- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended June 30, 2009

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ________________ to _________________

Commission File Number 333-120926

SOLAR ENERTECH CORP.

(Exact name of registrant as specified in its charter)

Delaware		98-0434357
State or other jurisdiction of		(I.R.S. Employer
incorporation or organization		Identification No.)

444 Castro Street, Suite #707

Mountain View, CA 94041

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (650) 688-5800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

	Large accelerated filer	o		Accelerated Filer o
	Non-accelerated filer	o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of shares outstanding of registrant’s class of common stock as of August 7, 2009: 113,506,696

SOLAR ENERTECH CORP

FORM 10-Q

INDEX

		PAGE
	Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets – June 30, 2009 (Unaudited) and September 30, 2008 (Audited)	3
	Unaudited Consolidated Statements of Operations – Three and Nine Months Ended June 30, 2009 and 2008	4
	Unaudited Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2009 and 2008	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	28
Item 4T.	Controls and Procedures	28
	Part II. Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	29
Item 3.	Defaults upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31

PART I

ITEM 1. FINANCIAL STATEMENTS

Solar EnerTech Corp.

Consolidated Balance Sheets

	June 30, 2009			September 30, 2008
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,323,000		$	3,238,000
Accounts receivable, net		6,372,000			1,875,000
Advance payments and other		880,000			3,175,000
Inventories, net		4,609,000			4,886,000
VAT receivable		1,597,000			2,436,000
Other receivable		290,000			730,000
Total current assets		17,071,000			16,340,000
Property and equipment, net		11,962,000			12,934,000
Investment		1,000,000			1,000,000
Deferred financing costs, net of accumulated amortization		1,491,000			1,812,000
Deposits		218,000			701,000
Total assets	$	31,742,000		$	32,787,000

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	8,986,000		$	1,771,000
Customer advance payment		490,000			96,000
Accrued expenses		890,000			910,000
Accounts payable and accrued liabilities, related parties		5,604,000			5,450,000
Derivative liabilities		598,000			980,000
Warrant liabilities		4,827,000			3,412,000
Convertible notes, net of discount		1,417,000			85,000
Total current liabilities		22,812,000			12,704,000

STOCKHOLDER'S EQUITY:
Common stock - 400,000,000 shares authorized at $0.001 par value 113,506,696 and 112,052,012 shares issued and outstanding at June 30, 2009 and September 30, 2008, respectively		113,000			112,000
Additional paid in capital		76,630,000			71,627,000
Other comprehensive income		2,452,000			2,485,000
Accumulated deficit		(70,265,000	)		(54,141,000	)
Total stockholders' equity		8,930,000			20,083,000
Total liabilities and stockholders' equity	$	31,742,000		$	32,787,000

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,
	2009			2008			2009			2008

Net sales	$	10,143,000		$	10,272,000		$	19,639,000		$	18,582,000
Cost of sales		(9,657,000	)		(10,235,000	)		(22,791,000	)		(19,680,000	)
Gross profit (loss)		486,000			37,000			(3,152,000	)		(1,098,000	)

Operating expenses:
Selling, general and administrative		2,577,000			1,606,000			8,224,000			8,185,000
Research and development		463,000			198,000			1,234,000			483,000
Loss on debt extinguishment		36,000			1,529,000			527,000			3,996,000
Total operating expenses		3,076,000			3,333,000			9,985,000			12,664,000

Operating loss		(2,590,000	)		(3,296,000	)		(13,137,000	)		(13,762,000	)

Other income (expense):
Interest income		3,000			24,000			13,000			80,000
Interest expense		(1,015,000	)		(238,000	)		(1,938,000	)		(814,000	)
Gain (loss) on change in fair market value of compound embedded derivative		(238,000	)		(22,000	)		350,000			12,267,000
Gain (loss) on change in fair market value of warrant liability		(3,158,000	)		107,000			(1,415,000	)		11,030,000
Other income (expense)		217,000			(107,000	)		3,000			(435,000	)
Net income (loss)	$	(6,781,000	)	$	(3,532,000	)	$	(16,124,000	)	$	8,366,000

