33,104,000
|
)
|
|
|
(5,934,000
|
)
|
Gross
profit (loss)
|
|
|
1,304,000
|
|
|
|
4,162,000
|
|
|
|
(1,041,000
|
)
|
|
|
(3,692,000
|
)
|
|
|
(361,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,475,000
|
|
|
|
7,243,000
|
|
|
|
9,224,000
|
|
|
|
11,778,000
|
|
|
|
11,865,000
|
|
Research
and development
|
|
|
54,000
|
|
|
|
287,000
|
|
|
|
700,000
|
|
|
|
702,000
|
|
|
|
198,000
|
|
Loss
on debt extinguishment
|
|
|
0
|
|
|
|
18,549,000
|
|
|
|
527,000
|
|
|
|
4,240,000
|
|
|
|
|
|
Impairment
loss on property and equipment
|
|
|
0
|
|
|
|
0
|
|
|
|
960,000
|
|
|
|
0
|
|
|
|
|
|
Total
operating expenses
|
|
|
2,529,000
|
|
|
|
26,079,000
|
|
|
|
11,411,000
|
|
|
|
16,720,000
|
|
|
|
12,063,000
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,225,000
|
)
|
|
|
(21,917,000
|
)
|
|
|
(12,452,000
|
)
|
|
|
(20,412,000
|
)
|
|
|
(12,424,000
|
)
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,000
|
|
|
|
5,000
|
|
|
|
16,000
|
|
|
|
87,000
|
|
|
|
62,000
|
|
Interest
expense
|
|
|
(59,000
|
)
|
|
|
(5,383,000
|
)
|
|
|
(3,998,000
|
)
|
|
|
(1,035,000
|
)
|
|
|
(1,086,000
|
)
|
Loss
on issuance of convertible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
(15,209,000
|
)
|
Gain
(loss) on change in fair market value of compound embedded
derivative
|
|
|
717,000
|
|
|
|
1,115,000
|
|
|
|
770,000
|
|
|
|
13,767,000
|
|
|
|
(200,000
|
)
|
Gain
(loss) on change in fair market value of warrant liability
|
|
|
1,393,000
|
|
|
|
4,369,000
|
|
|
|
1,344,000
|
|
|
|
13,978,000
|
|
|
|
(290,000
|
)
|
Impairment
loss on investment
|
|
|
(1,000,000
|
)
|
|
|
(1,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
(485,000
|
)
|
|
|
(929,000
|
)
|
|
|
139,000
|
|
|
|
(846,000
|
)
|
|
|
(285,000
|
)
|
Net
loss
|
|
|
(658,000
|
)
|
|
|
(23,740,000
|
)
|
|
|
(14,181,000
|
)
|
|
|
5,539,000
|
|
|
|
(29,432,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic
|
|
|
(0.00
|
)
|
|
|
(0.18
|
)
|
|
|
(0.16
|
)
|
|
|
0.07
|
|
|
|
(0.38
|
)
|
Net
loss per share - diluted
|
|
|
(0.00
|
)
|
|
|
(0.18
|
)
|
|
|
(0.16
|
)
|
|
|
(0.18
|
)
|
|
|
(0.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
156,502,573
|
|
|
|
128,327,753
|
|
|
|
87,817,762
|
|
|
|
75,944,461
|
|
|
|
78,396,108
|
|
Weighted
average shares outstanding - diluted
|
|
|
156,502,573
|
|
|
|
128,327,753
|
|
|
|
87,817,762
|
|
|
|
98,124,574
|
|
|
|
78,396,108
|
|
Consolidated
Balance Sheets
|
|
June 30,
2010
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
2,662,000
|
|
|
|
1,719,000
|
|
|
|
3,238,000
|
|
|
|
3,908,000
|
|
Accounts
receivable, net of allowance for doubtful account of $96,000
and $96,000 at June 30, 2010 and September 30, 2009,
respectively
|
|
|
13,544,000
|
|
|
|
7,395,000
|
|
|
|
1,875,000
|
|
|
|
913,000
|
|
Advance
payments and other
|
|
|
347,000
|
|
|
|
799,000
|
|
|
|
3,175,000
|
|
|
|
6,500,000
|
|
Inventories,
net
|
|
|
4,987,000
|
|
|
|
3,995,000
|
|
|
|
4,886,000
|
|
|
|
5,708,000
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
0
|
|
|
|
1,250,000
|
|
|
|
0
|
|
|
|
0
|
|
VAT
receivable
|
|
|
422,000
|
|
|
|
334,000
|
|
|
|
2,436,000
|
|
|
|
480,000
|
|
Other
receivable
|
|
|
173,000
|
|
|
|
408,000
|
|
|
|
730,000
|
|
|
|
110,000
|
|
Total
current assets
|
|
|
22,135,000
|
|
|
|
15,900,000
|
|
|
|
16,340,000
|
|
|
|
17,619,000
|
|
Property
and equipment, net
|
|
|
9,407,000
|
|
|
|
10,509,000
|
|
|
|
12,934,000
|
|
|
|
3,215,000
|
|
Investment
|
|
|
0
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
0
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
0
|
|
|
|
0
|
|
|
|
1,812,000
|
|
|
|
2,540,000
|
|
Deposits
|
|
|
101,000
|
|
|
|
87,000
|
|
|
|
701,000
|
|
|
|
1,741,000
|
|
Other
assets
|
|
|
730,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
assets
|
|
|
32,373,000
|
|
|
|
27,496,000
|
|
|
|
32,787,000
|
|
|
|
25,115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
12,286,000
|
|
|
|
5,794,000
|
|
|
|
1,771,000
|
|
|
|
2,891,000
|
|
Customer
advance payment
|
|
|
420,000
|
|
|
|
27,000
|
|
|
|
96,000
|
|
|
|
1,603,000
|
|
Accrued
interest expense
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
615,000
|
|
Accrued
expenses
|
|
|
2,474,000
|
|
|
|
1,088,000
|
|
|
|
910,000
|
|
|
|
507,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
5,773,000
|
|
|
|
5,646,000
|
|
|
|
5,450,000
|
|
|
|
3,969,000
|
|
Demand
note payable to a related party
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
450,000
|
|
Demand
notes payable
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
700,000
|
|
Derivative
liabilities
|
|
|
0
|
|
|
|
178,000
|
|
|
|
0
|
|
|
|
0
|
|
Short-term
loans
|
|
|
729,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Convertible
notes, net of discount
|
|
|
0
|
|
|
|
3,061,000
|
|
|
|
0
|
|
|
|
0
|
|
Total
current liabilities
|
|
|
21,682,000
|
|
|
|
15,794,000
|
|
|
|
8,227,000
|
|
|
|
10,735,000
|
|
Convertible
notes, net of discount
|
|
|
1,542,000
|
|
|
|
0
|
|
|
|
85,000
|
|
|
|
7,000
|
|
Derivative
liabilities
|
|
|
562,000
|
|
|
|
0
|
|
|
|
980,000
|
|
|
|
16,800,000
|
|
Warrant
liabilities
|
|
|
1,044,000
|
|
|
|
2,068,000
|
|
|
|
3,412,000
|
|
|
|
17,390,000
|
|
Total
liabilities
|
|
|
24,830,000
|
|
|
|
17,862,000
|
|
|
|
12,704,000
|
|
|
|
44,932,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock - 400,000,000 shares authorized at $0.001 par value 169,793,496 and
111,406,696 shares issued and outstanding at June 30, 2010
and September 30, 2009, respectively
|
|
|
170,000
|
|
|
|
111,000
|
|
|
|
112,000
|
|
|
|
79,000
|
|
Additional
paid in capital
|
|
|
96,881,000
|
|
|
|
75,389,000
|
|
|
|
71,627,000
|
|
|
|
39,192,000
|
|
Other
comprehensive income
|
|
|
2,554,000
|
|
|
|
2,456,000
|
|
|
|
2,485,000
|
|
|
|
592,000
|
|
Accumulated
deficit
|
|
|
(92,062,000
|
)
|
|
|
(68,322,000
|
)
|
|
|
(54,141,000
|
)
|
|
|
(59,680,000
|
)
|
Total
stockholders' equity
|
|
|
7,543,000
|
|
|
|
9,634,000
|
|
|
|
20,083,000
|
|
|
|
(19,817,000
|
)
|
Total
liabilities and stockholders' equity
|
|
|
32,373,000
|
|
|
|
27,496,000
|
|
|
|
32,787,000
|
|
|
|
25,115,000
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes that appear elsewhere in this prospectus. In addition
to historical financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause
or contribute to these differences include those discussed below and elsewhere
in this prospectus, particularly in “Risk factors” and “Forward-looking
statements.”
OVERVIEW
Solar
EnerTech Corp. is a solar product manufacturer based in Mountain View,
California, with low-cost operations located in Shanghai, China. Our
principal products are monocrystalline silicon and polycrystalline silicon solar
cells and solar modules. Solar cells convert sunlight to electricity through the
photovoltaic effect, with multiple solar cells electrically interconnected and
packaged into solar modules to form the building blocks for solar power
generating systems. 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. We manufacture photovoltaic solar cells, design
and produce advance photovoltaic modules for a variety applications, such as
standard panels for solar power stations, roof panels, solar arrays, and modules
incorporated directly into exterior walls. We primarily sell solar modules
to solar panel installers who incorporate our modules into their power
generating systems that are sold to end-customers located in Europe, Australia,
North America and China.
We have
established our manufacturing base in Shanghai, China to capitalize on the cost
advantages offered in manufacturing of solar power products. In our
67,107-square-foot manufacturing facility we operate two 25MW solar cell
production lines and a 50MW solar module production facility. We
believe that the choice of Shanghai, China for our manufacturing base provides
us with convenient and timely access to key resources and conditions to support
our growth and low-cost manufacturing operations.
Our solar
cells and modules are sold under the brand name “SolarE”.
Our total sales for the
nine months ended June 30, 2010 was $51.8 million and our end users are mainly
in Europe and Australia. In anticipation of entering the US market, we have
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.
We have
been able to increase sales since our inception in 2006. Although our efforts to
reach profitability have been adversely affected by the global recession, credit
market contraction and volatile polysilicon market, during fiscal year 2009 we
had significantly improved our operational results by restructuring our
management team, with a focus on our sales team, streamlining our procurement
and production process and implementing various quality control and cost cutting
programs. Consequently, gross margin has significantly improved and operational
costs have been reduced.
RESULTS
OF OPERATIONS FOR
THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009
The
following discussion of our financial condition, results of operations, cash
flows and changes in financial position should be read in conjunction with our
audited consolidated financial statements for the quarter ended September 30,
2009 and notes included elsewhere in this prospectus.
Sales,
Cost of Sales and Gross Profit (Loss)
|
|
Three
Months Ended June 30, 2010
|
|
|
Three
Months Ended June 30, 2009
|
|
|
Year-Over-Year
Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of change
|
|
Sales
|
|
$
|
16,355,000
|
|
|
|
100.0
|
%
|
|
$
|
10,143,000
|
|
|
|
100.0
|
%
|
|
$
|
6,212,000
|
|
|
|
61.2
|
%
|
Cost
of sales
|
|
|
(15,051,000
|
)
|
|
|
(92.0
|
)%
|
|
|
(9,657,000
|
)
|
|
|
(95.2
|
)%
|
|
|
(5,394,000
|
)
|
|
|
55.9
|
%
|
Gross
profit (loss)
|
|
$
|
1,304,000
|
|
|
|
8.0
|
%
|
|
$
|
486,000
|
|
|
|
4.8
|
%
|
|
$
|
818,000
|
|
|
|
168.3
|
%
|
|
|
Nine Months Ended June 30, 2010
&
lt;
/font>
|
|
|
Nine Months Ended June 30, 2009
&
lt;
/font>
|
|
|
Year-Over-Year Change
&am
p;lt ; /font>
|
|
|
|
Amount
|
|
|
% of net sales
</fo
n t>
|
|
|
Amount
|
|
|
% of net sales
</fo
n t>
|
|
|
Amount
|
|
|
% of change
&
lt; /font>
|
|
Sales
|
|
$
|
51,799,000
|
|
|
|
100.0
|
%
|
|
$
|
19,639,000
|
|
|
|
100.0
|
%
|
|
$
|
32,160,000
|
|
|
|
163.8
|
%
|
Cost
of sales
|
|
|
(47,637,000
|
)
|
|
|
(92.0
|
)%
|
|
|
(22,791,000
|
)
|
|
|
(116.0
|
)%
|
|
|
(24,846,000
|
)
|
|
|
109.0
|
%
|
Gross
profit (loss)
|
|
$
|
4,162,000
|
|
|
|
8.0
|
%
|
|
$
|
(3,152,000
|
)
|
|
|
(16.0
|
)%
|
|
$
|
7,314,000
|
|
|
|
(232.0
|
)%
|
For the
three months ended June 30, 2010, we reported total sales of $16.4 million,
representing an increase of $6.2 million, or 61.2%, compared to $10.1 million of
sales in the same period of the prior year. The increase in sales was due to the
strong organic growth from our existing customers in a growing market and
increased sales orders from new customers as a result of heightened efforts by
our sales and marketing team. Specifically, during the fourth quarter of fiscal
year 2009, we acquired a new key customer, specifically a 10MW contract with a
German system integrator, and in the first quarter of fiscal year 2010, we
signed a 15 MW and a 10MW contracts with existing customers. All of these events
contributed to the increased in sales volume during the three months ended June
30, 2010.
For the
nine months ended June 30, 2010, we recorded $51.8 million in sales, which
comprised of $44.4 million in solar module sales, $4.9 million in cell sales and
$2.5 million in resale of raw materials, compared to $19.6 million in sales in
the same period of the prior year, which comprised of $15.6 million in solar
module sales and $4.0 million in cell sales. The increase in sales resulted from
increases in solar module shipments from 5.87MW for the nine months ended June
30, 2009 to 22.74MW for the nine months ended June 30, 2010
For the
three months ended June 30, 2010, we incurred a gross profit of $1.3 million,
representing an increase of $0.8 million, or 168.3%, compared to the gross
profit of $0.5 million in the same period of the prior year. The increase in
gross profit was partially due to the decrease in raw material prices,
specifically silicon wafer prices which offset the decrease in module sales
prices. Silicon wafer prices decreased approximately 18.8% from RMB 19.6/piece
during the three months ended June 30, 2009 to RMB 15.9/piece during the three
months ended June 30, 2010. The increase in gross profit was also due to
economies of scale generated from higher production volume, which lowered per
unit production cost and continued efforts by technical group in improving the
efficiency of our cells. In addition, we have continued with its various cost
cutting programs and renegotiated most of its vendor contracts to reduce
operating expenses.
For the
nine months ended June 30, 2010, we incurred a gross profit of $4.2 million,
representing an increase of $7.3 million, or 232.0%, compared to negative gross
profit of $3.2 million in the same period of the prior year. The increase in
gross profit was partially 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 44.35% from RMB 27.89/piece
during the nine months ended June 30, 2009 to RMB 15.52/piece during the nine
months ended June 30, 2010. The increase in gross profit was also due to
economies of scale generated from higher production volume, which lowered per
unit production cost and continued efforts by technical group in improving the
efficiency of our cells. In addition, we have continued with its various cost
cutting programs and renegotiated most of its vendor contracts to reduce
operating expenses.
Selling,
General and Administrative
|
|
Three Months Ended June 30, 2010
|
|
|
Three Months Ended June 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Selling,
general and administrative
|
|
$
|
2,475,000
|
|
|
|
15.1
|
%
|
|
$
|
2,577,000
|
|
|
|
25.4
|
%
|
|
$
|
(102,000
|
)
|
|
|
(4.0
|
)%
|
|
|
Nine Months Ended June 30,
2010
|
|
|
Nine Months Ended June 30,
2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Selling,
general and administrative
|
|
$
|
7,243,000
|
|
|
|
14.0
|
%
|
|
$
|
8,224,000
|
|
|
|
41.9
|
%
|
|
$
|
(981,000
|
)
|
|
|
(11.9
|
)%
|
For the
three months ended June 30, 2010, our selling, general and administrative
expenses were $2.5 million, representing a decrease of $0.1 million, or 4.0%,
from $2.6 million in the three months ended June 30, 2009. Selling, general and
administrative expenses as a percentage of sales for the three months ended June
30, 2010 decreased to 15.1% from 25.4% for the three months ended June 30, 2009.
The decrease in the selling, general and administrative expenses was primarily
due to a decrease of $0.4 million in stock-based compensation expenses related
to employee options and restricted stock from $1.1 million for the three months
ended June 30, 2009 to $0.7 million for the three months ended June 30, 2010.
Excluding stock-based compensation expenses, our selling, general &
administrative expenses increased by approximately $0.3 million primarily due to
increased sales and marketing activities.
For the
nine months ended June 30, 2010, our selling, general and administrative
expenses were $7.2 million, representing a decrease of $1.0 million, or 11.9%,
from $8.2 million in the nine months ended June 30, 2009. Selling, general and
administrative expenses as a percentage of sales for the nine months ended June
30, 2010 decreased to 14.0% from 41.9% for the nine months ended June 30, 2009.
The decrease in the selling, general and administrative expenses was primarily
due to a decrease of $1.3 million in stock-based compensation expenses related
to employee options and restricted stock from $3.4 million for the nine months
ended June 30, 2009 to $2.1 million for the nine months ended June 30, 2010.
Excluding stock-based compensation expenses, our selling, general and
administrative expenses increased by approximately $0.3 million primarily due to
increased sales and marketing activities.
Research
and Development
|
|
Three Months Ended June 30, 2010
|
|
|
Three Months Ended June 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Research
and development
|
|
$
|
54,000
|
|
|
|
0.3
|
%
|
|
$
|
463,000
|
|
|
|
4.6
|
%
|
|
$
|
(409,000
|
)
|
|
|
(88.3
|
)%
|
|
|
Nine Months Ended June 30, 2010
|
|
|
Nine Months Ended June 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Research
and development
|
|
$
|
287,000
|
|
|
|
0.6
|
%
|
|
$
|
1,234,000
|
|
|
|
6.3
|
%
|
|
$
|
(947,000
|
)
|
|
|
(76.7
|
)%
|
Research
and development expenses in the three months ended June 30, 2010 were $0.1
million, representing a decrease of $0.4 million, or 88.3%, from $0.5 million
for the three months ended June 30, 2009. Research and development expenses as a
percentage of sales for the three months ended June 30, 2010 decreased to 0.3%
from 4.6% for the three months ended June 30, 2009. The decrease in research and
development expenses was mainly due to a decrease of $0.3 million in stock-based
compensation expenses related to employee options and restricted stock from $0.3
million for the three months ended June 30, 2009 to $13,000 for the three months
ended June 30, 2010.