Net income (loss) per share - basic	$	(0.08	)	$	(0.03	)	$	(0.18	)	$	0.09
Net income (loss) per share - diluted	$	(0.08	)	$	(0.03	)	$	(0.18	)	$	(0.10	)

Weighted average shares outstanding - basic		88,256,706			104,528,145			87,669,839			97,518,130
Weighted average shares outstanding - diluted		88,256,706			104,528,145			87,669,839			120,531,481

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,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	(16,124,000	)	$	8,366,000
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation of property and equipment		1,718,000			877,000
Stock-based compensation		4,689,000			4,777,000
Loss on debt extinguishment		527,000			3,996,000
Amortization of note discount and deferred financing cost		1,413,000			61,000
Gain on change in fair market value of compound embedded derivative		(350,000	)		(12,267,000	)
Loss (gain) on change in fair market value of warrant liability		1,415,000			(11,030,000	)
Changes in operating assets and liabilities:
Accounts receivable, net		(4,498,000	)		(1,339,000	)
Advance payments and other		2,291,000			2,069,000
Inventories, net		269,000			(3,047,000	)
VAT receivable		834,000			(2,601,000	)
Other receivable		439,000			(848,000	)
Accounts payable, accrued liabilities and customer advance payment		7,592,000			(3,154,000	)
Accounts payable and accrued liabilities, related parties		154,000			-
Net cash provided by (used in) operating activities		369,000			(14,140,000	)

Cash flows from investing activities:
Acquisition of property and equipment		(325,000	)		(5,482,000	)
Proceeds from sales of property and equipment		36,000			-
Deposits on property and equipment		-			(1,364,000	)
Net cash used in investing activities		(289,000	)		(6,846,000	)

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		5,000			(128,000	)
Net increase (decrease) in cash and cash equivalents		85,000			(1,227,000	)
Cash and cash equivalents, beginning of period		3,238,000			3,908,000
Cash and cash equivalents, end of period	$	3,323,000		$	2,681,000

The accompanying notes are an integral part of these consolidated financial statements.

SOLAR ENERTECH CORP.

Notes to Consolidated Financial Statements

June 30, 2009 (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.

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 “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.

Pursuant to the terms of the 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 Agreement is valid for 18 months.

NOTE 2 — 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. 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 (the “Acquisition”). In connection with executing these agreements, the Company terminated the Agency Agreement.

The Company had previously consolidated the financial statements of Infotech with its financial statements pursuant to 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 the U.S. generally accepted accounting principles.

Use of estimates

The preparation of consolidated financial statements in conformity with the United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 our 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 Statement of Financial Accounting Standard (“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

Our 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. Raw material cost is based on purchase costs while work-in-progress and finished goods are comprised of direct materials, direct labor and an allocation of manufacturing overhead costs. Inventory in-transit is included in finished goods and consists of products shipped but not recognized as revenue because it does not meet the revenue recognition criteria. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value.

Warranty cost

The Company provides product warranties and accrues for estimated future warranty costs in the period in which the revenue is recognized. Our standard solar modules are typically sold with a two-year warranty for defects in materials and workmanship and a 10-year and 25-year warranty against declines of more than 10.0% and 20.0%, respectively, of the initial minimum power generation capacity at the time of delivery. The Company therefore maintains warranty reserves to cover potential liabilities that could arise from our warranty obligations and accrues the estimated costs of warranties based primarily on management’s best estimate. The Company has not experienced any material warranty claims to date in connection with declines of the power generation capacity of its solar modules and will prospectively revise its actual rate to the extent that actual warranty costs differ from the estimates. The Company’s warranty costs for the nine months ended June 30, 2009 and 2008 were immaterial.

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. As of June 30, 2009, management expects those assets related to its continuing operations to be fully recoverable.

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 fair value of a cost method investment is not estimated if there are no 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 acquired by the Company constitute approximately 7.8% of 21-Century Silicon’s outstanding equity.

As of June 30, 2009, the Company accounted for the investment in 21-Century Silicon companies at cost amounting to $1.0 million.

Income taxes

The Company files federal and state income tax returns in the United States for its United States operations, and files separate foreign tax returns for its foreign subsidiary in the jurisdictions in which this entity operates. The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”).

Under the provisions of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between their financial statement carrying 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 of Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”). Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority based solely on the technical merits of the associated tax position. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company also elected the accounting policy that requires interest 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, FIN 48 provides guidance on de-recognition, accounting in interim periods, disclosure and transition.

Derivative financial instruments

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”), requires all derivatives to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in our structured borrowings, are separately valued and accounted for on the balance sheet. Fair values for exchange-traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

In September 2000, the Emerging Issues Task Force issued EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”), which requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, an asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in the company’s results of operations.

The Company’s management used market-based pricing models to determine the fair values of the Company’s derivatives. The model uses market-sourced inputs such as interest rates, exchange rates and option volatilities. Selection of these inputs involves management’s judgment and may impact net income.

The method used to estimate the value of the compound embedded derivatives (“CED”) as of each valuation date was a Monte Carlo simulation. Under this method the various features, restrictions, obligations and 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 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 Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payment,” as interpreted by SEC Staff Accounting Bulletin No. 107.

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The following assumptions are used in the Black-Scholes-Merton option pricing model:

Expected Term — The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding.

Expected Volatility — The Company’s expected volatilities are based on historical volatility of the Company’s stock, adjusted where determined by management for unusual and non-representative stock price activity not expected to recur. Due to the limited trading history, 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 Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” which states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably assured. Where a revenue transaction does not meet any of these criteria it is deferred and recognized once all such criteria have been met. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met.

On a transaction by transaction basis, the Company determines if the revenue should be recorded on a gross or net basis based on criteria discussed in EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”). 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.

Research and Development Cost

Expenditures for research activities relating to product development are charged to expense as incurred.

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.

Segment Information

The Company identifies its operating segments based on its business activities and geographical locations. The Company operates within a single operating segment - the manufacture of solar energy cells and modules. The Company operates in the United States and in China. Most of the Company’s business operations are conducted in China and a majority of the Company’s fixed assets are located in China.

During the three and nine months ended June 30, 2009, the Company had 3 customers and 4 customers, respectively, that accounted for more than 10% of net sales.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The standard establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 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 SFAS 159 had no material impact on its financial and results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised) (“SFAS 141(R)”), “Business Combinations.” The standard changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for 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. SFAS 141(R) is effective for the first annual reporting period beginning on or after December 15, 2008. Thus, SFAS 141(R) will be effective for the Company on October 1, 2009, with early adoption prohibited. The Company is evaluating the potential impact of the implementation of SFAS 141(R) on its financial position and results of operations.

In December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” The standard changes the accounting for non-controlling (minority) interests in consolidated financial statements, including the requirements to classify non-controlling interests as a component of consolidated stockholders’ equity, and the elimination of “minority interest” accounting in results of operations with earnings attributable to non-controlling interests reported as part of consolidated earnings. Additionally, SFAS 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS 160 is effective for the first annual reporting period beginning on or after December 15, 2008. Thus, SFAS 160 will be effective for the Company on October 1, 2009, with early adoption prohibited. The Company is evaluating the potential impact of the implementation of SFAS 160 on its financial position and results of operations.

In December 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-01 (“EITF 07-01”), “Accounting for Collaborative Arrangements.” EITF 07-01 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 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. EITF 07-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. The Company is currently evaluating the impact of the adoption of the provisions of EITF 07-1 on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 140-3 (“FSP FAS 140-3”), “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” The FSP FAS 140-3 addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one linked” transaction. The FSP FAS 140-3 includes a rebuttable presumption” that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP FAS 140-3 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. The Company is currently evaluating the impact of the adoption of FSP FAS 140-3 on the Company’s financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 requires additional disclosures related to the use of derivative instruments, the accounting for derivatives and how derivatives impact financial statements. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Thus, the Company adopted this standard on January 1, 2009. Since SFAS 161 only required additional disclosures, the adoption did not impact the Company’s financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This statement is effective for financial statements issued 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company adopted this statement for financial assets and financial liabilities effective November 15, 2008, which had no material impact on the Company’s financial and results of operations.