Research
and development expense in the nine months ended June 30, 2010 of $0.3 million,
representing a decrease of $0.9 million, or 76.7 %, from $1.2 million for the
nine months ended June 30, 2009. Research and development expense as a
percentage of sales for the nine months ended June 30, 2010 decreased to 0.6%
from 6.3% for the nine months ended June 30, 2009. The decrease in research and
development expenses were mainly due to a decrease of $0.8 million in
stock-based compensation expenses related to employee options and restricted
stock from $0.9 million for the nine months ended June 30, 2009 to $0.1 million
for the nine months ended June 30, 2010.
In
accordance with our joint research and development laboratory agreement with
Shanghai University, dated December 15, 2006 and expiring on December 15, 2016,
we are committed to funding an additional $3.7 million in the next 2 years. The
delay in the payment of remaining fiscal years 2008 and 2009 total commitments
of $1.7 million could lead to Shanghai University requesting that we pay the
committed amount within a short time frame. If we do not pay and are 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 for
approximately $0.7 million. As of the date of this report, we have not received
any additional compensation requests from Shanghai University. We expect to
increase our funding to research and development activities as we grow our
business.
Loss
on Debt Extinguishment
|
|
Three Months Ended June 30, 2010
|
|
|
Three Months Ended June 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Loss
on debt extinguishment
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
36,000
|
|
|
|
0.4
|
%
|
|
$
|
(36,000
|
)
|
|
|
(100.0
|
)%
|
|
|
Nine Months Ended June 30, 2010
|
|
|
Nine Months Ended June 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Loss
on debt extinguishment
|
|
$
|
18,549,000
|
|
|
|
35.8
|
%
|
|
$
|
527,000
|
|
|
|
2.7
|
%
|
|
$
|
18,022,000
|
|
|
|
3,419.7
|
%
|
There was
no loss on debt extinguishment recorded during the three months ended June 30,
2010. During the nine months ended June 30, 2010, we recorded a cumulative loss
on debt extinguishment of approximately $18.5 million as a result of the
Conversion Agreement and the Exchange Agreement.
During
the three and nine months ended June 30, 2009, $0.1 million and $0.9 million of
Series A and B Convertible Notes were converted into shares of our common stock,
respectively. We recorded a loss on debt extinguishment of $36,000 and $0.5
million, respectively for the three and nine months ended June 30, 2009 as a
result of the conversion based on the quoted market closing price of our common
shares on the conversion dates.
Other
Income (Expense)
|
|
Three Months Ended June 30, 2010
|
|
|
Three Months Ended June 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Interest
income
|
|
$
|
1,000
|
|
|
|
0.0
|
%
|
|
$
|
3,000
|
|
|
|
0.0
|
%
|
|
$
|
(2,000
|
)
|
|
|
(66.7
|
)%
|
Interest
expense
|
|
|
(59,000
|
)
|
|
|
(0.4
|
)%
|
|
|
(1,015,000
|
)
|
|
|
(10.0
|
)%
|
|
|
956,000
|
|
|
|
(94.2
|
)%
|
Gain
(loss) on change in fair market value
of compound embedded
derivative
|
|
|
717,000
|
|
|
|
4.4
|
%
|
|
|
(238,000
|
)
|
|
|
(2.3
|
)%
|
|
|
955,000
|
|
|
|
(401.3
|
)%
|
Gain
(loss) on change in fair market value
of warrant
liability
|
|
|
1,393,000
|
|
|
|
8.5
|
%
|
|
|
(3,158,000
|
)
|
|
|
(31.1
|
)%
|
|
|
4,551,000
|
|
|
|
(144.1
|
)%
|
Impairment
loss on investment
|
|
|
(1,000,000
|
)
|
|
|
(6.1
|
)%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(1,000,000
|
)
|
|
|
(100.0
|
)%
|
Other
income (expense)
|
|
|
(485,000
|
)
|
|
|
(3.0
|
)%
|
|
|
217,000
|
|
|
|
2.1
|
%
|
|
|
(702,000
|
)
|
|
|
(323.5
|
)%
|
Total
other income (expense)
|
|
$
|
567,000
|
|
|
|
3.5
|
%
|
|
$
|
(4,191,000
|
)
|
|
|
(41.3
|
)%
|
|
$
|
4,758,000
|
|
|
|
(113.5
|
)%
|
|
|
Nine Months Ended June 30, 2010
|
|
|
Nine Months Ended June 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Interest
income
|
|
$
|
5,000
|
|
|
|
0.0
|
%
|
|
$
|
13,000
|
|
|
|
0.1
|
%
|
|
$
|
(8,000
|
)
|
|
|
(61.5
|
)%
|
Interest
expense
|
|
|
(5,383,000
|
)
|
|
|
(10.4
|
)%
|
|
|
(1,938,000
|
)
|
|
|
(9.9
|
)%
|
|
|
(3,445,000
|
)
|
|
|
177.8
|
%
|
Gain
(loss) on change in fair market value
of compound embedded
derivative
|
|
|
1,115,000
|
|
|
|
2.2
|
%
|
|
|
350,000
|
|
|
|
1.8
|
%
|
|
|
765,000
|
|
|
|
218.6
|
%
|
Gain
(loss) on change in fair market value
of warrant
liability
|
|
|
4,369,000
|
|
|
|
8.4
|
%
|
|
|
(1,415,000
|
)
|
|
|
(7.2
|
)%
|
|
|
5,784,000
|
|
|
|
(408.8
|
)%
|
Impairment
loss on investment
|
|
|
(1,000,000
|
)
|
|
|
(1.9
|
)%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(1,000,000
|
)
|
|
|
(100.0
|
)%
|
Other
expense
|
|
|
(929,000
|
)
|
|
|
(1.8
|
)%
|
|
|
3,000
|
|
|
|
0.0
|
%
|
|
|
(932,000
|
)
|
|
|
(31,066.7
|
)%
|
Total
other income (expense)
|
|
$
|
(1,823,000
|
)
|
|
|
(3.5
|
)%
|
|
$
|
(2,987,000
|
)
|
|
|
(15.2
|
)%
|
|
$
|
1,164,000
|
|
|
|
(39.0
|
)%
|
For the
three months ended June 30, 2010, total other income was $0.6 million,
representing an increase of $4.8 million, or 113.5%, compared to total other
expense of $4.2 million for the same period of the prior year. Other income as a
percentage of sales for the three months ended June 30, 2010 was 3.5% compared
to a negative 41.3% for the same period in the prior year. We incurred interest
expenses of $59,000 in the three months ended June 30, 2010 primarily related to
6% interest charges on the Series B-1 Note. In the three months ended June 30,
2009, we incurred interest expense of $1.0 million primarily related to the
amortization of the discount on the convertible notes and deferred financing
cost, and 6% interest charges on Series A and B Convertible Notes.
In the
three months ended June 30, 2010, we recorded a gain on change in fair market
value of warranty liability of $1.4 million and a gain on change in fair market
value of compound embedded derivative of $0.7 million compared to a loss on
change in fair market value of warrant liability of $3.2 million and a loss on
change in fair market value of compound embedded derivative of $0.2 million
during the three months ended June 30, 2009. The lower conversion price of the
compound embedded derivative and warrant in the three months ended June 30, 2010
compared to that in the three months ended June 30, 2009 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. Other expenses of $0.5 million and other
income of $0.2 million for the three months ended June 30, 2010 and 2009,
respectively, were primarily related to foreign exchange gain
(loss).
The $1.0
million in impairment loss on investment for the three and nine months ended on
June 30, 2010 is related to the write-down of our investment in 21-Century
Silicon, which we consider as unrecoverable. No write-down of investment is
recorded in the prior period.
For the
nine months ended June 30, 2010, total other expenses was $1.8 million,
representing a decrease of $1.2 million or 39.0% compared to total other
expenses of $3.0 million for the same period of the prior year. Other expenses
as a percentage of sales for the nine months ended June 30, 2010 decreased to a
negative 3.5% from a negative 15.2% for the nine months ended June 30, 2009. In
the nine months ended June 30, 2010, we recorded a gain on change in fair market
value of compound embedded derivative of $1.1 million and a gain on change in
fair market value of warrant liability of $4.4 million compared to a gain on
change in fair market value of compound embedded derivative of $0.4 million and
a loss on change in fair market value of warrant liability of $1.4 million
during the nine months ended June 30, 2009. The lower conversion price of the
compound embedded derivative and warrant in the nine months ended June 30, 2010
compared to that in the nine months ended June 30, 2009, 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 $5.4 million
and $1.9 million in the nine months ended June 30, 2010 and 2009, respectively,
primarily related to the amortization of the discount on the convertible notes
and deferred financing cost, and 6% interest charges on Series A and B, and
Series B-1 Convertible Notes. Other expenses of $0.9 million and other income of
$3,000 for the nine months ended June 30, 2010 and 2009, respectively, were
primarily related to foreign exchange gain (loss).
RESULTS
OF OPERATIONS
COMPARISON
OF THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
The
following discussion of our financial condition, results of operations, cash
flows and changes in financial position should be read in conjunction with our
audited consolidated financial statements and notes included elsewhere in this
prospectus.
Sales,
Cost of Sales and Gross Profit (Loss)
|
|
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, we reported total sales of $32.8 million,
representing an increase of $3.4 million, or 11.6%, compared to $29.4 million of
sales in the same period of fiscal year 2008. The increase in sales 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
sales in the third quarter of fiscal year 2009, and improved our gross margin to
16.0% as percentage of 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 per piece during
fiscal year 2008 to RMB16 per piece during fiscal year 2009, as compared to
module sales prices that decreased approximately 41% from €2.2 per watt during
fiscal year 2008 to €1.3 per 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. We also promoted a lean and zero inventory system to control quality and
unqualified products. Further, we 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, we 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 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 was 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
and 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
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
shares of our common stock. The total amount of Series A and B convertible notes
that were converted into shares of our common stock 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 was $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
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 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 our 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 $0.8 million for the fiscal year
ended September 30, 2008 were primarily related to foreign exchange gain
(loss).
Contractual
Obligations
The
following tables sets forth, as of September 30, 2009, the aggregate amounts of
our significant contractual obligations and commitments with definitive payment
terms due in each of the periods presented ($ in millions):
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
More than 5
|
|
|
|
Total
|
|
|
year
|
|
|
1 to 3 years
|
|
|
4 to 5 year
|
|
|
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
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Liquidity
and Capital Resources
|
|
June 30, 2010
|
|
|
September 30, 2009
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,662,000
|
|
|
$
|
1,719,000
|
|
|
$
|
943,000
|
|
As of
June 30, 2010, we had cash and cash equivalents of $2.7 million as compared to
$1.7 million at September 30, 2009. We will require a significant amount of cash
to fund our operations. Changes in our operating plans, an increase in our
inventory, increased expenses, or other events, may cause us to seek additional
equity or debt financing in the future. In order to continue as a going concern,
we will need to continue to generate new sales while controlling our costs. If
we are unable to successfully generate enough sales to cover our costs, we only
have limited cash resources to bear operating losses. To the extent our
operations are not profitable, we may not continue as a going
concern.
Our
liquidity is impacted to a large extent based on both the nature of the products
we sell and also the geographical location of our customers, as our payment
terms on sale vary greatly depending on both factors. With respect to the
products we sell, while in the past we have engaged in transactions where we
have resold our raw materials due to our overstock of materials relative to our
then limited production capacity, as our production capacity has increased over
the years, our sales now consist primarily of solar modules to solar panel
installers in Europe and Australia who incorporate our modules into their power
generating systems that are sold to end-customers. Payment terms for the sale of
our modules are generally longer than payment terms where we resell our raw
materials in China and as a result, our payment terms have lengthened relative
to prior years. In addition, with respect to the geographic location of our
customers, the payment terms for the sale of our solar modules are generally
longer for our customers in the United States than for our customers in Europe
and Australia. While our current sales to customers in the United States are
limited, if we are able to increase our sales in the U.S. market or in other
markets that may have longer payment terms, our payment terms may lengthen. If
we have more sales of products or in geographies with longer payment terms, the
longer payment terms will impact the timing of our cash flows.
|
|
Nine
Months Ended June 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
653,000
|
|
|
$
|
369,000
|
|
|
$
|
284,000
|
|
Investing
activities
|
|
|
(454,000
|
)
|
|
|
(289,000
|
)
|
|
|
(165,000
|
)
|
Financing
activities
|
|
|
729,000
|
|
|
|
-
|
|
|
|
729,000
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
15,000
|
|
|
|
5,000
|
|
|
|
10,000
|
|
Net
increase in cash and cash equivalents
|
|
$
|
943,000
|
|
|
$
|
85,000
|
|
|
$
|
858,000
|
|
Net cash
provided by operating activities were $0.7 million and $0.4 million for the nine
months ended June 30, 2010 and 2009, respectively. Cash flow from operating
activities reflected a net loss of $23.7 million adjusted for non-cash items,
including depreciation of property and equipment, stock-based compensation, the
change in the fair market value of the compound derivative liabilities and
warrants liabilities, impairment loss on investment, amortization of note
discount and deferred financing cost, and loss on debt extinguishment. The
increase of $0.3 million in cash flow from operating activities from June 30,
2009 to June 30, 2010 was mainly attributable to the improved cash generating
ability resulting from enlarged sales and positive gross margin. The net loss
excluding non-cash expenses for nine months ended June 30, 2010 decreased
compared to the same period in 2009, partially offset by higher balances of
accounts receivable, inventories, VAT receivables, and a lower accounts payable
balance outstanding in the current period.
Net cash
used in investing activities were $0.5 million and $0.3 million in the nine
months ended June 30, 2010 and 2009, respectively. The increase of $0.2 million
in net cash used in investing activities was primarily due to higher property
and equipment acquisitions during the nine months ended June 30, 2010 compared
to the nine months ended June 30, 2009.
Net cash
provided by financing activities was $0.7 million in the nine months ended June
30, 2010 due to we borrowed the fund from a credit facility with Industrial Bank
Co., Ltd. There was no cash provided by financing activities for the nine months
ended June 30, 2009.
Our
consolidated balance sheet, statements of operations and cash flows 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.
After
consummating the transactions contemplated under the Conversion Agreement and
Exchange Agreement, our only outstanding convertible note is the Series
B-1-Note. As of June 30, 2010, the principal outstanding and the carrying value
of the Series B-1 Note were $1.8 million and 1.5 million, respectively. The
Series B-1 Note bears interest at 6% per annum and is due on March 19, 2012. The
holders of the Series B-1 Note can demand repayment from us upon the occurrence
of any of the triggering events detailed in the Series B-1 Note. It is uncertain
whether we will be able to satisfy this claim if it comes due. See “Note 9 –
Convertible Notes” in the notes to consolidated financial statements for the
quarter ended June 30, 2010. In addition, we have certain commitments as
disclosed in the “Off-Balance Sheet Arrangements” section below.
If we
experience a material shortfall versus our operating plans, 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, 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. Additionally, the
independent registered public accounting firm’s report on our most
recent annual report on Form 10-K for the year ended September 30, 2009 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.
Off-Balance
Sheet Arrangements
Pursuant
to a joint research and development laboratory agreement with Shanghai
University, dated December 15, 2006 and expiring on December 15, 2016, we are
committed to funding the establishment of laboratories and completion of
research and development activities. We have committed to invest no less than
RMB 5 million each year for the first three years and no less than RMB 30
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 6.7909 as of June 30, 2010.
Year
|
|
Amount
|
|
2010
|
|
$
|
2,604,000
|
|
2011
|
|
|
1,119,000
|
|
|
|
|
|
|
Total
|
|
$
|
3,723,000
|
|
We intend
to increase research and development spending as we grow our business. The
payment to Shanghai University will be used to fund program expenses and
equipment purchase. 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 June 30, 2010, (included in
the total amount of $3.7 million above), 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 we fail to make payments,
when requested, we will be deemed to be in breach of the agreement. If we are
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 for approximately $0.7 million. As of June 30, 2010, we are not
in breach as we have not received any additional compensation requests from
Shanghai University.
On August
21, 2008, we entered into an equity purchase agreement in which we acquired
two million shares of common stock of 21-Century Silicon for $1.0 million in
cash. See “Note 3 — Summary of Significant Accounting Policies” in the notes to
consolidated financial statements for the quarter ended June 30,
2010.
On
September 22, 2008, the registered capital of Solar EnerTech (Shanghai) Co., Ltd
was increased from $25 million to $47.5 million, which was approved by our Board
of Directors and authorized by Shanghai Municipal Government (the “Shanghai
Government”). The paid-in capital as of June 30, 2010 was $31.96 million, with
an outstanding remaining balance of $15.54 million to be originally funded by
September 21, 2010. In August 2010, we received the approval of the Shanghai
Government to extend the funding requirement date by nine months to June 2011.
We plan to raise funds to meet this capital requirement through participation in
the capital markets, such as undertaking equity offerings. If external financing
is not available, we will file an application with the Shanghai Government to
reduce the capital requirement, which is legally permissible under PRC
law.
On
January 15, 2010, we incorporated a wholly-owned subsidiary in Yizheng, Jiangsu
Province of China to supplement our existing production facilities to meet
increased sales demands. The subsidiary was formed with a registered capital
requirement of $33 million, of which $23.4 million is to be funded by October
16, 2011. In order to fund the registered capital requirement, we will have to
raise funds or otherwise obtain the approval of local authorities to reduce the
amount of registered capital for the subsidiary. The registered capital
requirement outstanding as of June 30, 2010, is $23.4 million.
On
February 8, 2010, we acquired land use rights of a parcel of land at the price
of approximately $0.7 million. This piece of land is 68,025 square meters and is
located in Yizheng, Jiangsu Province of China, which will be used to house our
second manufacturing facility. As part of the acquisition of the land use right,
we are required to complete construction of the facility by February 8,
2012.
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 sales 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.
Principles
of Consolidation and Basis of Accounting
Prior to
August 19, 2008, we operated our 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 we did not own Infotech, our 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 us and Infotech (the “Agency Agreement”). Under the Agency
Agreement, we 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 us through legal ownership, we acquired
Infotech at a nominal amount on August 19, 2008 through a series of agreements.