In May 2008, the FASB issued FASB Staff Position No. APB 14-1 (“FSP APB 14-1”), “Accounting for Convertible Debt Instruments That May Be Settled In Cash Upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 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. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required and early adoption is prohibited. The Company is evaluating the potential impact of the implementation of FSP APB 14-1 on its financial position and results of operations.

In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force Issue No. 07-05 (“EITF 07-05”), “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock.” EITF 07-5 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. EITF 07-5 does not permit early adoption for an existing instrument. The Company is currently evaluating the impact of the adoption of EITF 07-5 on the Company’s financial position and results of operations.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP EITF 03-6-1 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. The FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the requirement of FSP EITF 03-6-1 as well as the impact of the adoption on its consolidated financial statements.

In November 2008, the FASB ratified EITF Issue No. 08-6 (“EITF 08-6”), “Equity Method Investment Accounting Considerations.” EITF 08-6 addresses the impact that SFAS 141(R) and SFAS 160 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. EITF 08-6 is effective in fiscal periods beginning on or after December 15, 2008. The Company is currently assessing the impact of the adoption of the provisions of EITF 08-6 on its consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 (“FSP FAS 157-4”), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 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 FSP FAS 157-4. The adoption of FSP FAS 157-4 did not have a significant impact on its consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 (“FSP FAS 107-1”) and APB 28-1 (“APB 28-1”), “Interim Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 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. FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted FSP FAS 107-1 and APB28-1 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, the FASB released FASB Staff Position No. FAS 115-2 and FAS 124-2 (“FSP FAS 115-2/124-2”), “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP FAS 115-2/124-2 was issued contemporaneously with FSP FAS 157-4 and FSP FAS 107-1 and APB 28-1. These statements 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. FSP FAS 115-2/124-2 is effective for fiscal years and interim periods beginning after June 15, 2009. The Company adopted FSP FAS 115-2/124-2 during the quarter ended June 30, 2009. The adoption of FSP FAS 115-2/124-2 did not have a significant impact on the Company’s financial statements.

In May 2009, the FASB issued SFAS No. 165 (“SFAS 165”), “Subsequent Events,” to establish general standards of accounting for and disclosure of subsequent events. SFAS 165 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). SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted SFAS 165 during the quarter ended June 30, 2009. The adoption of SFAS 165 did not have a significant impact on the Company's financial statement disclosures (see Note 14 – Subsequent Events).

In June 2009, the FASB issued SFAS No. 167 (“SFAS 167”), “Amendments to FASB Interpretations No. 46(R).”SFAS No. 167 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. SFAS No. 167 is effective for interim and annual periods that begin after November 15, 2009 . The Company is currently evaluating the impact of adopting SFAS 167 on its results of operations and financial position.

NOTE 3 — INVENTORIES

At June 30, 2009 and September 30, 2008, inventories consist of:

	June 30, 2009		September 30, 2008
Raw materials	$	2,505,000	$	2,111,000
Work in process		230,000		145,000
Finished goods		1,874,000		2,630,000
Total inventories	$	4,609,000	$	4,886,000

NOTE 4 — ADVANCE PAYMENTS AND OTHER

At June 30, 2009 and September 30, 2008, advance payments and other consist of:

	June 30, 2009		September 30, 2008
Prepayment for raw materials	$	703,000	$	2,959,000
Other		177,000		216,000
Total advance payments and other	$	880,000	$	3,175,000

NOTE 5 — PROPERTY AND EQUIPMENT

At June 30, 2009 and September 30, 2008, property and equipment consists of:

	June 30, 2009			September 30, 2008
Production equipment	$	7,322,000		$	5,564,000
Leasehold improvement		3,567,000			3,201,000
Automobiles		496,000			542,000
Office equipment		342,000			339,000
Machinery		2,745,000			2,170,000
Furniture		39,000			39,000
Construction in progress		1,001,000			2,915,000
Total property and equipment		15,512,000			14,770,000
Less: accumulated depreciation		(3,550,000	)		(1,836,000	)
Property and equipment, net	$	11,962,000		$	12,934,000

NOTE 6 — 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, 2009 and 2008, respectively, except certain minimum taxes.

The Company accounts for income taxes using the liability method in accordance with SFAS 109. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements, but have not been reflected in the Company’s taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is more likely than not that the Company will generate sufficient taxable income in future periods to realize the benefit of the Company’s deferred tax assets. As of June 30, 2009 and 2008, the deferred tax asset was subject to a 100% valuation allowance and therefore is not recorded on the Company’s balance sheet as an asset.

Utilization of the net operating loss carry forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company also has net operating losses in its foreign jurisdiction and that loss can be carried over 5 years from the year the loss was incurred.

The Company is subject to taxation in the US and various states and foreign jurisdictions. 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 does not anticipate any significant change within the next 12 months of its uncertain tax positions.

NOTE 7 — CONVERTIBLE NOTES

On March 7, 2007, the Company entered into a securities purchase agreement to issue $17,300,000 of secured convertible notes (the “notes”) and detachable stock purchase warrants (the “warrants”). Accordingly, during the three months ended March 31, 2007, the Company sold units consisting of:

•

$5,000,000 in principal amount of Series A Convertible Notes and warrants to purchase 7,246,377 shares (exercise price of $1.21 per share) of its common stock;

•

$3,300,000 in principal amount of Series B Convertible Notes and warrants to purchase 5,789,474 shares (exercise price of $0.90 per share) of its common stock; and

•

$9,000,000 in principal amount of Series B Convertible Notes and warrants to purchase 15,789,474 shares (exercise price of $0.90 per share) of its common stock.

These notes bear interest at 6% per annum and are due on March 7, 2010. The principal amount of the Series A Convertible Notes may be converted at the initial rate of $0.69 per share for a total of 7,246,377 shares of common stock (which amount does not include shares of common stock that may be issued for the payment of interest). The principal amount of the Series B Convertible Notes may be converted at the initial rate of $0.57 per share for a total of 21,578,948 shares of common stock (which amount does not include shares of common stock that may be issued for the payment of interest).

In connection with the issuance of the notes and warrants, the Company engaged an exclusive advisor and placement agent (the “advisor”) and issued warrants to the advisor to purchase an aggregate of 1,510,528 shares at an exercise price of $0.57 per share and 507,247 shares at an exercise price of $0.69 per share, of the Company’s common stock (the “advisor warrants”). In addition to the issuance of the warrants, the Company paid $1,038,000 in commissions, an advisory fee of $173,000, and other fees and expenses of $84,025.

As of June 30, 2009, we had outstanding convertible notes with a principal balance of $11.6 million consisting of $2.5 million in principal amount of Series A Convertible Notes and $9.1 million in principal amount of Series B Convertible Notes. These outstanding notes were recorded at carrying value at $1.4 million as of June 30, 2009 and are due on March 7, 2010.

The Company evaluated the notes for derivative accounting considerations under SFAS 133 and EITF 00-19 and determined that the notes contain two embedded derivative features, the conversion option and a redemption privilege accruing to the holder if certain conditions exist (the “compound embedded derivative”). The compound embedded derivative is measured at fair value both initially and in subsequent periods. Changes in fair value of the compound embedded derivative are recorded in the account “gain (loss) on fair market value of compound embedded derivative” in the accompanying consolidated statements of operations.

The warrants (including the advisor warrants) are classified as a liability, as required by SFAS No. 150 (“SFAS 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 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		1,332,000
Carrying amount of notes at June 30, 2009	$	1,417,000

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
Loss on fair market value of warrant liability		1,415,000
Fair value of warrant liability at June 30, 2009	$	4,827,000

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		(350,000	)
Conversion of Series A and B Notes		(32,000	)
Fair value of compound embedded derivative at June 30, 2009	$	598,000

The value of the warrants (including the advisor warrants) was estimated using a binomial valuation model with the following assumptions:

	June 30, 2009			September 30, 2008
Implied term (years)		2.68			3.43
Suboptimal exercise factor		2.5			2.5
Volatility		112	%		84	%
Dividend yield		0	%		0	%
Risk free interest rate		1.48	%		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 June 30, 2009 and September 30, 2008, total unamortized deferred financing cost was $1.5 million and $1.8 million, respectively.