In connection with executing these agreements, we terminated the original agency
relationship with Infotech.
We 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 us and
Infotech and, notwithstanding the termination of the Agency Agreement, we
continue to consolidate the financial statements of Infotech with our financial
statements since Infotech became our wholly-owned subsidiary as a result of the
acquisition.
Our
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
Our
functional currency is the Renminbi as substantially all of our operations are
in China. Our 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 a sale 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
We
provide product warranties and accrue for estimated future warranty costs in the
period in which revenue is recognized. Our standard solar modules are typically
sold with a two-year warranty for defects in materials and workmanship and a
ten-year and twenty five-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. We therefore maintain warranty reserves to cover potential
liabilities that could arise from our warranty obligations and accrue the
estimated costs of warranties based primarily on management’s best estimate. In
estimating warranty costs, we applied 460 – Guarantees, specifically paragraphs,
460-10-25-5 to 460-10-25-7 of the FASB Accounting Standards Codification. This
guidance requires that we make a reasonable estimate of the amount of a warranty
obligation. It also provides that in the case of an entity that has no
experience of its own, reference to the experience of other entities in the same
business may be appropriate. Because we began to commercialize our products in
fiscal year 2007, there is insufficient experience and historical data that can
be used to reasonably estimate the expected failure rate of our solar modules.
Thus, we consider warranty cost provisions of other China-based manufacturers
that produce photovoltaic products that are comparable in engineering design,
raw material input and functionality to our products, and sold to a similar
target and class of customer with similar warranty coverage. In determining
whether such peer information can be used, we also consider the years of
experience that these manufacturers have in the industry. Because our industry
is relatively young as compared to other traditional manufacturing industries,
the selected peer companies that we consider have less than ten years in
manufacturing and selling history. In addition, they have a manufacturing base
in China, offer photovoltaic products with comparable engineering design, raw
material input, functionality and similar warranty coverage, and sell in
markets, including the geographic areas and class of customer, where we compete.
Based on the analysis applied, we accrue warranty at 1% of sales. We have not
experienced any material warranty claims to date in connection with declines of
the power generation capacity of our solar modules and will prospectively revise
our actual rate to the extent that actual warranty costs differ from the
estimates. As of June 30, 2010 and September 30, 2009, our warranty liabilities
were $928,000 and $515,000, respectively. Our warranty costs for the nine months
ended June 30, 2010 and 2009 were $411,000 and $156,000, respectively. There
were no warranty claim payments during the nine months ended June 30, 2010 and
2009.
Other
Assets
We
acquired land use rights to a parcel of land from the government in the PRC. All
land in the PRC is owned by the PRC government and cannot be sold to any
individual or entity. The government in the PRC, according to relevant PRC law,
may sell the right to use the land for a specified period of time. Thus, the
land we purchased in the PRC is considered to be leasehold land and recorded as
other assets at cost less accumulated amortization. Amortization is provided
over the term of the land use right agreements on a straight-line basis, which
is for 46.5 years from February 8, 2010 through August 31, 2056.
Impairment
of Long Lived Assets
We review
our long-lived assets 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. No loss
on property and equipment impairment was recorded during the nine months ended
June 30, 2010 and 2009, respectively.
Investment
Investment
in an entity where we own less than twenty percent of the voting stock of the
entity and do not exercise significant influence over operating and financial
policies of the entity are accounted for using the cost method. Investment in
the entity where we own twenty percent or more, but not in excess of fifty
percent of the voting stock of the entity or less than twenty percent and
exercise significant influence over operating and financial policies of the
entity are accounted for using the equity method. We have a policy in place to
review our investments at least annually and 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 we believe that the carrying value of an investment is in excess of estimated
fair value, it is our 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, we entered into an equity purchase agreement in which we acquired
two million shares of common stock of 21-Century Silicon for $1.0 million in
cash. See “Note 3 — Summary of Significant Accounting Policies” in the notes to
consolidated financial statements for the quarter ended June 30,
2010.
Income
Taxes
We file
federal and state income tax returns in the United States for our United States
operations, and file separate foreign tax returns for our foreign subsidiary in
the jurisdictions in which the entity operates. We account 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, we
consider all available evidence including past operating results, estimates of
future taxable income, and the feasibility of tax planning strategies. In the
event that we change our determination as to the amount of deferred tax assets
that can be realized, we will adjust our valuation allowance with a
corresponding impact to the provision for income taxes in the period in which
such determination is made.
Unrecognized
Tax Benefits
Effective
on October 1, 2007, we 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. We also elected the accounting policy that requires interest and
penalties to be recognized as a component of tax expense. We classify 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 and Warrants
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 our structured borrowings, are
separately valued and accounted for on the balance sheet. Fair values for
exchange-traded securities and derivatives are based on quoted market prices.
Where market prices are not readily available, fair values are determined using
market based pricing models incorporating readily observable market data and
requiring judgment and estimates.
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.
Our
management used market-based pricing models to determine the fair values of our
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.
Our
management used the binomial valuation model to value the derivative financial
instruments and warrant liabilities at each valuation date. 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 derivative financial instruments and 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 derivative
financial instruments and warrants.
Stock-Based
Compensation
On
January 1, 2006, we began recording compensation expense associated with stock
options and other forms of employee equity compensation in accordance with FASB
ASC 718, “Compensation – Stock Compensation”.
We
estimate 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 —Our expected term represents the period that our stock-based awards are
expected to be outstanding.
Expected
Volatility— Our expected volatilities are based on historical volatility of our
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. We currently do not pay dividends and do not expect
to pay dividends in the foreseeable future.
Risk-Free
Interest Rate— We base 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, we take into consideration the
historical option forfeitures over the expected term.
Revenue
Recognition
We
recognize 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.
Contracts with distributors do not have significant post-shipment obligations,
other than product warranty, which is accrued for as warranty costs at the time
revenue is recognized, based on the above criteria. We do not grant price
concessions to distributors after shipment.
On a
transaction by transaction basis, we determine if the revenue should be recorded
on a gross or net basis based on criteria discussed in the Revenue Recognition
topic of the FASB Subtopic 605-405, “Reporting Revenue Gross as a Principal
versus Net as an Agent”. We consider the following factors to determine the
gross versus net presentation: if we (i) act as principal in the transaction;
(ii) take title to the products; (iii) have risks and rewards of ownership, such
as the risk of loss for collection, delivery or return; and (iv) act 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. We record our allowance for
doubtful accounts based upon our assessment of various factors. We considers
historical experience, the age of the accounts receivable balances, credit
quality of our customers, current economic conditions, and other factors that
may affect our customers’ ability to pay.
Shipping
and Handling Costs
We
incurred shipping and handling costs of $1,414,000 and $162,000 for the nine
months ended June 30, 2010 and 2009, 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 nine months ended June 30,
2010 and 2009 were $288,000 and $1,234,000, respectively.
Comprehensive
Loss
Comprehensive
loss is defined as the change in our equity 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 stockholders’ equity. Our other
comprehensive income consists of cumulative foreign currency translation
adjustments.
Segment
Information
We
identify our operating segments based on its business activities. We operate
within a single operating segment - the manufacture of solar energy cells and
modules in China. Our 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 nine months ended June 30, 2010 and 2009, we had three and four customers,
respectively, that accounted for more than 10% of sales.
Impact
of New Accounting Pronouncements
In
January 2010, the FASB issued ASU 2010-06, which amended “Fair Value
Measurements and Disclosures” (ASC Topic 820) — “Improving Disclosures about
Fair Value Measurements”. This guidance amends existing authoritative guidance
to require additional disclosures regarding fair value measurements, including
the amounts and reasons for significant transfers between Level 1 and Level 2 of
the fair value hierarchy, the reasons for any transfers into or out of Level 3
of the fair value hierarchy, and presentation on a gross basis of information
regarding purchases, sales, issuances, and settlements within the Level 3
rollforward. This guidance also clarifies certain existing disclosure
requirements. The guidance is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements within the Level 3 rollforward, which are
effective for interim and annual reporting periods beginning after December 15,
2010. We adopted this guidance on January 1, 2010. The adoption of this guidance
did not have a significant impact on our financial statements.
In
February 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09,
which amended “Subsequent Events” (ASC Topic 855) — “Amendments to Certain
Recognition and Disclosure Requirements”. The amendments were made to address
concerns about conflicts with SEC guidance and other practice issues. Among the
provisions of the amendment, the FASB defined a new type of entity, termed an
“SEC filer,” which is an entity required to file or furnish its financial
statements with the SEC. Entities other than registrants whose financial
statements are included in SEC filings (e.g., businesses or real estate
operations acquired or to be acquired, equity method investees, and entities
whose securities collateralize registered securities) are not SEC filers. While
an SEC filer is still required by U.S. GAAP to evaluate subsequent events
through the date its financial statements are issued, it is no longer required
to disclose in the financial statements that it has done so or the date through
which subsequent events have been evaluated. We adopted this guidance on
February 24, 2010. The adoption of this guidance did not have a significant
impact on our financial statements.
On
September 30, 2009, we 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 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. We have 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.
We
did not elect to report any of
our
financial assets or liabilities at
fair value, and as a result, the adoption of FASB ASC 825 had no material impact
on
our
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 us on October 1, 2009, with
early adoption prohibited. We are evaluating the potential impact of the
implementation of FASB ASC 805 on our 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 us on October 1, 2009, with
early adoption prohibited. We are evaluating the potential impact of the
implementation of FASB ASC 810 on our 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 us on October 1, 2009. We are currently evaluating the
impact of the adoption of this guidance on our 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 us after the beginning of our fiscal year 2010.
We are currently evaluating the impact of the adoption of FASB ASC 860 on our
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, we adopted
this standard on January 1, 2009. Since FASB ASC 815 only required additional
disclosures, the adoption did not impact our 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 our 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 us on October 1, 2009. Retrospective application to all periods
presented is required and early adoption is prohibited. We are evaluating the
potential impact of the implementation of FASB ASC 470 on our 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 us on October 1, 2009. We are currently evaluating the requirement of this
guidance as well as the impact of the adoption on our consolidated financial
statements.
In
November 2008, an update was made to the FASB 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. We are currently assessing the
impact of the adoption of the provisions of this guidance on our 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, we adopted this guidance and it
did not have a significant impact on out 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. We adopted this guidance during the quarter ended
June 30, 2009. There was no significant impact on our 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. We adopted the guidance during the
quarter ended June 30, 2009. The adoption of this guidance did not have a
significant impact on our 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. We
adopted FASB ASC 855 during the quarter ended June 30, 2009. The adoption of
FASB ASC 855 did not have a significant impact on our financial statement
disclosures (see
“
Note 16 –
Subsequent Events
”
, in the notes to
consolidated financial statements for the fiscal year ended September 30,
2009).
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 us on
January 1, 2010. We do not expect the adoption of FASB ASC 810-10 will have any
impact on our results of operations and financial position as we do 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 us on October 1, 2009. We do not
expect the adoption of ASU 2009-05 to have a material effect on our financial
statements.
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.
BUSINESS
OUR
BUSINESS
Solar
EnerTech Corp. is a solar product manufacturer based in Mountain View,
California, with low-cost operations located in Shanghai, China. Our
principal products are monocrystalline silicon and polycrystalline silicon solar
cells and solar modules. Solar cells convert sunlight to electricity through the
photovoltaic effect, with multiple solar cells electrically interconnected and
packaged into solar modules to form the building blocks for solar power
generating systems. 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. We manufacture photovoltaic solar cells, design and produce
advanced photovoltaic 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. We primarily sell solar
modules to solar panel installers who incorporate our modules into their power
generating systems that are sold to end-customers located in Europe, Australia,
North America and China.
We have
established our manufacturing base in Shanghai, China to capitalize on the cost
advantages offered in manufacturing of solar power products. In our
67,107-square-foot manufacturing facility we operate two 25MW solar cell
production lines and a 50MW solar module production facility. We
believe that the choice of Shanghai, China for our manufacturing base provides
us with convenient and timely access to key resources and conditions to support
our growth and low-cost manufacturing operations.
We have
been able to increase sales since our inception in 2006. Although our efforts to
reach profitability have been adversely affected by the global recession, credit
market contraction and volatile polysilicon market, during fiscal year 2009 we
had significantly improved our operational results by restructuring our
management team, with a focus on our sales team, streamlining our procurement
and production process and implementing various quality control and cost cutting
programs. Consequently, gross margin has significantly improved and operational
costs have been reduced.
OUR
INDUSTRY
Introduction
Solar
power has emerged as one of the most rapidly growing renewable energy sources.
Through a process known as the photovoltaic (PV) effect, electricity is
generated by solar cells that convert sunlight into electricity. In general,
global solar cell production can be categorized by three different types of
technologies, namely, monocrystalline silicon, polycrystalline silicon and thin
film technologies. Crystalline silicon technology is currently the most commonly
used. 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, solar
power technology is poised to help transform the energy landscape within the
next decade.
Although
PV technology has been used for several decades, the solar power market grew
significantly only in the past several years. Despite the contraction in demand
for solar power products during the second half of 2008 and the first half of
2009 resulting from the global recession and credit market contraction, we
believe that demand for solar power products has recovered significantly in
response to a series of factors, including the recovery of the global economy
and increasing availability of financing for solar power projects. Although
selling prices for solar power products, including the average selling prices of
our products, have generally stabilized at levels substantially below pre-crisis
prices, there is no assurance that such prices may not decline again. In
addition, demand for solar power products is significantly affected by
government incentives adopted to make solar power competitive with conventional
fossil fuel power. The widespread implementation of such incentive policies, as
has occurred in many countries in Europe, Asia Pacific and North America, has
significantly stimulated demand, whereas reductions or limitations on such
policies, as have recently been announced in Germany, Spain and South Korea, can
reduce demand for such products. We believe that demand will continue to grow
rapidly in the long term as solar power becomes an increasingly important source
of renewable energy.
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 us in the
photovoltaic market.
Key
Drivers for Growth in the Solar Power Industry
We
believe the following factors have driven and will continue to drive the growth
of the solar power industry:
Environmental
and Other Advantages of Solar Power
Solar
power has several advantages over both conventional and other forms of renewable
energy:
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•
|
Reduced
Dependence on Finite Conventional Energy Sources.
As demand for energy continues to
increase and existing conventional reserves become depleted or exhausted,
the prices of conventional energy sources such as oil, natural gas and
coal continue to rise. Unlike these fossil fuels, solar energy has no fuel
price volatility or supply constraints. In addition, because solar power
relies solely on sunlight, it does not present similar storage or
transportation risks associated with fossil or nuclear
fuels.
|
|
•
|
Environmental
Friendliness.
As one of the cleanest sources of
energy, s
olar cells
and c
oncentrated
solar power
systems
generate electricity without significant air or water emissions,
hab
itat impact or
waste generation.
|
|
•
|
Peak Energy
Use Advantage.
Solar power is well-suited to
match peak energy needs as maximum sunlight hours generally correspond to
peak demand periods when electric
ity prices are at their
highest.
|
|
•
|
Modularity, Scalability and
Flexible Location.
As the size and generating capacity
of a solar system are a function of the number of solar modules installed,
solar power products can be deployed in many different sizes and
configurations to meet specific customer needs. Moreover, unlike other
renewable energy sources such as hydroelectric and wind power, solar power
can be installed and utilized wherever there is sunlight and directly
where the power will be used. As a result, solar power limits the costs of
and energy losses associated with transmission and distribution from
large-scale electric plants to end
users.
|
|
•
|
Reliability
and Durability.
Without moving parts and the need
for regular maintenance, solar power systems are among the most reliable
and durable forms of electricity
generation.
|
Long-term
Growth in Demand for Alternative Sources of Energy
Prior to
mid-2008, global economic development resulted in strong energy demand, while
depletion of fossil fuel reserves and escalating electricity consumption caused
wholesale electricity prices to rise significantly. This resulted in higher
electricity costs for consumers and highlighted the need to develop technologies
for reliable and sustainable electricity generation. Solar power offers an
attractive means of power generation without relying extensively on fossil fuel
reserves. As global economic development continues to move forward, we expect
continued demand for alternative sources of energy to meet rising energy needs
and we believe the importance of solar power as a common alternative energy
source for global energy consumption will continue to increase rapidly in the
long term.
Government
Incentives for Solar Power
In
countries where governments have implemented renewable energy policies and
incentives to encourage the use and accelerate the development of renewable
energy sources, the use of solar power has continued to grow. A number of
countries have offered various types of financial incentives in the form of
capital cost subsidies, feed-in tariffs, net metering, tax credits and other
incentives to end-users, distributors, system integrators and manufacturers of
solar power products. International environmental protection initiatives, such
as the Kyoto Protocol for the reduction of overall carbon dioxide and other gas
emissions, have also created momentum for government incentives encouraging
solar power and other renewable energy sources.
Decreasing
Costs of Producing Solar Energy
Solar
energy has become an attractive alternative energy source because of narrowing
cost differentials between solar energy and conventional energy sources due to
market-wide decreases in the average selling prices for solar power products
driven by lower raw materials costs and increased production efficiencies. From
2008 to 2009, market prices for polysilicon have declined
significantly. Polysilicon is a key raw material in crystalline
silicon-based solar power products and the decline in its price has made
crystalline silicon technology more competitive than technologies that are less
dependent on polysilicon, such as thin film. Recently, however, the
current price for polysilicon has increased but not to 2008 prices, which was
approximately 300% higher than current prices.
Key
Challenges for the Solar Power Industry
Despite
the benefits of solar power, the industry must overcome the following challenges
to achieve widespread commercialization and use.
High
Cost of Solar Power Compared with Other Sources of Energy to
Consumers
Despite
rising costs of conventional energy sources and declining costs of generating
electricity through photovoltaic means in recent years, solar power generation
is still more expensive compared to conventional power generation. To address
this issue, the solar power industry must seek to reduce the price per watt of
solar energy for the consumer by lowering manufacturing and installation costs
and finding ways to increase the conversion efficiency rate of solar power
products. We believe that, as the gap narrows between the cost of electricity
generated from solar power products and the cost of electricity purchased from
conventional energy sources, solar power will become increasingly attractive to
consumers and demand for solar power will increase in the future.