Because the potential timing and stock price may vary over a range of possible values, a Monte Carlo simulation was built based on the possible stock price paths (i.e., daily expected stock price over a forecast period). Under this approach an individual potential stock price path is simulated based on the initial stock price at the measurement date, the expected volatility and risk free rate over the forecast period. Each path is compared against the logic described above for potential exercise events and the present value (or non-exercise which result in $0 value) recorded. This is repeated over a significant number of trials, or individual stock price paths, in order to generate an expected or mean value for the present value of the CED.

The significant assumptions used in estimating stock price paths as of each valuation date are:

	June 30, 2009			September 30, 2008
Starting stock price (closing price on valuation date)	$	0.44		$	0.40
Annual volatility of stock		111.60	%		84.20	%
Risk free rate		0.35	%		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.

During the three months ended June 30, 2009, $0.1 million of Series B Convertible Notes were converted into our 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 our 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 our 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 our common shares on the conversion dates.

During the quarter ended June 30, 2008, $1.5 million of Series A and B Convertible Notes were converted into our common shares. The Company recorded a loss on debt extinguishment of $1.5 million as a result of the conversion based on the quoted market closing price of our common shares on the conversion dates. For the nine months ended June 30, 2008, $4.6 million of Series A and B Convertible Notes were converted into our common shares. The Company recorded a loss on debt extinguishment of $4.4 million as a result of the conversion based on the quoted market closing price of our common shares on the conversion dates. This loss was offset by a gain on debt extinguishment from settlement agreement with Coach Capital LLC in the amount of approximately $0.4 million (see Note 8 below). The net amount of $4.0 million loss on debt extinguishment is included in the Consolidated Statements of Operations for the nine months ended June 30, 2008.

The loss on debt extinguishment is computed at the conversion dates as follow:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2009			2008			2009			2008
Fair value of the common shares	$	35,000		$	1,735,000		$	316,000		$	5,743,000
Unamortized deferred financing costs associated with the converted notes		14,000			224,000			140,000			673,000
Fair value of the CED liability associated with the converted notes		(6,000	)		(422,000	)		(33,000	)		(2,033,000	)
Accreted amount of the notes discount		(7,000	)		(8,000	)		104,000			(13,000	)
Loss on debt extinguishment	$	36,000		$	1,529,000		$	527,000		$	4,370,000

NOTE 8 — EQUITY TRANSACTIONS

Common stock issued for repayment of loans

During the quarter ended December 31, 2007, the Company was informed by Thimble Capital that it had assigned the note payable of $100,000 due from 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 (as described in Note 7 above) to purchase shares of the Company’s common stock. The 7,246,377 Series A warrants and the 21,578,948 Series B warrants are exercisable at $1.21 and $0.90, respectively and expire in March 2012. In addition, in March 2007, as additional compensation for services as placement agent for the convertible debt offering, the Company issued the advisor warrants, which entitle the placement agent to purchase 507,247 and 1,510,528 shares of the Company’s common stock at exercise prices of $0.69 and $0.57 per share, respectively. The advisor warrants expire in March 2012.

The warrants (including the advisor warrants) are classified as a liability in accordance with SFAS 150, as interpreted by FASB Staff Position 150-1 “Issuer’s Accounting for Freestanding Financial Instruments Composed of More Than One Option or Forward Contract Embodying Obligations under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, due to the terms of the warrant agreements which contain cash redemption provisions in the event of a fundamental transaction, which provide that the Company would repurchase any unexercised portion of the warrants at the date of the occurrence of the fundamental transaction for the value as determined by the Black-Scholes Merton valuation model. As a result, the warrants are measured at fair value both initially and in subsequent periods. Changes in fair value of the warrants are recorded in the account “gain (loss) on fair market value of warrant liability” in the accompanying Consolidated Statements of Operations.

On January 11, 2008, the Company sold 24,318,181 shares of its common stock and 24,318,181 Series C warrants to purchase shares of common stock for an aggregate purchase price of $21.4 million in a private placement offering to accredited investors. The exercise price of the warrants is $1.00 per share. The warrants are exercisable for a period of 5 years from the date of issuance of the warrants.

For the services in connection with this closing, the placement agent and the selected dealer, Knight Capital Markets, LLC and Ardour Capital Investments, received an aggregate of a 6.0% cash commission, a 1.0% advisory fee and warrants to purchase 1,215,909 shares of common stock at $0.88 per share, exercisable for a period of 5 years from the date of issuance of the warrants. The net proceeds from issuing common stocks and Series C warrants in January 2008 after all the financing costs were $19.9 million and were recorded in additional paid in capital and common stock. Neither the shares of common stock nor the shares of common stock underlying the warrants sold in this offering were granted registration rights. Additionally, in connection with the offering all of our Series A and Series B warrant holders waived their full ratchet anti-dilution and price protection rights previously granted to them in connection with our March 2007 convertible note and warrant financing.

A summary of warrants outstanding at June 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 June 30, 2009		56,377,190

At June 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		2.71
$	0.88-$1.00		47,113,038	$	0.95		3.16
$	1.21		7,246,377	$	1.21		2.69

Restricted Stock

On August 19, 2008, Mr. Leo Young, our Chief Executive Officer, entered into a Stock Option Cancellation and Share Contribution Agreement with Jean Blanchard, a former officer, to provide for (i) the cancellation of a stock option agreement by and between Mr. Young and Ms. Blanchard dated on or about March 1, 2006 and (ii) the contribution to the Company by Ms. Blanchard of the remaining 25,250,000 shares of common stock underlying the cancelled option agreement.

On the same day, an Independent Committee of the Company’s Board 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 our Board of Directors, and has a term of 10 years. Restricted stock vest over a three year period and unvested restricted stock are forfeited and cancelled as of the date that employment terminates. Participation is limited to employees, directors and consultants of the Company and its subsidiaries and other affiliates. During any period in which shares acquired pursuant to the 2008 Plan remain subject to vesting conditions, the participant shall have all of the rights of a stockholder of the Company holding shares of stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares. If a participant terminates his or her service for any reason (other than death or disability), or the participant’s service is terminated by the Company for cause, then the participant shall forfeit to the Company any shares acquired by the participant which remain subject to vesting Conditions as of the date of the participant’s termination of service. If a participant’s service is terminated by the Company without cause, or due to the death or disability of the participant, then the vesting of any restricted stock award shall be accelerated in full as of the effective date of the participant’s termination of service.

The following table summarizes the Company’s restricted stock activities:

	Shares
Balance as of September 30, 2008		25,250,000
Forfeited		(100,000	)

Balance as of June 30, 2009		25,150,000

The total unvested restricted stock and weighted average grant date fair value of the restricted stock as of June 30, 2009 were 25,150,000 shares and $0.62 per share, respectively.

Stock-based compensation expense for restricted stock for the three and nine months ended June 30, 2009 was $1.3 million and $3.9 million, respectively. As of June 30, 2009, the total unrecognized compensation cost net of forfeitures relate to unvested awards not yet recognized is $11.1 million and is expected to be amortized over a weighted average period of 2.1 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 June 30, 2009 and September 30, 2008, 10,412,082 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:

	Shares Available For Grant			Number of Shares Outstanding			Weighted Average Fair Value Per Share		Weighted Average Exercise Price Per Share
Balance at September 30, 2007		2,700,000			7,300,000		$	0.66	$	1.20
Additional shares reserved		5,000,000			—			—		—
Options granted		(870,000	)		870,000		$	0.37	$	0.61
Options cancelled		509,375			(509,375	)	$	0.42	$	0.85
Balance at September 30, 2008		7,339,375			7,660,625		$	0.39	$	0.62
Options granted		(500,000	)		500,000		$	0.13	$	0.20
Options cancelled		3,572,707			(3,572,707	)	$	0.38	$	0.62
Balance at June 30, 2009		10,412,082			4,587,918		$	0.35	$	0.57

At June 30, 2009 and September 30, 2008, 4,587,918 and 7,660,625 options were outstanding, respectively and had a weighted-average remaining contractual life of 8.45 years and 9.03 years, respectively. Of these options, 2,790,833 and 3,477,506 shares were vested and exercisable on June 30, 2009 and September 30, 2008, respectively. The weighted-average exercise price and weighted-average remaining contractual term of options currently exercisable were $0.62 and 8.29 years, respectively.