Difficulties
in Obtaining Cost-Effective Financing for Solar Power Projects
The
global recession and credit market contraction in the second half of 2008 and
first half of 2009, which have led to weak consumer confidence, diminished
consumer and commercial spending and credit market contraction due to lack of
liquidity, have had a significant negative impact on industries that are
capital-intensive and highly dependent on investments, including the solar power
industry. Many solar power companies, particularly those down the solar power
value chain, have experienced difficulties in obtaining cost-effective financing
for the capital expenditure and working capital needs of their operations and
large-scale project installations. While the demand for solar power has
recovered significantly in response to a series of factors, including the
recovery of the global economy, and while availability of financing for solar
power projects has generally improved as a result, the difficulties in obtaining
financing and increased costs of financing still experienced by many companies
has resulted in cancellations, postponements or significant scale-backs of a
number of solar power projects, which in turn has had an adverse impact on
demand for solar power products. A protracted disruption in the ability of solar
power companies to access financing at affordable rates or at all may continue
to slow down the growth of the solar power industry.
Continuing
Reliance on Government Subsidies and Incentives
The
current growth of the solar power industry substantially relies on the
availability and size of government subsidies and economic incentives in the
form of capital cost rebates, direct subsidies to end users, reduced tariffs,
low interest financing loans and tax credits, net metering and other incentives.
Governments may eventually decide to reduce or eliminate these subsidies and
economic incentives. For instance, the governments of Spain and Germany have
decided to significantly reduce the feed-in tariffs available to solar power
projects. The uncertainty of such decisions, as well as the possible elimination
of favorable policies, may make it difficult for some solar companies to plan
future projects, which may not be financially feasible without such incentives.
As such, it remains a challenge for the solar power industry to reach sufficient
scale to be cost-effective in a non-subsidized marketplace.
Volatility
of Prices in the Polysilicon and Solar Power Product Markets
Up until
mid-2008, an industry-wide shortage of virgin polysilicon, the basic raw
material for all crystalline silicon solar power products and semiconductor
devices, coupled with rapidly growing demand from both the solar power industry
and the semiconductor industry, caused rapid escalation of virgin polysilicon
prices. This rise in polysilicon costs had created strong incentives for
producers of solar power products to enter into long-term polysilicon supply
contracts, and to seek alternative sources of silicon, such as recoverable
silicon materials, to mitigate polysilicon price and supply risk. Because prices
for silicon wafers, solar cells and solar modules, as well as intermediate
products such as recovered silicon materials and silicon ingots, are affected by
the price of polysilicon, during the same period the prices of silicon wafers
and intermediate products such as recovered silicon and silicon ingots also rose
strongly.
However,
in the second half of 2008 and the first half of 2009, industry demand was
seriously affected by the global recession and credit market contraction.
Weakened polysilicon demand from the semiconductor industry beginning in the
third quarter of 2008 caused polysilicon manufacturers to become increasingly
dependent on demand from the solar industry in 2008 and through the first half
of 2009 as the global recession continued. At the same time, global silicon
feedstock manufacturing capacity experienced a significant expansion in 2008 as
a result of increases in capacity by polysilicon manufacturers, which further
reduced the market prices of virgin polysilicon and downstream solar power
products. By the fourth quarter of 2008, declines in both solar and
semiconductor markets led to significantly reduced demand for silicon feedstock.
As a result, the market prices of virgin polysilicon and downstream solar power
products were further depressed. Similarly, the prices of silicon wafers, solar
cells and solar modules, as well as intermediate products likewise fell
significantly. The sharp fall in prices throughout the polysilicon-based solar
power value chain caused solar power companies to seek price reductions in their
inputs to manage pressures on their margins. The result was widespread
renegotiation of long-term supply contracts to amend prices and volumes, or to
change fixed price contracts to variable price contracts. In addition, because
recoverable silicon materials can be used as a substitute for virgin
polysilicon, prices of recoverable silicon materials, which are generally priced
at a discount to virgin polysilicon, were also negatively affected.
Despite
the contraction in demand for solar power products during the second half of
2008 and the first half of 2009, we believe that demand for solar power products
has recovered significantly in response to a series of factors, including the
recovery of the global economy and the increasing availability of financing for
solar power projects. We believe that such demand will continue to grow rapidly
in the long term as solar power becomes an increasingly important source of
renewable energy. However, prices of solar power products, including our
products, have not increased and may continue to decrease.
Need
to Promote Awareness and Acceptance of Solar Power Usage
Increasing
promotion efforts for solar power products are needed to increase customers’
awareness and acceptance of solar power through implementation of innovative
technologies and designs to make solar power systems suitable for commercial and
residential users.
OUR
COMPETITIVE STRENGTHS
We
believe that the following strengths enable us to compete successfully in the
solar power industry:
Our focus on
niche markets and customers not typically covered by the major solar
manufacturers.
We focus
on niche, “emerging markets” and “emerging customers” in existing markets not
typically covered by the major solar manufacturers. Some of the
emerging markets are new solar businesses in stable countries such as Belgium,
Netherlands, Italy and Australia. With the PV market starting to
recover from worldwide recession, smaller scale customers still need low-cost
but reliable suppliers as such customers are often underserved by major
manufacturers who prefer to sell solar product in large volumes. Distribution
channels for major manufacturers will sometimes go through two to three levels
before reaching the end user of the solar product. Our focus is to
reduce the distribution levels so that our products will reach our end user
through only one intermediary, thus, reducing prices by reducing distribution
levels. .
Our
ability to provide high-quality products enables us to increase our sales and
enhance our brand recognition.
We have
made significant efforts to continuously improve the quality of our products.
Since we commenced our operations we have developed substantial expertise in
manufacturing solar power products. In addition, we have improved our production
equipment, developed proprietary know-how and technology for our production
process and implemented strict quality control procedures in our production
process. We have received our Underwriters Laboratories Inc. (UL) certification
for a wide range of its crystalline solar photovoltaic power modules and
completed certification for IEC, VDE and TUV in the European markets. The high
quality of our silicon cells and modules has helped us enhance our brand name
recognition among our customers and in the industry. We believe that our
experience and capability in producing high quality silicon wafers will enable
us to provide high quality solar cells and solar modules and further broaden our
customer base.
Our strategic
locations provide us with convenient access to key resources and conditions to
support our rapid growth and low-cost manufacturing
operations.
We have
established our manufacturing base in Shanghai, China to capitalize on both the
cost advantage offered in Shanghai as low-cost manufacturing site as well as the
convenience of Shanghai as a commercial center for our customers and suppliers
and our sales and marketing teams. We believe that the choice of Shanghai for
our manufacturing base which requires significant labor, large operating space
and significant energy consumption provides us with convenient and timely access
to key resources and conditions to support our rapid growth and low-cost
manufacturing operations, including low-cost land, labor and utilities, which
will become an increasingly important cost advantage as the proportion of
silicon materials cost to our total cost of sales decreases.
Our
modern production equipment enable us to enhance our productivity.
We use
modern production lines to produce solar cells, which enable us to achieve high
efficiency and lower our cost. In addition, we have made comprehensive
improvements to our solar cell production lines, production process, production
management and quality control process, which has improved the conversion
efficiency of our solar cells and the percentage of our solar cells that meet
our quality criteria.
OUR
STRATEGY
In order
to achieve our goal of becoming a leading vertically integrated supplier of
solar power products, we intend to pursue the following principal
strategies:
Continue
to diversify our customer base with a focus on quality, service and competitive
pricing, but with a focus on niche, “emerging markets” and “emerging customers”
in existing markets not typically covered by the major solar
manufacturers.
For our
2009 fiscal year, sales to customers that individually exceeded 10% of our
sales accounted for approximately 70.74% of our sales. While we
continue to attempt to increase and diversify our customer base with a focus on
quality, service and competitive pricing, we are focused on niche, “emerging
markets” and “emerging customers” in existing markets not typically covered by
the major solar manufacturers. Some of the emerging markets are new
solar businesses in stable countries such as Belgium, Netherlands, Italy and
Australia. With the PV market starting to recover from worldwide
recession, smaller scale customers still need low-cost but reliable suppliers as
such customers are often underserved by major manufacturers who prefer to sell
solar product in large volumes.
Develop
a vertically integrated business model where we can produce wafers to capture
additional margin.
We plan
to continue our efforts to develop our solar cell and solar module business and,
to the extent we can raise sufficient capital, plan to integrate our business
vertically with the step of expanding our capabilities so that we are able to
produce silicon wafers in addition solar cells and solar modules. We believe a
more vertically integrated business model will offer us significant advantages
in reducing our costs and dependency on third parties to source core product
components. In addition, adding the ability to produce our own
silicon wafers would provide additional assurances that we will be able to
monitor the quality of the components of our products.
Raise
additional capital or increase our borrowings to continue to prudently invest in
the coordinated expansion of our production capacity to achieve rapid and
sustained growth and improve our profitability.
Despite
the recent contraction in demand for solar power products as a result of the
current global recession and credit market contraction, we expect that solar
power will continue to grow rapidly as an important source of renewable energy.
We intend to take advantage of the opportunity created by this projected growth
in demand for solar power and prudently invest in the coordinated expansion of
our production capacity of solar cells and solar modules in order to achieve
rapid and sustained growth of our vertically integrated production capacity. In
this regard, to the extent we are able to raise or borrow sufficient capital, we
intend to add an additional 50MW line for a total of 100MW of manufacturing
capacity.
Continue
to enhance our research and development capability with a focus on improving our
manufacturing processes to increase overall cell efficiency, reduce our average
cost and improve the quality of our products.
We
believe that the continual improvement of our research and development
capability is vital to maintaining our long-term competitiveness. Our research
and development laboratory focuses on enhancing the quality of our solar cells
and modules, improving production efficiency and increasing the conversion
efficiency of our solar cells and modules. We have established a
joint research and development laboratory with Shanghai University to
facilitate improvements to our products to create a valuable competitive
advantage over our competitors. We intend to continue to devote
management and financial resources to research and development as well as to
seek cooperative relationships with academic institutions to further lower our
overall production costs, increase the conversion efficiency rates of our solar
power products and improve our product quality.
Establish
regional sales and support offices and warehouses in Central Europe and North
America to expand our sales and marketing network and enhance our sales and
marketing channels.
In order to support our
goal to expand sales in Central Europe and North America, we plan to establish
regional sales and support offices and warehouses in such locations.
Furthermore, we plan to devote significant resources to developing customers
through establishing diversified sales channels comprising project developers,
system integrators, distributors and sales agents and diversified marketing
activities, including attending trade shows and exhibits worldwide as well as
providing high quality services to our customers.
Establish
strategic alliances with medium and small distributors and system integrators
and securing silicon raw material supplies at competitive cost.
We
believe our ability to establish and maintain long-term strategic alliances with
medium and small distributors for our solar cells and solar modules are critical
to our continued business development. We also believe that secure and
cost-efficient access to silicon raw material supplies is critical to our future
success.
OUR
CORPORATE HISTORY AND INFORMATION
Solar
EnerTech Corp. was originally incorporated under the laws of the State of Nevada
on July 7, 2004. We engaged in a variety of businesses until March
2006, when we began our current operations as a photovoltaic solar energy cell
and module manufacturer. Our management decided that, to facilitate a change in
business that was focused on the photovoltaic solar energy cell industry, it was
appropriate to change our name. In April 2006, we changed our name to Solar
EnerTech Corp. and in August 2008, we reincorporated to the State of
Delaware.
PRODUCTS
AND CUSTOMERS
Our main
product are monocrystalline silicon and polycrystalline solar modules, which we
sell to solar panel installers who incorporate our modules into their power
generating systems that are sold to end-customers located in Europe, Australia,
North America and China. For the nine fiscal months ended June 30,
2010 and the fiscal years ended September 30, 2009 and 2008, sales to three,
four and one customers, respectively, exceeded 10% of our sales and accounted
for approximately 76.28%, 70.74% and 38.15%, respectively, of our
sales.
RESEARCH
& DEVELOPMENT
In
December 2006, we entered into a joint venture with Shanghai University to
operate a research facility to study various aspects of advanced PV technology.
Our joint venture 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.
Management believes that the joint research and development laboratory will
enable us to create a valuable competitive advantage over solar cell producers
today, with the goal of enabling us to become an important solar-cell
manufacturer. The research and development we will undertake pursuant to
this agreement includes the following:
|
·
|
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;
and
|
|
·
|
we
plan to research and develop key material for low-cost flexible film PV
cells and non-vacuum technology.
|
We
committed to invest no less than RMB 5 million each year for the first three
years and no less than RMB 30 million cumulatively for the first five years. Due
to the delay in the progress of research and development activities in the
earlier years, the amount of $1.7 million originally committed to be paid during
fiscal years 2009 and 2008 has not been paid as of June 30, 2010, as Shanghai
University has not yet incurred the additional costs to meet its research and
development milestones. Shanghai University has taken steps to ensure that
progress towards achieving the milestones are back on track. Specifically, by
the end of 2011, Shanghai University expects to complete academic papers and
studies relating to cell conversion rates and other agreed upon
projects.
COMPETITION
The solar
energy market is highly competitive. Outside China, our 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, our primary competitors are Suntech Power Holding’s Co.,
Ltd., Trina Solar Ltd., Baoding Tianwei Yingli New Energy Resources Co., Ltd.,
Nanjing PV-Tech Co., Ltd, Canadian Solar Inc., JA Solar Holding Co., Ltd. and
Solarfun Power Holdings Co., Ltd.
We
compete primarily on the basis of the power efficiency, quality, performance and
appearance of our products, price, strength of its supply chain and distribution
network, after-sales service and brand image. Many of our competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial and marketing resources than we do.
INTELLECTUAL
PROPERTY
We are
not, at present, the holder of any registered trademarks or copyrights on our
products. We are the holders of two patents. We intend to trademark the
trade name “SolarE” in Asia, Europe and North America in the future and will, if
we are successful in our research and development activities, seek intellectual
property protection for such products. Solar cells are in the public domain and
our only protection in producing them is in the know-how or experience of its
employees and management in producing its products.
ENVIRONMENTAL
REGULATIONS
In our
manufacturing process, we will use, generate and discharge toxic, volatile or
otherwise hazardous chemicals and wastes in our manufacturing activities. We are
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 we fail 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.
Management
believes that we have all environmental permits necessary to conduct our
business and have obtained all necessary environmental permits for our facility
in Shanghai. Management also believes that we have properly handled our
hazardous materials and wastes and have appropriately remediated any
contamination at any of our premises. We are 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 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.
PRINCIPAL
SUPPLIERS
We
currently purchase silicon wafer, our key raw material, from the spot
market. In 2008 and 2009, our five largest suppliers supplied in the
aggregate approximately 53.2% and 70.8%, respectively, of our total silicon
wafer material purchases by value.
EMPLOYEES
As of
June 30, 2010, we employed approximately 397 people, as follows: our California
office currently has 1 employee and the manufacturing plant in Shanghai
currently has 396 employees.
PROPERTY
We lease
all of our properties.
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 added 21,506 square feet to our existing facility
with monthly rent of $11,000. The lease expires in
August 2012.
We also
have an operating lease for 3,365 square foot of office space in
Shanghai. The monthly rent for this space is $10,645. The lease
expires on December 31, 2011 and can be renewed with three-month advanced
notice.
On
February 8, 2010, we acquired land use rights of a parcel of land at the price
of approximately $0.7 million. This piece of land is 68,025 square meters and is
located in Yizheng, Jiangsu Province of China, which will be used to house our
second manufacturing facility. As part of the acquisition of the land use right,
we are required to complete construction of the facility by February 8,
2012. All land in the PRC is owned by the PRC government and cannot be sold
to any individual or entity. The government in the PRC, according to relevant
PRC law, may sell the right to use the land for a specified period of time.
Thus, the land we purchased in the PRC is considered to be leasehold
land.
Finally,
we lease 678 square feet of office space on a month to month basis 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.
LEGAL
PROCEEDINGS
We are
involved in various claims and actions arising in the ordinary course of
business. In the opinion of management, based on consultation with
legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on us. We believe appropriate accruals have
been made for the disposition of these matters. We establish an
accrual for a liability when it is both probable that the liability has been
incurred and the amount of the loss can be reasonably
estimated. These accruals are reviewed quarterly and adjusted to
reflect the impact of negotiations, settlements and payments, rulings, advice of
legal counsel, and other information and events pertaining to a particular
case. Legal expenses related to defense, negotiations, settlements,
rulings, and advice of outside legal counsel are expensed as
incurred.
MANAGEMENT
EXECUTIVE
OFFICERS AND DIRECTORS
The
following table sets forth certain information regarding our directors and
executive officers as of June 30, 2010. There are no family relationships among
our executive officers and directors.
Name
|
|
Age
|
|
Position
|
Leo
Shi Young
|
|
56
|
|
Director,
President and Chief Executive Officer
|
Steve
Ye
|
|
34
|
|
Chief
Financial Officer, Treasurer and Secretary
|
David
A. Field
|
|
48
|
|
Director
|
David
Anthony
|
|
48
|
|
Director
|
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 M.B.A.
from Fordham University, New York (2005); an M.A. from the School of the Art
Institute of Chicago (1985); and a B.A. from Tsinghua University of Beijing
(1982).
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 us, 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 M.B.A. 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 certified public
accountant in State of Delaware and a Chartered Financial Analyst.
DAVID A.
FIELD, Director since January 2010
Mr. Field
is president and chief executive officer of Applied Solar, LLC, the successor to
the business and assets of Applied Solar, Inc., which, together with one of its
wholly-owned subsidiaries, Solar Communities I, LLC, filed a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy Code on July 28,
2009. Mr. Field is a director of ThermoEnergy Corporation, a Delaware
corporation. Mr. Field had been president, chief executive officer
and a director of Applied Solar, Inc., positions he had held since October
2007, November 2008 and June 2008, respectively. Prior to
joining Applied Solar, Inc., Mr. Field was a senior executive at Clark Security
Products from January 2005 to August 2006. Previously, he founded and
managed several companies in the energy sector. In June 2001, Mr.
Field founded and was chief executive officer of Clarus Energy Partners, a
leading distributed generation developer, owner and operator that was acquired
by Hunt Power in early 2004. Prior to Clarus Energy, Mr. Field co-founded
Omaha-based Kiewit Fuels, a renewable energy company specializing in the
development of biofuels production. In addition to a career in
sustainable energy development, he also has an extensive background in water
technology and infrastructure development, with companies such as Bechtel, Peter
Kiewit, and Poseidon Resources, as well as in corporate finance with
Citicorp.
DAVID
ANTHONY, Director since January 2010
Mr.
Anthony is an experienced entrepreneur, venture capitalist, and
educator. He is the Managing Director of 21 Ventures, a position he
has held since 2003, and sits on the boards of ThermoEnergy Corporation, Agent
Video Intelligence, Axion Power International, Inc., 3GSolar, BioPetroClean,
Open Energy and VOIP Logic. Prior to 21 Ventures, Mr. Anthony
launched Notorious Entertainment, a developer of multimedia
brands.
Board
Composition and Committees
Our board
of directors is comprised of Leo Shi Young, David A. Field and David
Anthony. Of such directors, each of David A. Field and David Anthony
is an “independent director” as such term is defined in NASDAQ Manual Rule 5605
(a)(2) of the listing standards of the NASDAQ Stock Market. We were not a party
to any transaction, relationship or other arrangement with any of our
“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.
Our board
of directors directs the management of our business and affairs, as provided by
Delaware law, and conducts its business through meetings of the board of
directors. The composition of the board committees will comply, when
required, with the applicable rules of the exchange on which our common stock is
listed and applicable law. Our board of directors has adopted a
written charter for each of the standing committees, each of which is available
on our website.
While we
have charters providing for an Audit Committee, Compensation Committee and
Nominating and Governance Committee, we do not currently have members of the
Board of Directors serving on any of the committees.
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.solarE-power.com and was filed with
SEC on February 11, 2008 as Exhibit 14.1 to our Form 8-K.
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, our
chief financial officer and to any executive officer whose annual salary and
bonus exceeded $100,000 during our last completed fiscal year that ended on
September 30, 2009.
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
Option Awards($)
|
|
|
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.
|
AGREEMENTS
WITH PRINCIPAL EXECUTIVE OFFICER
Amended
and Restated Executive Employment, Incentive, and Severance Agreement with Mr.
Leo Shi Young
Under the
terms of the Amended and Restated Executive Employment, Incentive, and Severance
Agreement entered into between us and Mr. Young on January 7, 2010 (the
“Executive Incentive Agreement”), Mr. Young is entitled to:
|
·
|
receive
an annual base salary of $250,000;
|
|
·
|
additional
options for a number of shares of our common stock to be determined by the
Board if the Company reaches certain operating and financial metrics
agreed upon between the Board and Mr.
Young;
|
|
·
|
a
severance arrangement of a lump sum payment in an amount equal to eighteen
(18) months of Mr. Young’s then effective base salary and acceleration of
vesting of stock options and restricted stock in the event of Mr. Young’s
involuntary termination from service (i) for reasons other than Cause; or
(ii) due to a Diminution of Responsibilities (each as defined in the
Executive Incentive Agreement); and
|
|
·
|
other
benefits as set forth in the Executive Incentive
Agreement.
|
Amended
and Restated Employment Agreement with Steve Mao Ye
Under the
terms of the Amended and Restated Employment Agreement entered into between us
and Mr. Ye on January 7, 2010 (the “Ye Employment Agreement”), Mr. Ye is
entitled to receive:
|
·
|
an
annual salary of Chinese RMB 600,000 (approximately US$88,000 as of the
date of the Employment Agreement), increasing to Chinese RMB 672,000
(approximately US$98,500 as of the date of the Ye Employment Agreement) to
the extent the Company achieves profitability for each of the quarters
ending March 30, 2010 and June 30,
2010;
|
|
·
|
severance
arrangement of a lump sum payment in an amount equal to six (6) months of
Mr. Ye’s then effective base salary and acceleration of vesting of stock
options and restricted stock under certain conditions;
and
|
|
·
|
other benefits as set forth in
the Ye Employment Agreement.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
OUTSTANDING
EQUITY AWARDS AT SEPTEMBER 30, 2009
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Number of Securities
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
or Units of
|
|
|
Market Value of
|
|
|
|
Underlying Unexercised
|
|
|
Underlying Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Stock(#) That
|
|
|
Shares or units of
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not Vested
|
|
|
Stock That have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date
|
|
|
|
(#)
|
|
|
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 $0.20 per share. These shares vest 25% annually over 4 years
beginning on April 2,
2009
|
DIRECTOR
COMPENSATION
Name
|
|
Option
Awards
($)
|
|
|
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.
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 our 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 our employees,
directors and consultants and those of our 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 our 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 our 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 our stockholders and upon our
reincorporation into the State of Delaware.
On May 5, 2008, at
our
Annual Meeting of Stockholders,
our
stockholders approved the Amended 2007
Plan. On August 13, 2008,
we
reincorporated into the State of
Delaware.
On May 9,
2008, the Compensation Committee of the board of directors 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.
Under the
Series A and Series B Notes Conversion Agreement entered into by us and certain
holders of our former Series A Convertible Notes and Series B Convertible Notes
on January 7, 2010, these note holders agreed to take all necessary actions
required to: (i) increase the number of shares of common stock authorized to be
issued under our equity incentive plans to equal 20% of our fully-diluted
outstanding stock (including the conversion of all of notes and warrants) and
(ii) provide for the grants of additional stock options equal to approximately
30% of the current option holding of each of our employees in good standing,
which options shall have an exercise price of $0.15 per share. We
have not yet undertaken these actions but plan to in the future.
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 us 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 our 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 our 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 our board of directors, and has a term of 10 years.
Participation is limited to our employees, directors and consultants and those
of our 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 holding shares of
our 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 us for cause, then
the participant shall forfeit 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 us 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.
CERTAIN
RELATIONSHIPS AND 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 our 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 us 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 Hong Kong New Energy Technologies, Limited and Solar
EnerTech (Shanghai) Co., Ltd. on August 19, 2008.
On April
27, 2009, we 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. During the three and nine months ended June 30, 2010, we
recorded sales from SET-Solar Corp in the amount of $0.5 million. As of June 30,
2010, the accounts receivable due from SET-Solar Corp. and the cash collateral
received from SET-Solar Corp. are $0.4 million and $0.3 million, respectively.
We are currently in the process of ceasing our joint venture relationship with
Jiangsu Shunda which will result in SET-Solar Corp. becoming an independent
entity who will be one of our U.S. distributors.
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables sets forth security information as of June 30, 2010, 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 June 30, 2010,
we had 169,793,496 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
stockholder
identified in the table possesses sole
voting and investment power over all shares of common stock shown as
beneficially owned by the
stockholder
.
Shares of
common stock subject to options or warrants that are currently exercisable or
exercisable within 60 days after June 30, 2010 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
Name and Address
|
|
Number of Shares
Beneficially Owned
|
|
|
Percentage Owned
|
|
The
Quercus Trust (1)
|
|
|
125,734,189
|
|
|
|
59.2
|
%
|
(1)
Information based on Amendment No. 7 to Schedule 13D dated January 7, 2010. 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. The Quercus Trust holds 83,127,191 shares
of common stock and warrants to purchase 42,606,998 shares of common
stock.
Security
Ownership of Management
|
|
Number of Shares
|
|
|
|
|
Name and Address (1)
|
|
Beneficially Owned
|
|
|
Percentage Owned
|
|
Leo
Shi Young
|
|
|
15,284,286
|
(2)
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
Shi
Jian Yin (3)
|
|
|
3,500,000
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
Steve
Mao Ye
|
|
|
125,000
|
(4)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
David
A. Field
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
David
Anthony
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group
|
|
|
18,909,286
|
|
|
|
11.1
|
%
|
*
|
Beneficially
owns less than 1% of our outstanding common shares and
options.
|
(1)
|
The
address for our officers and directors is 655 West Evelyn Avenue, Suite
#2, Mountain View, CA 94041
|
(2)
|
Mr.
Young was granted 11,750,000 of restricted shares on August 19,
2008. 20% of these shares vested on August 19, 2010 and the
remaining 80% will vest on August 19, 2011. These
restricted shares bear voting rights and therefore are included in this
calculation.
|
(3)
|
As
of the date hereof, Mr. Yin is no longer an officer or director of our
company.
|
(4)
|
Mr.
Ye was granted an option for 500,000 shares on May 20,
2009. The options vests 25% annually over 4 years beginning on
April 2, 2009. As of August 24, 2010, 125,000 shares have
vested.
|
DESCRIPTION
OF SECURITIES
COMMON
STOCK
We are
authorized to issue 400,000,000 shares of common stock, $0.001 par value per
share, of which 169,793,496 shares are issued and outstanding as of June 30,
2010. Each outstanding share of common stock is entitled to one vote,
either in person or by proxy, on all matters that may be voted upon by their
holders at meetings of the stockholders.
Holders
of our common stock:
|
·
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by our board of
directors;
|
|
·
|
are
entitled to share ratably in all of our assets available for distribution
to holders of common stock upon our liquidation, dissolution or winding
up;
|
|
·
|
do
not have preemptive, subscription or conversion rights or redemption or
sinking fund provisions; and
|
|
·
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
|
The
holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors if
they so choose and, in such event, the holders of the remaining shares will not
be able to elect any of our directors.
WARRANTS
We have
issued Series A, Series B and Series C warrants to purchase shares of our common
stock. We and the holders of over 50% of each of the outstanding
Series A, Series B and Series C warrants (collectively the “PIPE Warrants”)
entered into an Amendment to the Series A, B, and C Warrants (the “Warrant
Amendment”) on January 7, 2010 which amended the PIPE Warrants to reduce their
exercise prices from $1.21, $0.90 and $1.00, respectively, to $0.15. The PIPE
Warrants were also 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. As of the June 30, 2010, our Series
A, Series B and Series C warrants were exercisable into 7,246,377, 20,431,554
and 24,318,181 shares of our common stock, respectively, each at $0.15 per
share. The PIPE Warrants expire 60 months from the date of their
issuance.
We also
have issued other warrants exercisable for 3,233,684 shares of common
stock. The warrants expire in March 2012.
In
addition, we have agreed to issue to Rodman & Renshaw, LLC, our placement
agent for this offering, warrants to purchase 5% of the aggregate number of
shares of our common stock sold in this offering
WARRANTS
TO BE ISSUED AS PART OF THIS OFFERING
The
warrants offered in this offering will be issued in a form filed as an exhibit
to the registration statement of which this prospectus is a part. You should
review a copy of the form of warrant for a complete description of the terms and
conditions applicable to the warrants. The following is a brief summary of the
warrants and is subject in all respects to the provisions contained in the form
of warrant.
The
warrants will have an exercise price of $
[
·
]
per share of our common
stock and will be exercisable at the option of the holder at any time after the
closing date of this offering, through and including the date that is the five
year anniversary of the initial exercise date.
The
warrants may be exercised only for full shares of common stock. If the
registration statement covering the shares issuable upon exercise of the
warrants contained in the units is no longer effective, the warrants will be
issued with restrictive legends unless such shares are eligible for sale under
Rule 144 promulgated under the Securities Act. We will not issue fractional
shares of common stock or cash in lieu of fractional shares of common stock.
Warrant holders do not have any voting or other rights as a stockholder of our
company. The exercise price and the number of shares of common stock purchasable
upon the exercise of each warrant are subject to adjustment upon the happening
of certain events, such as stock dividends, distributions, and
splits.
The
warrants provide that no exercise will be effected, and the holder of a warrant
will not have the right to exercise a warrant, if after giving effect to the
exercise the holder, together with any affiliates, would beneficially own in
excess of 4.99% of the number of our shares outstanding immediately after giving
effect to the issuance of shares upon exercise. The holder, upon at least 60
days notice to us, may increase the 4.99% threshold but not above
9.99%.
In the
event that we (i) merge with or sell or lease all or substantially all of our
assets to another company in one or more related transactions, (ii) are the
target of a completed tender offer that has been accepted by the holders of 50%
or more of our then outstanding common stock, (iii) effect any reorganization,
reclassification or recapitalization of our company or any compulsory share
exchange pursuant to which our common stock is effectively converted into or
exchangeable for other securities, or (iv) consummate a business combination,
including a spin-off, with another entity or group of persons in which that
entity or group acquires more than 50% of the then outstanding shares of our
common stock, then the holder of a warrant will be entitled, upon exercise of
the warrant, to receive shares of the successor entity and any additional
consideration paid in the transaction to our stockholders. The amount of shares
and the exercise price of the warrants shall be adjusted as necessary to reflect
the alternate consideration issuable in the transaction. If the consideration to
be received in the transaction is all cash or the transaction is a going private
transaction or the acquiring entity is not listed on a national securities
exchange, including NASDAQ, then the holder of a warrant, at his or her option,
may require the acquiring entity to purchase the warrant for cash in an amount
equal to the value of the unexercised portion of the warrant. The warrant
valuation shall be based on the Black-Scholes option pricing model.
No market
exists for the warrants. We do not intend to list the warrants offered hereby on
any securities exchange.
SERIES
B-1 NOTE
On March
19, 2010, we issued a Series B-1 Convertible Note with a principal amount of
$1.8 million (the “
Series B-1
Note
”). The Series B-1 Note has an interest rate equal to 6%
per annum and is due on March 19, 2012. The Series B-1 Note is
convertible into a number of shares of our common stock equal to the quotient of
(a) the amount being converted and (b) $0.15 (subject to any adjustment pursuant
to the terms of the note). The noteholder, however, cannot convert if
such conversion results in the noteholder beneficial owning more than 4.99% of
our shares, subject to exceptions as discussed in the Series B-1
Note.
DELAWARE
ANTI-TAKEOVER LAW AND CHARTER BYLAWS PROVISIONS
We are
subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
|
·
|
prior
to such date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer;
or
|
|
·
|
on
or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
|
Section
203 defines a business combination to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested
stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled by
such entity or person.
Our
bylaws contain provisions that could have the effect of discouraging potential
acquisition proposals or making a tender offer or delaying or preventing a
change in control of our company, including changes a stockholder might consider
favorable. In particular, our bylaws, among other things,
will:
|
·
|
provide
our board of directors with the ability to alter our bylaws without
stockholder approval;
|
|
·
|
provide
for an advance notice procedure with regard to the nomination of
candidates for election as directors and with regard to business to be
brought before a meeting of stockholders;
and
|
|
·
|
provide
that vacancies on our board of directors may be filled by a majority of
directors in office, although less than a
quorum.
|
Such
provisions may have the effect of discouraging a third-party from acquiring us,
even if doing so would be beneficial to our stockholders. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of our board of directors and in the policies formulated by
them, and to discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited acquisition proposal and
to discourage some tactics that may be used in proxy fights. We
believe that the benefits of increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited proposal to acquire
or restructure our company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing
changes in our management.
TRANSFER
AGENT
The
transfer agent and registrar for our common stock is Continental Stock Transfer
& Trust Company, 17 Battery Place, 8th Floor, New York, New
York 1004 and its telephone number is
212.509.4000.
PLAN
OF DISTRIBUTION
Rodman
& Renshaw, LLC, which we refer to as the placement agent, has entered into a
placement agency agreement with us in connection with this offering. The
placement agent may engage one or more sub-placement agents or selected dealers.
Among other things, the placement agent will assist us in identifying and
evaluating prospective investors and approach prospective investors regarding
the offering. The placement agent will assist us on a “reasonable best efforts”
basis. The placement agent will have no obligation to buy any of the securities
from us, nor is it required to arrange the purchase or sale of any specific
number or dollar amount of securities. We will enter into a securities purchase
agreement directly with each investor in connection with this offering, which
will set forth the terms of the offering, as described in this prospectus, will
include customary representations and warranties regarding the offering, the
units to be issued and sold, and our business, and will contain customary
conditions to closing and other customary terms.
This
offering will be made only to persons who qualify as “institutional investors”
under the securities laws of the state of their residence, or for entities, of
their domicile, or to legal entities to whom offers and sales may be made
without qualification or registration of this offering under the securities laws
of their state of domicile.
The
placement agency agreement provides that the obligations of the placement agent
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain certificates,
opinions and letters from us, our officers, our counsel, and our independent
registered public accounting firm. If the closing conditions are not satisfied
by December 10, 2010, we will return your subscription amount to you without
interest and without any other offset or deduction within two days.
We are
planning to conduct only one closing of the offering
. On the
closing date, we will issue the units for which subscriptions have been
received and accepted to the subscribers and we will receive funds in the amount
of the aggregate purchase price for those units. We currently
anticipate the closing of the sale of the units on or before
December 10, 2010.
On the
closing date, the following will occur:
|
·
|
we
will receive funds in the amount of the aggregate purchase price of
the units being sold by us on the closing date, less the amount
of fees we are paying to the placement
agent;
|
|
·
|
we
will cause common stock sold on the closing date to be delivered in
either certificate form or book-entry form through the facilities of the
Depository Trust Company; and
|
|
·
|
we
will cause an executed warrant exercisable for the applicable number of
shares to be delivered to each purchaser of common stock on the
closing date.
|
We have
agreed to pay the placement agent a cash fee equal to 7% of the gross proceeds
of this offering. Subject to compliance with FINRA Rule 5110(f)(2)(D), we
have also agreed to reimburse the placement agent’s expenses up to
a maximum
of 1.5% of the gross proceeds raised in the offering, but in no event more than
of $35,000. The placement agent will also receive warrants to
purchase 5% of the aggregate number of shares of our common stock sold in this
offering. The placement agent warrants are not covered by this
prospectus. The warrants issued to the placement agent will be
substantially identical to the warrants offered by this prospectus except that
the warrants issued to the placement agent will have an exercise price per share
of 125% of the public offering price, or $
[
·
]
, and the expiration
date of such warrants shall be the five year anniversary of the effective
date of this offering. Pursuant to FINRA Rule 5110(g), for a period of six
months after the issuance date of the placement agent warrants, neither the
placement agent warrants nor any warrant shares issued upon exercise of the
placement agent warrants shall be sold, transferred, assigned, pledged, or
hypothecated, or be the subject of any hedging, short sale, derivative, put, or
call transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the date
of effectiveness or commencement of sales of this offering, except the transfer
of any security:
|
(i)
|
by
operation of law or by reason of reorganization of the
Company;
|
|
(ii)
|
to
any FINRA member firm participating in the offering and the officers or
partners thereof, if all securities so transferred remain subject to the
lock-up restriction set forth above for the remainder of the time
period;
|
|
(iii)
|
if
the aggregate amount of our securities of the Company held by the holder
of the placement agent warrants or related person do not exceed 1% of the
securities being offered;
|
|
(iv)
|
that
is beneficially owned on a pro-rata basis by all equity owners of an
investment fund, provided that no participating member manages or
otherwise directs investments by the fund, and participating members in
the aggregate do not own more than 10% of the equity in the fund;
or
|
|
(v)
|
the
exercise or conversion of any security, if all securities received remain
subject to the lock-up restriction set forth above for the remainder of
the time period.
|
The
following table shows the per unit and total placement agent fee to be paid by
us to the placement agent. This amount is shown assuming all of the securities
offered pursuant to this prospectus are sold and issued by us.
Placement
Agent
Fee
Per
Unit
|
|
Total
|
$
[
·
]
|
|
$
[
·
]
|
We are
offering pursuant to this prospectus up to 70,000,000 of our units, but
there can be no assurance that the offering will be fully subscribed.
Accordingly, we may sell substantially less than 70,000,000 of our units,
in which case our net proceeds would be substantially reduced and the total
placement agent fees may be substantially less than the maximum total set forth
above. We have agreed to indemnify the placement agent against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
and liabilities related to the performance by the placement agent of the
services contemplated by the placement agency agreement. We have also agreed to
contribute to payments the placement agent may be required to make in respect of
such liabilities.
The
placement agent may be deemed to be an underwriter within the meaning of Section
2(a)(11) of the Securities Act of 1933, as amended, and any commission received
by it and any profit realized on the resale of the securities sold by it while
acting as principal might be deemed to be an underwriting discount or commission
under the Securities Act. As an underwriter, the placement agent would be
required to comply with the requirements of the Securities Act and the
Securities Exchange Act of 1934, as amended, including, without limitation, Rule
10b-5 and Regulation M under the Securities Exchange Act. These rules and
regulations may limit the timing of purchases and sales of shares of common
stock and warrants to purchase shares of common stock by the placement agent.
Under these rules and regulations, the placement agent may not engage in any
stabilization activity in connection with our securities; and may not bid for or
purchase any of our securities or attempt to induce any person to purchase any
of our securities, other than as permitted under the Securities Exchange Act,
until it has completed its participation in the distribution.
The
estimated offering expenses payable by us, in addition to the placement agent’s
fee, are approximately $260,398.20, which include legal, accounting and printing
costs and various other fees associated with registering the units and listing
the common stock.
The form
of placement agency agreement is filed as an exhibit to the registration
statement of which this prospectus is a part.
FOREIGN
REGULATORY
RESTRICTIONS ON PURCHASE
OF THE UNITS
No action
may be taken in any jurisdiction other than the United States that would permit
a public offering of the units or the possession, circulation or distribution of
this prospectus in any jurisdiction where action for that purpose is required.
Accordingly, the common stock may not be offered or sold, directly or
indirectly, and neither the prospectus nor any other offering material or
advertisements in connection with the units may be distributed or published in
or from any country or jurisdiction except under circumstances that will result
in compliance with any applicable rules and regulations of any such country or
jurisdiction.
LEGAL
MATTERS
The
validity of the securities being offered by this prospectus and other legal
matters will be passed upon for us by DLA Piper LLP (US), East Palo Alto,
California.
EXPERTS
The
consolidated financial statements of Solar EnerTech Corp. (the “Company”) at
September 30, 2009 and 2008, and for each of the two years in the period ended
September 30, 2009, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young Hua Ming, independent registered public
accounting firm, as set forth in their report thereon (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
the Company's ability to continue as a going concern as described in Note 2 to
the consolidated financial statements) appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 for the units in this offering. This prospectus does
not contain all of the information in the registration statement and the
exhibits and schedule that were filed with the registration statement. For
further information with respect to us and our common stock, we refer you to the
registration statement and the exhibits and schedule that were filed with the
registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement.
A copy of
the registration statement and the exhibits and schedules that were filed with
the registration statement may be inspected without charge at the Public
Reference Room maintained by the Securities and Exchange Commission at 100 F
Street, N.E. Washington, DC 20549, and copies of all or any part of the
registration statement may be obtained from the Securities and Exchange
Commission upon payment of the prescribed fee. Information regarding the
operation of the Public Reference Room may be obtained by calling the Securities
and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange
Commission maintains a website that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the SEC. The address of the website is www.sec.gov.
We file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Interim Consolidated Financial
Statements (unaudited
)
Consolidated
Balance Sheets – June 30, 2010 (unaudited) and September 30, 2009
(audited)
|
F-
2
|
|
|
Unaudited
Consolidated Statements of Operations – Three and Nine Months Ended June
30, 2010 and 2009
|
F-
3
|
|
|
Unaudited
Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2010
and 2009
|
F-
4
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
F-
5
|
Consolidated
Financial Statements (audited)
Reports
of Independent Registered Public Accounting Firm
|
F-
30
|
|
|
Consolidated
Balance Sheets as of September 30, 2009 and 2008
|
F-
31
|
|
|
Consolidated
Statements of Operations for the years ended September 30, 2009 and
2008
|
F-
32
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended September 30, 2009
and 2008
|
F-
33
|
|
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2009 and
2008
|
F-
34
|
|
|
Notes
to Consolidated Financial Statements
|
F-
35
|
Solar EnerTech Corp.
Consolidated
Balance Sheets
|
|
June 30, 2010
|
|
|
September 30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,662,000
|
|
|
$
|
1,719,000
|
|
Accounts
receivable, net of allowance for doubtful account of $96,000 and $96,000
at June 30, 2010 and September 30, 2009, respectively
|
|
|
13,544,000
|
|
|
|
7,395,000
|
|
Advance
payments and other
|
|
|
347,000
|
|
|
|
799,000
|
|
Inventories,
net
|
|
|
4,987,000
|
|
|
|
3,995,000
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
-
|
|
|
|
1,250,000
|
|
VAT
receivable
|
|
|
422,000
|
|
|
|
334,000
|
|
Other
receivable
|
|
|
173,000
|
|
|
|
408,000
|
|
Total
current assets
|
|
|
22,135,000
|
|
|
|
15,900,000
|
|
Property
and equipment, net
|
|
|
9,407,000
|
|
|
|
10,509,000
|
|
Other
assets
|
|
|
730,000
|
|
|
|
-
|
|
Investment
|
|
|
-
|
|
|
|
1,000,000
|
|
Deposits
|
|
|
101,000
|
|
|
|
87,000
|
|
Total
assets
|
|
$
|
32,373,000
|
|
|
$
|
27,496,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
12,286,000
|
|
|
$
|
5,794,000
|
|
Customer
advance payment
|
|
|
420,000
|
|
|
|
27,000
|
|
Accrued
expenses
|
|
|
2,474,000
|
|
|
|
1,088,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
5,773,000
|
|
|
|
5,646,000
|
|
Short-term
loans
|
|
|
729,000
|
|
|
|
-
|
|
Convertible
notes, net of discount
|
|
|
-
|
|
|
|
3,061,000
|
|
Derivative
liabilities
|
|
|
-
|
|
|
|
178,000
|
|
Total
current liabilities
|
|
|
21,682,000
|
|
|
|
15,794,000
|
|
Convertible
notes, net of discount
|
|
|
1,542,000
|
|
|
|
-
|
|
Derivative
liabilities
|
|
|
562,000
|
|
|
|
-
|
|
Warrant
liabilities
|
|
|
1,044,000
|
|
|
|
2,068,000
|
|
Total
liabilities
|
|
|
24,830,000
|
|
|
|
17,862,000
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock - 400,000,000 shares authorized at $0.001 par value 169,793,496 and
111,406,696 shares issued and outstanding at June 30, 2010 and September
30, 2009, respectively
|
|
|
170,000
|
|
|
|
111,000
|
|
Additional
paid in capital
|
|
|
96,881,000
|
|
|
|
75,389,000
|
|
Other
comprehensive income
|
|
|
2,554,000
|
|
|
|
2,456,000
|
|
Accumulated
deficit
|
|
|
(92,062,000
|
)
|
|
|
(68,322,000
|
)
|
Total
stockholders' equity
|
|
|
7,543,000
|
|
|
|
9,634,000
|
|
Total
liabilities and stockholders' equity
|
|
$
|
32,373,000
|
|
|
$
|
27,496,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Solar
EnerTech Corp.
Consolidated
Statements of Operations
(Unaudited)
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
16,355,000
|
|
|
$
|
10,143,000
|
|
|
$
|
51,799,000
|
|
|
$
|
19,639,000
|
|
Cost
of sales
|
|
|
(15,051,000
|
)
|
|
|
(9,657,000
|
)
|
|
|
(47,637,000
|
)
|
|
|
(22,791,000
|
)
|
Gross
profit (loss)
|
|
|
1,304,000
|
|
|
|
486,000
|
|
|
|
4,162,000
|
|
|
|
(3,152,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
2,475,000
|
|
|
|
2,577,000
|
|
|
|
7,243,000
|
|
|
|
8,224,000
|
|
Research
and development
|
|
|
54,000
|
|
|
|
463,000
|
|
|
|
287,000
|
|
|
|
1,234,000
|
|
Loss
on debt extinguishment
|
|
|
-
|
|
|
|
36,000
|
|
|
|
18,549,000
|
|
|
|
527,000
|
|
Total
operating expenses
|
|
|
2,529,000
|
|
|
|
3,076,000
|
|
|
|
26,079,000
|
|
|
|
9,985,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,225,000
|
)
|
|
|
(2,590,000
|
)
|
|
|
(21,917,000
|
)
|
|
|
(13,137,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,000
|
|
|
|
3,000
|
|
|
|
5,000
|
|
|
|
13,000
|
|
Interest
expense
|
|
|
(59,000
|
)
|
|
|
(1,015,000
|
)
|
|
|
(5,383,000
|
)
|
|
|
(1,938,000
|
)
|
Gain
(loss) on change in fair market value of compound embedded
derivative
|
|
|
717,000
|
|
|
|
(238,000
|
)
|
|
|
1,115,000
|
|
|
|
350,000
|
|
Gain
(loss) on change in fair market value of warrant liability
|
|
|
1,393,000
|
|
|
|
(3,158,000
|
)
|
|
|
4,369,000
|
|
|
|
(1,415,000
|
)
|
Impairment
loss on investment
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
Other
income (expense)
|
|
|
(485,000
|
)
|
|
|
217,000
|
|
|
|
(929,000
|
)
|
|
|
3,000
|
|
Net
loss
|
|
$
|
(658,000
|
)
|
|
$
|
(6,781,000
|
)
|
|
$
|
(23,740,000
|
)
|
|
$
|
(16,124,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic
|
|
$
|
(0.004
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.18
|
)
|
Net
loss per share - diluted
|
|
$
|
(0.004
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
156,502,573
|
|
|
|
88,256,706
|
|
|
|
128,327,753
|
|
|
|
87,669,839
|
|
Weighted
average shares outstanding – diluted
|
|
|
156,502,573
|
|
|
|
88,256,706
|
|
|
|
128,327,753
|
|
|
|
87,669,839
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Solar
EnerTech Corp.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Nine Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(23,740,000
|
)
|
|
$
|
(16,124,000
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment
|
|
|
1,842,000
|
|
|
|
1,718,000
|
|
Loss
on disposal of property and equipment
|
|
|
51,000
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
2,221,000
|
|
|
|
4,689,000
|
|
Loss
on debt extinguishment
|
|
|
18,549,000
|
|
|
|
527,000
|
|
Impairment
loss on investment
|
|
|
1,000,000
|
|
|
|
-
|
|
Payment
of interest by issuance of shares
|
|
|
210,000
|
|
|
|
-
|
|
Amortization
of note discount and deferred financing cost
|
|
|
5,146,000
|
|
|
|
1,413,000
|
|
Gain
on change in fair market value of compound embedded
derivative
|
|
|
(1,115,000
|
)
|
|
|
(350,000
|
)
|
(Gain)
loss on change in fair market value of warrant liability
|
|
|
(4,369,000
|
)
|
|
|
1,415,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(6,075,000
|
)
|
|
|
(4,498,000
|
)
|
Advance
payments and other
|
|
|
441,000
|
|
|
|
2,291,000
|
|
Inventories,
net
|
|
|
(962,000
|
)
|
|
|
269,000
|
|
VAT
receivable
|
|
|
(84,000
|
)
|
|
|
834,000
|
|
Other
receivable
|
|
|
236,000
|
|
|
|
439,000
|
|
Accounts
payable, accrued liabilities and customer advance payment
|
|
|
7,175,000
|
|
|
|
7,592,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
127,000
|
|
|
|
154,000
|
|
Net
cash provided by operating activities
|
|
|
653,000
|
|
|
|
369,000
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(463,000
|
)
|
|
|
(325,000
|
)
|
Proceeds
from sales of property and equipment
|
|
|
9,000
|
|
|
|
36,000
|
|
Net
cash used in investing activities
|
|
|
(454,000
|
)
|
|
|
(289,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowing
under short-term loans
|
|
|
1,141,000
|
|
|
|
-
|
|
Short-term
loans repayment
|
|
|
(412,000
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
729,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
15,000
|
|
|
|
5,000
|
|
Net
increase in cash and cash equivalents
|
|
|
943,000
|
|
|
|
85,000
|
|
Cash
and cash equivalents, beginning of period
|
|
|
1,719,000
|
|
|
|
3,238,000
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,662,000
|
|
|
$
|
3,323,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
Extinguishment
of convertible notes by issuance of common stocks
|
|
$
|
(5,729,000
|
)
|
|
$
|
104,000
|
|
Extinguishment
of convertible notes by issuance of Series B-1 Note
|
|
$
|
(1,815,000
|
)
|
|
$
|
-
|
|
Issuance
of Series B-1 Note
|
|
$
|
1,535,000
|
|
|
$
|
-
|
|
Acquisition
of other assets
|
|
$
|
732,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SOLAR
ENERTECH CORP.
Notes
to Consolidated Financial Statements
June
30, 2010 (Unaudited)
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. On August 13, 2008, the Company reincorporated to the State of
Delaware.
The
Company conducts a substantial part of its operations under a wholly-owned
subsidiary in Shanghai, China named Solar EnerTech (Shanghai) Co.,
Ltd.
On
January 15, 2010, the Company incorporated a wholly-owned subsidiary in Yizheng,
Jiangsu Province of China to supplement its existing production facilities to
meet increased sales demands.
On
February 8, 2010, the Company acquired land use rights of 68,025 square meter
parcel of land located in Yizheng, Jiangsu Province of China, which will be used
to house the Company’s second manufacturing facility.
NOTE
2 — LIQUIDITY AND GOING CONCERN
The
Company has incurred significant net losses from operations during each period
from inception through June 30, 2010 and has an accumulated deficit of
approximately $92.1 million at June 30, 2010. For the nine months ended June 30,
2010, the Company incurred a net loss of approximately $23.7
million.
As of
December 31, 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 $6.8 million,
collectively known as the “Notes”. These Notes bore interest at 6% per annum and
were due on March 7, 2010. On January 7, 2010 (the “Conversion
Date”), the Company entered into a Series A and Series B Notes Conversion
Agreement (the “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 would automatically be
converted into shares of the Company’s common stock at a conversion price
which was reduced from $0.69 and $0.57, respectively to $0.15 per share and were
amended to eliminate the maximum ownership percentage restriction prior to
such conversion. Under the Conversion Agreement, the Notes were 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 would automatically be
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, each Note no longer represented a right to receive any cash
payments (including, but not limited to, interest payments) and only
represented a right to receive the shares of common stock into which such Note
has been converted into. On January 7, 2010, a total of approximately $9.8
million of the Series A and B Convertible Notes were effectively converted into
shares of the Company’s common stock. As of June 30, 2010, the Company has an
outstanding convertible note with a principal balance of $1.8 million consisting
of the Series B-1 Note, which was recorded at a carrying amount of $1.5 million.
The Series B-1 Note bears interest at 6% per annum and is due on March 19,
2012.
On March
25, 2010, the Company entered into a one year contract with China Export &
Credit Insurance Corporation (“CECIC”) to insure the collectability of
outstanding accounts receivable for two of the Company’s key customers. The
Company pays a fee based on a fixed percentage of the accounts
receivable outstanding and expenses this fee when it is incurred. In
addition, on March 30, 2010, the Company entered into a one year revolving
credit facility arrangement with Industrial Bank Co., Ltd. (“IBC”) that is
secured by the accounts receivable balances of the Company’s two key customers
insured by CECIC above. The Company can draw up to the lower of $2.0
million or the cumulative amount of accounts receivable outstanding from the
respective two key customers. If any of the insured customers fail to repay
the amounts outstanding due to the Company, the insurance proceeds will be
remitted directly to IBC instead of the Company. The interest rate of
the credit facility is variable and ranged from 3.30% to 4.48% during the
quarter ended June 30, 2010. As of June 30, 2010, the Company drew on this
credit facility with IBC amounted to $0.7 million and there have been no
insurance claims submitted to CECIC. The credit facility contains
certain non-financial ratios related covenants, including maintaining
creditworthiness, complying with all contractual obligations, providing true and
accurate records as requested by IBC, fulfillment of other indebtedness (if
any), maintaining its business license and continuing operations, ensuring its
financial condition does not deteriorate, remaining solvent, and other
conditions, as defined in the credit facility agreement. The Company complied
with these covenants as of June 30, 2010.
The
Company has approximately $2.7 million in cash and cash equivalents on hand as
of June 30, 2010. 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 improve operations including
securing key new customer contracts, which have increased sales volumes.
In addition, the Company has engaged in various cost cutting programs and
renegotiated most of its contracts to reduce operating expenses. Due to these
actions and the decrease in raw material prices, specifically silicon wafer
prices, the Company has been generating positive gross margins since the third
quarter of fiscal year 2009.
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 sales 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. Sales 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 a sale 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 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 ten-year and twenty five-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. In estimating warranty costs, the Company applied
460 – Guarantees, specifically paragraphs, 460-10-25-5 to 460-10-25-7 of the
FASB Accounting Standards Codification. This guidance requires that the Company
make a reasonable estimate of the amount of a warranty obligation. It also
provides that in the case of an entity that has no experience of its own,
reference to the experience of other entities in the same business may be
appropriate. Because the Company began to commercialize its products in fiscal
year 2007, there is insufficient experience and historical data that can be used
to reasonably estimate the expected failure rate of its solar modules. Thus, the
Company considers warranty cost provisions of other China-based manufacturers
that produce photovoltaic products that are comparable in engineering design,
raw material input and functionality to the Company’s products, and sold to a
similar target and class of customer with similar warranty coverage. In
determining whether such peer information can be used, the Company also
considers the years of experience that these manufacturers have in the industry.
Because the Company’s industry is relatively young as compared to other
traditional manufacturing industries, the selected peer companies that the
Company considers have less than ten years in manufacturing and selling history.
In addition, they have a manufacturing base in China, offer photovoltaic
products with comparable engineering design, raw material input, functionality
and similar warranty coverage, and sell in markets, including the geographic
areas and class of customer, where the Company competes. Based on the analysis
applied, the Company accrues warranty at 1% of sales. 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 June 30, 2010 and September 30, 2009, the Company’s
warranty liabilities were $928,000 and $515,000, respectively. The Company’s
warranty costs for the three and nine months ended June 30, 2010 and 2009 were
$155,000, $411,000, $66,000 and $156,000, respectively. The Company did not make
any warranty payments during the nine months ended June 30, 2010 and
2009.
Other
Assets
The
Company acquired land use rights to a parcel of land from the government in the
PRC. All land in the PRC is owned by the PRC government and cannot be sold to
any individual or entity. The government in the PRC, according to relevant PRC
law, may sell the right to use the land for a specified period of time. Thus,
the Company’s land purchase in the PRC is considered to be leasehold land and
recorded as other assets at cost less accumulated amortization. Amortization is
provided over the term of the land use right agreements on a straight-line
basis, which is for 46.5 years from February 8, 2010 through August 31,
2056.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets 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. No loss on property and equipment impairment was recorded
during the nine months ended June 30, 2010 and 2009,
respectively.
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, Inc., a
polysilicon manufacturer based in Dallas, Texas (“21-Century Silicon”), for $1.0
million in cash. The two million shares of common stock represented
approximately 7.8% of 21-Century Silicon’s outstanding equity. In connection
with the equity purchase agreement, the Company also signed a memorandum of
understanding with 21-Century Silicon for a four-year supply framework agreement
for polysilicon shipments. The first polysilicon shipment from
21-Century Silicon was initially expected in March 2009, but was subsequently
delayed to March 2010. On March 5, 2009, the Emerging Technology Fund, created
by the State of Texas, invested $3.5 million in 21-Century Silicon to expedite
production and commercialization of research. The Company’s ownership of
21-Century Silicon became 5.5% as a result of the dilution. This first
polysilicon shipment that was to be delivered in March 2010 has been further
delayed without a specified date given by 21-Century Silicon. As a result of the
continued delays in shipment, in July 2010, members of the Company’s executive
team, including the CEO, visited 21-Century Silicon and conducted reviews of the
production facility and technical development. The review indicated
that 21-Century Silicon’s production facility and technical development were
significantly below expected standards. Based on the findings from this visit,
the timing of the first polysilicon shipment is unknown and it is unknown
whether it will even occur. In addition, management of 21-Century Silicon
expressed the need for more funding to sustain operations. Moreover, 21-Century
Silicon could not provide the Company with updated financial information
concerning 21-Century Silicon’s working capital condition and future cash
flows. The Company considered the above findings were indicators that
a significant adverse effect on the fair value of the Company’s investment in
21-Century Silicon had occurred. Accordingly, an impairment loss of $1.0 million
is recorded in the Consolidated Statements of Operations for the three and nine
months ended June 30, 2010 to fully write-down the carrying amount of the
investment. The Company may also be obligated to acquire an additional two
million shares of 21-Century Silicon upon the first polysilicon shipment meeting
the quality specifications determined solely by the Company. As of June 30,
2010, the Company has not yet acquired the additional two million shares as the
product shipment has not occurred. In connection with its impairment
of the investment in 21-Century Silicon, the Company considers the likelihood
that it will be required to acquire the additional two million shares to be
remote.
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 each of its
foreign subsidiaries in the jurisdictions in which those entities operate. The
Company accounts for income taxes under liability method per the provisions of
Accounting Standards Codification Topic 740 (“ASC 740”), “Income
Taxes”.
Under the
provisions of ASC 740, deferred tax assets and liabilities are determined based
on the differences between their financial statement carrying values and their
respective tax bases using enacted tax rates that will be in effect in the
period in which the 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
In
assessing the realizability of deferred tax assets, the Company has considered
whether it is more-likely-than-not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The Company
records a valuation allowance to reduce deferred tax assets to a net amount that
management believes is more-likely-than-not of being realizable based on the
weight of all available evidence. In the event that the Company changes its
determination as to the amount of deferred tax assets that are
more-likely-than-not to 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 ASC 740, “Income Taxes”, formerly referenced as FIN 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109”. Under 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 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 classifies the unrecognized tax
benefits that are expected to be effectively settled within one year as current
liabilities, otherwise, the unrecognized tax benefits will be classified as
non-current liabilities.
Derivative
Financial Instruments and Warrants
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
Company’s management used the binomial valuation model to value the derivative
financial instruments and warrant liabilities at each valuation date. 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 derivative financial instruments and 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 derivative
financial instruments and 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 to direct customers and
distributors in accordance with guidance provided 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 a direct
customer, revenue is deferred until all acceptance criteria have been met.
Contracts with distributors do not have significant post-shipment obligations,
other than product warranty, which is accrued for as warranty costs at the time
revenue is recognized, based on the above criteria. The Company does not grant
price concessions to distributors after shipment.
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 provision
for bad debts based on an assessment of the recoverability of accounts
receivable. Specific provisions are made to the receivables where events or
changes in circumstances indicate that the balances may not be collectible. The
Company considers various factors, including 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. The Company performs a specific provision review of the
outstanding accounts receivable at least quarterly.
Shipping
and Handling Costs
The
Company incurred shipping and handling costs of $1,414,000 and $162,000 for the
nine months ended June 30, 2010 and 2009, 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 nine months ended June 30,
2010 and 2009 were $288,000 and $1,234,000, 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 nine months ended June 30, 2010 and 2009, the Company had three and four
customers, respectively, that accounted for more than 10% of sales.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued ASU 2010-06, which amended “Fair Value
Measurements and Disclosures” (ASC Topic 820) — “Improving Disclosures about
Fair Value Measurements”. This guidance amends existing authoritative guidance
to require additional disclosures regarding fair value measurements, including
the amounts and reasons for significant transfers between Level 1 and Level 2 of
the fair value hierarchy, the reasons for any transfers into or out of Level 3
of the fair value hierarchy, and presentation on a gross basis of information
regarding purchases, sales, issuances, and settlements within the Level 3
rollforward. This guidance also clarifies certain existing disclosure
requirements. The guidance is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements within the Level 3 rollforward,
which are effective for interim and annual reporting periods beginning after
December 15, 2010. The Company adopted this guidance on January 1, 2010.
The adoption of this guidance did not have a significant impact on the Company’s
financial statements.
In
February 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09,
which amended “Subsequent Events” (ASC Topic 855) — “Amendments to Certain
Recognition and Disclosure Requirements”. The amendments were made to address
concerns about conflicts with SEC guidance and other practice issues. Among the
provisions of the amendment, the FASB defined a new type of entity, termed an
“SEC filer,” which is an entity required to file or furnish its financial
statements with the SEC. Entities other than registrants whose financial
statements are included in SEC filings (e.g., businesses or real estate
operations acquired or to be acquired, equity method investees, and entities
whose securities collateralize registered securities) are not SEC filers. While
an SEC filer is still required by U.S. GAAP to evaluate subsequent events
through the date its financial statements are issued, it is no longer required
to disclose in the financial statements that it has done so or the date through
which subsequent events have been evaluated. The Company adopted this guidance
on February 24, 2010. The adoption of this guidance did not have a significant
impact on the Company’s 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 June 30, 2010 and September 30, 2009, the
Company had approximately $82,000 and $144,000, 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 since fiscal year 2009 as
the economy is recovering from the crisis. Potential credit risk 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 generally 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. Payment
terms for our solar module sales generally range from 0 to 60 days. In some
cases, these terms are extended for certain qualifying customers of whom the
Company applied rigorous credit requirements. The Company has
also purchased insurance from the China Export & Credit Insurance
Company to insure the collectability of the outstanding accounts receivable
balances of two key customers. During the nine months ended June 30, 2010 and
2009, the Company had three and four customers, respectively that accounted for
more than 10% of 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 sales 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 were cumulative foreign currency translation
adjustments amounting to $2.6 million and $2.5 million at June 30, 2010 and
September 30, 2009, respectively. Foreign currency transaction
gains and losses are included in earnings. For the nine months ended June 30,
2010 and 2009, the Company recorded foreign exchange loss of $0.9 million and
gain of $3,000, respectively.
NOTE
5 — INVENTORIES
At June
30, 2010 and September 30, 2009, inventories consist of:
|
|
June 30, 2010
|
|
|
September 30, 2009
|
|
Raw
materials
|
|
$
|
3,346,000
|
|
|
$
|
1,708,000
|
|
Work
in process
|
|
|
149,000
|
|
|
|
945,000
|
|
Finished
goods
|
|
|
1,492,000
|
|
|
|
1,342,000
|
|
Total
inventories
|
|
$
|
4,987,000
|
|
|
$
|
3,995,000
|
|
NOTE
6 — PROPERTY AND EQUIPMENT
At June
30, 2010 and September 30, 2009, property and equipment consists
of:
|
|
June
30, 2010
|
|
|
September
30, 2009
|
|
Production
equipment
|
|
$
|
8,025,000
|
|
|
$
|
7,383,000
|
|
Leasehold
improvements
|
|
|
3,660,000
|
|
|
|
3,620,000
|
|
Machinery
|
|
|
2,897,000
|
|
|
|
2,749,000
|
|
Automobiles
|
|
|
361,000
|
|
|
|
496,000
|
|
Office
equipment
|
|
|
345,000
|
|
|
|
342,000
|
|
Furniture
|
|
|
40,000
|
|
|
|
39,000
|
|
Construction
in progress
|
|
|
-
|
|
|
|
22,000
|
|
Total
property and equipment
|
|
|
15,328,000
|
|
|
|
14,651,000
|
|
Less:
accumulated depreciation
|
|
|
(5,921,000
|
)
|
|
|
(4,142,000
|
)
|
Total
property and equipment, net
|
|
$
|
9,407,000
|
|
|
$
|
10,509,000
|
|
NOTE
7 — INCOME TAX
The
Company has no taxable income and no provision for federal and state income
taxes is required for the nine months ended June 30, 2010 and 2009,
respectively, except certain minimum taxes.
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.
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 net operating losses in its
foreign jurisdictions and those losses can be carried forward 5 years from the
year the loss was incurred. As of June 30, 2010 and 2009, the Company’s deferred
tax assets were subject to a full valuation allowance.
There are
no ongoing examinations by taxing authorities at this time. The Company’s tax
years starting from 2006 to 2009 remain open in various tax jurisdictions. The
Company has not recorded any unrecognized tax benefits; and does not anticipate
any significant changes within the next 12 months.
NOTE 8 — CONVERTIBLE
NOTES
On
March 7, 2007, the Company 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, the Company 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 bore an interest rate of 6% per annum and were due on March 7, 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).
The
Company evaluated the Notes for derivative accounting considerations under FASB
ASC 815 and determined that the notes contained two embedded derivative
features, the conversion option and a redemption privilege accruing to the
holder if certain conditions exist (the “compound embedded derivative” or
“CED”). 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.
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.
The
Series A and Series B Warrants (including the Advisor Warrants) were 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.
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.
On
January 7, 2010 (the “Conversion Date”), the Company entered into a Series A and
Series B Notes Conversion Agreement (the “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. As of the Conversion Date, approximately $9.8 million of the Series A and
B Convertible Notes were effectively converted into 64,959,227 shares of the
Company’s common stock along with 1,035,791 shares of the Company’s common stock
as settlement of the accrued interest on the Series A and B Convertible Notes,
and the remaining $1.8 million of the Series B Notes were exchanged into another
convertible note as further discussed below. In connection with the
Conversion Agreement, on January 7, 2010, the Company entered into an Amendment
(the “Warrant 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 reduced the exercise
price for all of the PIPE Warrants from $1.21, $0.90 and $1.00, respectively, to
$0.15, removed certain maximum ownership provisions and removed anti-dilution
provisions for lower-priced security issuances.
The
Conversion Agreement resulted in modifications or exchanges of the Notes and
PIPE Warrants, which should be accounted for pursuant to FASB ASC 405-20,
“Liabilities” and 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”. The
combination of the adjustment to conversion price and the automatic conversion
of the Notes effectively resulted in the settlement of the Notes through the
issuance of shares of the Company’s common stock and amendment of the PIPE
Warrants’ terms. Since the Company is relieved of its obligation for the Notes,
the transaction is accounted for as an extinguishment of the Notes upon issuance
of ordinary shares and modification of the PIPE Warrants’ terms. The loss on
extinguishment associated with the Conversion Agreement amounted to
approximately $17.2 million.
On
January 19, 2010, a holder of approximately $1.8 million of the Company’s
formerly outstanding Series B Notes and Series B Warrants (hereinafter referred
to as the “Holder”) of the Company’s common stock disputed the effectiveness of
the Conversion Agreement and the Warrant Amendment. Accordingly, the
Holder did not tender its Series B Notes for conversion. After negotiations with
the Holder, on March 19, 2010, the Company entered into an Exchange Agreement
with the Holder (the “Exchange Agreement”), whereby the Company issued the
Series B-1 Note with a principal amount of $1.8 million (the “Series B-1 Note”)
to the Holder along with 283,498 shares of the Company’s common stock as
settlement of the accrued interest on the Holder’s Series B Notes and 666,666
shares of the Company’s common stock as settlement of the outstanding dispute
regarding the effectiveness of the Company’s Conversion Agreement and the
Warrant Amendment. The Company did not capitalize any financing costs
associated with the issuance of the Series B-1 Note. As of June 30, 2010,
the Company has an outstanding convertible note with a principal balance of $1.8
million consisting of the Series B-1 Note, which was recorded at a carrying
amount of $1.5 million. The Series B-1 Note bears interest at 6% per annum and
is due on March 19, 2012. During the three and nine months ended June 30, 2010,
the Company issued 2,082 and 24,073 shares of its common stock, respectively to
settle the accrued interest on the Series B-1 Note.
The
Exchange Agreement resulted in modifications or exchanges of the Holder’s rights
under its former Series B Note, 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”. The loss on debt extinguishment associated
with the Exchange Agreement amounted to approximately $1.3 million.
The costs
associated with the Conversion Agreement were directly derived from the
execution of the Company’s plan in improving its liquidity and business
sustainability, as disclosed in Note 2 — “Liquidity and Going Concern”. The
related loss on debt extinguishment was a cost that was integral to the
continuing operations of the business which is different in nature to the
continuing interest payments and change in fair value of the compound embedded
derivative and warrant liability. Accordingly, the loss on debt extinguishment
is included in operating expenses in the accompanying consolidated statements of
operations.
The
Company evaluated the Series B-1 Note for derivative accounting considerations
under FASB ASC 815 and determined that the Series B-1 Note contained 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 loss
on debt extinguishment is computed as follows:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Fair
value of the common shares
|
|
$
|
25,000
|
|
|
$
|
35,000
|
|
|
$
|
18,863,000
|
|
|
$
|
316,000
|
|
Fair
value of Series B-1 Note
|
|
|
-
|
|
|
|
-
|
|
|
|
3,108,000
|
|
|
|
-
|
|
Unamortized
deferred financing costs associated with the converted
notes
|
|
|
-
|
|
|
|
14,000
|
|
|
|
594,000
|
|
|
|
140,000
|
|
Fair
value of the CED liability associated with the converted
notes
|
|
|
-
|
|
|
|
(6,000
|
)
|
|
|
(74,000
|
)
|
|
|
(33,000
|
)
|
Accreted
amount of the notes discount
|
|
|
(25,000
|
)
|
|
|
(7,000
|
)
|
|
|
(7,544,000
|
)
|
|
|
104,000
|
|
Common
shares issued in conjunction with Series B-1 Note
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
Loss
on extinguishment of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
3,502,000
|
|
|
|
-
|
|
Loss
on debt extinguishment
|
|
$
|
-
|
|
|
$
|
36,000
|
|
|
$
|
18,549,000
|
|
|
$
|
527,000
|
|
During
the three months ended June 30, 2010, $25,000 of the Series B-1 Note was
converted into 166,667 shares of the Company’s common stock. The Company
recorded a cumulative loss on debt extinguishment of approximately $18.5 million
as a result of the Conversion Agreement and the Exchange Agreement during the
nine months ended June 30, 2010.
During
the three months ended June 30, 2009, $0.1 million of Series B Convertible Notes
were converted into the Company’s 175,439 common shares. The Company recorded a
loss on debt extinguishment of approximately $36,000 as a result of the
conversion based on the quoted market closing price of its common shares on the
conversion dates. For the nine months ended June 30, 2009, $0.9 million of
Series A and B Convertible Notes were converted into 1,454,684 shares of the
Company’s common stock. 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.
The
following table summarizes the valuation of the Notes and the related Compound
Embedded Derivative, the Series A and Series B Warrants (including the Advisor
Warrants), and the Series B-1 Note and the related Compound Embedded
Derivative:
|
|
Amount
|
|
Carrying
amount of notes at September 30, 2009
|
|
$
|
3,061,000
|
|
Amortization
of note discount and conversion effect
|
|
|
(3,061,000
|
)
|
Carrying
amount of notes at June 30, 2010
|
|
$
|
-
|
|
|
|
|
|
|
Carrying
amount of Series B-1 Note at March 19, 2010
|
|
$
|
1,815,000
|
|
Fair
value of compound embedded derivative liabilities
|
|
|
(1,573,000
|
)
|
Loss
on debt extinguishment
|
|
|
1,293,000
|
|
Amortization
of note discount and conversion effect
|
|
|
7,000
|
|
Carrying
amount of Series B-1 Note at June 30, 2010
|
|
$
|
1,542,000
|
|
|
|
|
|
|
Fair
value of warrant liability at September 30, 2009
|
|
$
|
2,068,000
|
|
Loss
on PIPE warrant extinguishment
|
|
|
3,502,000
|
|
Cashless
exercise of warrants
|
|
|
(157,000
|
)
|
Gain
on fair market value of warrant liability
|
|
|
(4,369,000
|
)
|
Fair
value of warrant liability at June 30, 2010
|
|
$
|
1,044,000
|
|
|
|
|
|
|
Fair
value of compound embedded derivative at September 30,
2009
|
|
$
|
178,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(104,000
|
)
|
Loss
on debt extinguishment
|
|
|
(74,000
|
)
|
Fair
value of Series A and B compound embedded derivative at June 30,
2010
|
|
$
|
-
|
|
|
|
|
|
|
Fair
value of the Series B-1 compound embedded derivative liabilities at March
19, 2010
|
|
$
|
1,573,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(1,011,000
|
)
|
Fair
value of the Series B-1 compound embedded derivative liabilities at June
30, 2010
|
|
$
|
562,000
|
|
Series
B-1 Note
The
material terms of the Series B-1 Note are as follows:
Interest
Payments
The
Series B-1 Note bears interest at 6% per annum and is due on March 19, 2012.
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, and (ii) a trigger event
shall not have occurred.
Voting
Rights
The
holder of the Series B-1 Note does not have voting rights under these
agreements.
Dividends
Until all
amounts owed under the Series B-1 Note 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
Right
At any
time or times on or after the issuance date of the Series B-1 Note, 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) may be converted into fully paid and
non-assessable shares of common stock, at the conversion rate discussed
next.
Conversion
Rate
The
number of shares of common stock issuable upon conversion of the Series B-1 Note
is determined by dividing (x) the conversion amount (principal, interest
and late charges accrued and unpaid), by (y) the then applicable conversion
price (initially $0.15 for Series B-1 Note, subject to adjustment as
provided in the agreement). No adjustment in the conversion price of the Series
B-1 Note 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 Series B-1 Note 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 Series B-1 Note in effect immediately
prior to the change shall be proportionately adjusted.
Redemptions
The
Series B-1 Note permits the holder the right of redemption in the event of
certain specified triggering events such as:
1)
|
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;
|
2)
|
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 Series B-1 Note, 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 Series B-1 Note into
shares of common stock that is tendered in accordance with the provisions
of the Series B-1 Note;
|
3)
|
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 this Series B-1 Note 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;
|
4)
|
(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 Series B-1
Note;
|
5)
|
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;
|
6)
|
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;
|
7)
|
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;
and
|
8)
|
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.
|
At any
time after becoming aware of a trigger event, the holder may require the Company
to redeem all or any portion of the Series B-1 Note 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 5 and 8 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 or 3 has occurred and remains uncured or
the conversion shares otherwise could not be received or sold by the holder
without any resale restrictions.
Rights
upon Fundamental Transaction, Change of Control and Qualified
Financing
The
Series B-1 Note also contains certain provisions relating to the occurrences of
a fundamental transaction limiting the type of entity that can be a successor
entity and requiring the successor entity to assume the obligations of the
Series B-1 Note. In addition, the Series B-1 Note contains certain
provisions relating to a change of control or qualified financing which permit
the holder the right of redemption for all or a portion of the Series B-1
Note.
1)
|
Assumption.
The Company
may not enter into or be party to a fundamental transaction, as such terms
is defined in the Series B-1 Note,
unless:
|
|
•
|
The
successor entity assumes in writing all of the obligations of the Company
under the Series B-1 Note 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 on Change of
Control.
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
Series B-1 Note 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
.
|
3)
|
Redemption Right on Subsequent
Financing
.
In the event that the Company or any of its subsidiaries shall issue any
of its or its subsidiaries’ equity or equity equivalent securities, or
commit to issue or sell in one or more series of related transactions or
financings, including without limitation any debt, preferred stock or
other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable
for shares of common stock, options or convertible securities (any such
offer, sale, grant, disposition or announcement of such current or future
committed financing is referred to as a “Subsequent Financing”), the
Company is obligated to provide the Holder written notice of the
Subsequent Financing and the Holder, at its option, may require the
Company to redeem the Series B-1 Note up to the Redemption
Amount.
|
(A) In
the event that the Gross Proceeds of the Subsequent Financing equals or exceeds
$15,000,000 (a “Qualified Financing”), the “Redemption Amount” shall equal 100%
of the Principal Amount then outstanding. For purposes hereof, “Gross
Proceeds” shall mean the aggregate proceeds received or receivable by the
Company in respect of one or more series of related future transactions or
financings for which the Company is committed in connection with such Qualified
Financing.
(B) In
the event that the Gross Proceeds of the Subsequent Financing is less than
$15,000,000, the Redemption Amount shall equal a pro-rated portion of the
Principal Amount equaling a ratio, the numerator of which is the amount of
proceeds raised by the Company in the Subsequent Financing and the denominator
which is $15,000,000.
NOTE 9 — EQUITY
TRANSACTIONS
Warrants
During
March 2007, in conjunction with the issuance of $17.3 million in convertible
debt, the board of directors approved the issuance of warrants (as described in
Note 8 — “Convertible Notes” above) to purchase shares of the Company’s common
stock. The 7,246,377 Series A warrants and the 21,578,948 Series B warrants are
exercisable at $1.21 and $0.90, respectively and expire in March 2012. In
addition, in March 2007, as additional compensation for services as placement
agent for the convertible debt offering, the Company issued the advisor
warrants, which entitle the placement agent to purchase 507,247 and 1,510,528
shares of the Company’s common stock at exercise prices of $0.69 and $0.57 per
share, respectively. The advisor warrants expire in March 2012.
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.
In
connection with the Conversion Agreement, on January 7, 2010, the Company
entered into an Amendment (the “Warrant 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
reduced the exercise price for all of the PIPE Warrants from $1.21, $0.90 and
$1.00, respectively, to $0.15, removed certain maximum ownership provisions and
removed anti-dilution provisions for lower-priced security issuances. Given the
above, the liability associated with the PIPE Warrants at the pre Conversion
Agreement exercise price was considered extinguished and was replaced with the
liability associated with the PIPE Warrants at the post Conversion Agreement
exercise price, which were recorded at fair value.
During
the nine months ended June 30, 2010, a warrants holder exchanged 1,147,394
warrants for 450,878 shares of the Company’s common stock after a cashless
exercise. There was no warrants exercise during the nine months ended
June 30, 2009.
A summary
of outstanding warrants as of June 30, 2010 is as follows:
|
|
Number of
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
|
Price ($)
|
|
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 common stock purchase — Series C
|
|
|
24,318,181
|
|
|
|
1.00
|
|
Additional
paid in capital
|
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 placement service
|
|
|
1,215,909
|
|
|
|
0.88
|
|
Additional
paid in capital
|
Extinguishment
in accordance with the Conversion Agreement
|
|
|
(53,143,506
|
)
|
|
|
N/A
|
|
Loss
on debt extinguishment
|
Issuance
in accordance with the Conversion Agreement
|
|
|
53,143,506
|
|
|
|
0.15
|
|
Warrant
liabilities
|
Cashless
exercise of warrants
|
|
|
(1,147,394
|
)
|
|
|
0.15
|
|
Additional
paid in capital
|
Outstanding
at June 30, 2010
|
|
|
55,229,796
|
|
|
|
|
|
|
At June
30, 2010, 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
|
|
|
$
0.15
|
|
|
|
51,996,112
|
|
|
$
|
0.15
|
|
|
|
2.10
|
|
|
$
0.57-$0.88
|
|
|
|
3,233,684
|
|
|
$
|
0.71
|
|
|
|
2.02
|
|
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 of Directors 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.
Issuance
of fully vested restricted stock to the Company’s former Board of
Directors
On
January 12, 2010, the Company issued 400,000 shares of fully vested restricted
stock to the Company’s former board of directors on their resignation date. As
the former directors no longer provide services to the Company, these awards
were properly accounted for as awards to non-employees in accordance with FASB
ASC 718.
The
following table summarizes the activity of the Company’s unvested restricted
stock units as of June 30, 2010 and changes during the nine months ended June
30, 2010:
|
|
Restricted Stock
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number
of
|
|
|
average
grant-
|
|
|
|
Shares
|
|
|
date fair value
|
|
Unvested
as of September 30, 2008
|
|
|
25,250,000
|
|
|
$
|
0.62
|
|
Restricted
stock canceled
|
|
|
(2,100,000
|
)
|
|
$
|
0.62
|
|
Unvested
as of September 30, 2009
|
|
|
23,150,000
|
|
|
$
|
0.62
|
|
Restricted
stock canceled
|
|
|
(10,000,000
|
)
|
|
$
|
0.62
|
|
Restricted
stock granted
|
|
|
400,000
|
|
|
$
|
0.31
|
|
Restricted
stock vested
|
|
|
(400,000
|
)
|
|
$
|
0.31
|
|
Unvested
as of June 30, 2010
|
|
|
13,150,000
|
|
|
$
|
0.62
|
|
The total
unvested restricted stock as of June 30, 2010 and September 30, 2009 were
13,150,000 and 23,150,000 shares, respectively.
Stock-based
compensation expense for restricted stock for the three and nine months ended
June 30, 2010 were $0.7 million and $2.1 million, respectively. As of June 30,
2010, the total unrecognized compensation cost net of forfeitures relate to
unvested awards not yet recognized is $3.1 million and is expected to be
amortized over a weighted average period of 1.1 years.
Issuance
of common shares to non-employees
On
February 1, 2010, the Company issued 400,000 shares of common stock to the
Company’s third party financial advisors. These awards were properly accounted
for as awards to non-employees in accordance with FASB ASC 718.
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 June 30, 2010 and
September 30, 2009, 12,860,000 and 12,060,000 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:
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
Average
|
|
|
|
Option
Available For
|
|
|
Number
of Option
|
|
|
Fair
Value Per
|
|
|
Exercise
Price Per
|
|
|
|
Grant
|
|
|
Outstanding
|
|
|
Share
|
|
|
Share
|
|
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
|
|
Options
granted
|
|
|
(250,000
|
)
|
|
|
250,000
|
|
|
$
|
0.20
|
|
|
$
|
0.32
|
|
Options
cancelled
|
|
|
1,050,000
|
|
|
|
(1,050,000
|
)
|
|
$
|
0.39
|
|
|
$
|
0.62
|
|
Balance
at June 30, 2010
|
|
|
12,860,000
|
|
|
|
2,140,000
|
|
|
$
|
0.27
|
|
|
$
|
0.49
|
|
The total
fair value of shares vested during the nine months ended June 30, 2010 and 2009
were $36,000 and $337,000, respectively.
At June
30, 2010 and September 30, 2009, 2,140,000 and 2,940,000 options were
outstanding, respectively and had a weighted-average remaining contractual life
of 7.91 years and 6.98 years, respectively. Of these options, 1,507,917 and
2,333,127 shares were vested and exercisable on June 30, 2010 and September 30,
2009, respectively. The weighted-average exercise price and
weighted-average remaining contractual term of options currently exercisable
were $0.58 and 7.40 years, respectively.
The fair
values of employee stock options granted during the three and nine months ended
June 30, 2010 were estimated using the Black-Scholes option-pricing model with
the following weighted average assumptions:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
Volatility
|
|
|
-
|
|
|
|
97.0
|
%
|
|
|
93.0
|
%
|
|
|
97.0
|
%
|
Expected
dividend
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free
interest rate
|
|
|
-
|
|
|
|
1.68
|
%
|
|
|
1.70
|
%
|
|
|
1.68
|
%
|
Expected
term in years
|
|
|
-
|
|
|
|
3.90
|
|
|
|
3.32
|
|
|
|
3.90
|
|
Weighted-average
fair value
|
|
|
-
|
|
|
$
|
0.13
|
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
There
were no employee stock options granted during the three months ended June 30,
2010.
In
accordance with the provisions of FASB ASC 718, the Company has recorded
stock-based compensation expense of $0.7 million and $2.2 million for the three
and nine months ended June 30, 2010, respectively, which include the
compensation effect for the options repriced and restricted stock. The Company
recorded $1.5 million and $4.7 million for the three and nine months ended June
30, 2009, 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
10 — 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, 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 June 30, 2010:
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
active markets
|
|
|
|
|
|
Significant
|
|
|
|
Fair Value at
|
|
|
for identical
|
|
|
Significant other
|
|
|
unobservable
|
|
|
|
June 30, 2010
|
|
|
assets
|
|
|
observable inputs
|
|
|
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilites
|
|
$
|
562,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
562,000
|
|
Warrant
liabilities
|
|
|
1,044,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,044,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
1,606,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,606,000
|
|
The
method used to estimate the value of the Series B-1 Note compound embedded
derivatives (“CED”) was a binomial model with the following
assumptions:
|
|
June 30, 2010
|
|
Implied
term(years)
|
|
|
1.72
|
|
Suboptimal
exercise factor
|
|
|
2.50
|
|
Volatility
|
|
|
79.50
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
Risk-free
interest rate
|
|
|
0.46
|
%
|
The fair
value of the Series A and Series B Warrants (including the Advisor Warrants)
were estimated using a binomial valuation model with the following
assumptions:
|
|
June 30, 2010
|
|
|
September 30, 2009
|
|
Implied
term (years)
|
|
|
1.68
|
|
|
|
2.43
|
|
Suboptimal
exercise factor
|
|
|
2.5
|
|
|
|
2.5
|
|
Volatility
|
|
|
82
|
%
|
|
|
106
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk
free interest rate
|
|
|
0.52
|
%
|
|
|
1.15
|
%
|
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.
At June
30, 2010, the principal outstanding and the carrying value of the Company’s
Series B-1 Note were $1.8 million and $1.5 million, respectively. The Series B-1
Note contains 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. The fair value of the convertible notes can be
determined based on the fair value of the entire financial
instrument.
NOTE
11 — COMPREHENSIVE LOSS
The
components of comprehensive loss were as follows:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
loss
|
|
$
|
(658,000
|
)
|
|
$
|
(6,781,000
|
)
|
|
$
|
(23,740,000
|
)
|
|
$
|
(16,124,000
|
)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in foreign currency translation
|
|
|
87,000
|
|
|
|
15,000
|
|
|
|
98,000
|
|
|
|
(33,000
|
)
|
Comprehensive
loss
|
|
$
|
(571,000
|
)
|
|
$
|
(6,766,000
|
)
|
|
$
|
(23,642,000
|
)
|
|
$
|
(16,157,000
|
)
|
The
accumulated other comprehensive income at June 30, 2010 and September 30, 2009
comprised of accumulated translation adjustments of $2.6 million and $2.5
million, respectively.
NOTE 12 — COMMITMENTS AND
CONTINGENCIES
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 6.7909
as of June 30, 2010.
Year
|
|
Amount
|
|
2010
|
|
$
|
2,604,000
|
|
2011
|
|
|
1,119,000
|
|
|
|
|
|
|
Total
|
|
$
|
3,723,000
|
|
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
June 30, 2010, (included in the total amount of $3.7 million above), 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 for approximately $0.7 million. As
of June 30, 2010, the Company is not in breach as it has not received any
additional compensation requests 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.
Capital
commitments
On August
21, 2008, the Company acquired two million shares of common stock of 21-Century
Silicon for $1.0 million in cash as previously discussed in “Note 3 — Summary of
Significant Accounting Policies – Investments” above. In
July 2010, members of the Company’s executive team, including the CEO, visited
21-Century Silicon and conducted reviews of the production facility and
technical development. The review indicated that 21-Century Silicon’s production
facility and technical development were significantly below expected standards.
In addition, management of 21-Century Silicon expressed the need for more
funding to sustain operations. Moreover, 21-Century Silicon could not provide
the Company with updated financial information concerning 21-Century Silicon’s
working capital condition and future cash flows. The timing of the first
polysilicon shipment is unknown and it is unknown whether it will even occur.
The Company considered the factors above as indicators that a significant
adverse effect on the fair value of the Company’s investment in 21-Century
Silicon had occurred. Accordingly, an impairment loss of $1.0 million
is recorded in the Consolidated Statements of Operations for the three months
ended June 30, 2010 to fully write-down the carrying amount of the
investment. The Company may also be obligated to acquire an additional two
million shares of 21-Century Silicon upon the first polysilicon shipment meeting
the quality specifications determined solely by the Company. As of June 30,
2010, the Company has not yet acquired the additional two million shares as the
product shipment has not occurred. In connection with its impairment
of the investment in 21-Century Silicon, the Company considers the likelihood
that it will be required to acquire the additional two million shares to be
remote.
On
September 22, 2008, the registered capital of Solar EnerTech (Shanghai) Co., Ltd
was increased from $25 million to $47.5 million, which was approved by the Board
of Directors of the Company and authorized by Shanghai Municipal Government (the
“Shanghai Government”). The paid-in capital as of June 30, 2010 was $31.96
million, with an outstanding remaining balance of $15.54 million to be
originally funded by September 21, 2010. In August 2010, the Company received
the approval of the Shanghai Government to extend the funding requirement date
by nine months to June 2011. The Company plans to raise funds to meet this
capital requirement through participation in the capital markets, such as
undertaking equity offerings. If external financing is not available, the
Company will file an application with the Shanghai Government to reduce the
capital requirement, which is legally permissible under PRC
law.
On
January 15, 2010, the Company incorporated a wholly-owned subsidiary in Yizheng,
Jiangsu Province of China to supplement its existing production facilities to
meet increased sales demands. The subsidiary was formed with a
registered capital requirement of $33 million, of which $23.4 million is to be
funded by October 16, 2011. In order to fund the registered capital
requirement, the Company will have to raise funds or otherwise obtain the
approval of local authorities to reduce the amount of registered capital for the
subsidiary. The registered capital requirement outstanding as of June 30, 2010
is $23.4 million.
On
February 8, 2010, the Company acquired land use rights of a parcel of land at
the price of approximately $0.7 million. This piece of land is 68,025 square
meters and is located in Yizheng, Jiangsu Province of China, which will be used
to house the Company’s second manufacturing facility. As part of the acquisition
of the land use right, the Company is required to complete construction of the
facility by February 8, 2012.
NOTE 13 — RELATED PARTY
TRANSACTIONS
At June
30, 2010 and September 30, 2009, the accounts payable and accrued liabilities,
related party balance was $5.8 million and $5.6 million, respectively. The $5.8
million accrued liability represents $4.8 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. During the three and nine months ended June 30, 2010, the
Company recorded sales from SET-Solar Corp in the amount of $0.5 million. As of
June 30, 2010, the accounts receivable due from SET-Solar Corp. and the cash
collateral received from SET-Solar Corp. are $0.4 million and $0.3 million,
respectively.
NOTE
14 — 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.
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 $3.5 million 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 FASB 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
O
utstanding
|
|
|
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:
|
|
|
|
|
Quoted prices in
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
active markets
|
|
|
|
|
|
Significant
|
|
|
|
September 30,
|
|
|
for identical
|
|
|
Significant other
|
|
|
unobservable
|
|
|
|
2009
|
|
|
assets
|
|
|
observable inputs
|
|
|
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, the Company has 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.
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