The fair values of employee stock options granted during the three and nine months ended June 30, 2009 and 2008 were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Three Months Ended						Nine Months Ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Volatility		97.0	%		99.2	%		97.0	%		99.2	%
Expected dividend		0	%		0	%		0	%		0	%
Risk-free interest rate		1.68	%		2.24	%		1.68	%		2.38	%
Expected term in years		3.9			2.2			3.9			2.6
Weighted-average fair value	$	0.13		$	0.36		$	0.13		$	0.37

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 was 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 was approximately $0.3 million which was fully expensed as of June 30, 2008. The repriced options had originally been issued with $0.94 to $1.65 per share option exercise prices, which prices reflected the then current market prices of our stock on the dates of original grant. As a result of the recent sharp reduction in our stock price, our Board of Directors believed that such options no longer would properly incentivize our employees, officers, directors and consultants who held such options to work in the best interests of our company and stockholders.

In accordance with the provisions of SFAS 123R, the Company has recorded stock-based compensation expense of $0.2 million and $0.8 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 Company recorded $0.6 million and $4.8 million for the three and nine months ended June 30, 2008, respectively, which include the compensation effect for the options repriced. The stock-based compensation expense is based on the fair value of the options at the grant date. 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 9 — FAIR VALUE OF FINANCIAL INSTRUMENTS

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value to measure assets and liabilities, establishes a framework for measuring fair value, and requires additional disclosures about the use of fair value. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. SFAS 157 does not expand or require any new fair value measures. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In December 2007, the FASB agreed to a one year deferral of SFAS 157’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 SFAS 157 on October 1, 2008, which had no effect on the Company’s financial position, operating results or cash flows.

SFAS 157 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 SFAS 157, 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, 2009:

	Fair Value at June 30, 2009		Quoted prices in active markets for identical assets	Significant other observable inputs	Significant unobservable inputs
			(Level 1)	(Level 2)	(Level 3)

Derivative liabilites	$	598,000	-	-	$	598,000
Warrant liabilities		4,827,000	-	-		4,827,000

Total liabilities	$	5,425,000	-	-	$	5,425,000

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 7 – Convertible Notes.

In April 2009, the FASB issued FSP FAS No. 107-1, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This interpretation is effective for interim reporting periods ending after June 15, 2009. During the quarter ended June 30, 2009, the Company adopted FSP FAS No. 107-1. The adoption of FSP FAS No. 107-1 did not impact our consolidated financial statements.

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 7 - Convertible Notes) for the methods and assumptions used in the fair value estimation.

At June 30, 2009 and September 30, 2008, the carrying value of the Company’s convertible notes was $1.4 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 7 – 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 10 — COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) were as follows:

	Three Months Ended June 30,						Nine Months Ended June 30,
	2009			2008			2009			2008
Net income (loss)	$	(6,781,000	)	$	(3,532,000	)	$	(16,124,000	)	$	8,366,000
Other comprehensive income:
Change in foreign currency translation		15,000			484,000			(33,000	)		1,769,000
Comprehensive income (loss)	$	(6,766,000	)	$	(3,048,000	)	$	(16,157,000	)	$	10,135,000

The accumulated other comprehensive income at June 30, 2009 and September 30, 2008 comprised of accumulated translation adjustments of $2.5 million and $ 2.5 million, respectively.

NOTE 11 — NET INCOME (LOSS) PER SHARE

The following table presents the computation of basic and diluted net income (loss) per share applicable to common stockholders:

	Three Months Ended						Nine Months Ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008

Calculation of net income (loss) per share - basic:

Net income (loss)	$	(6,781,000	)	$	(3,532,000	)	$	(16,124,000	)	$	8,366,000
Weighted-average number of common shares outstanding		88,256,706			104,528,145			87,669,839			97,518,130
Net income (loss) per share - basic	$	(0.08	)	$	(0.03	)	$	(0.18	)	$	0.09

Calculation of net income (loss) per share - diluted:

Net income (loss)	$	(6,781,000	)	$	(3,532,000	)	$	(16,124,000	)	$	8,366,000
Less: Gain on change in fair market value of compounded embedded derivative		-			-			-			(12,267,000	)
Deferred financing costs		-			-			-			-
Interest expense on convertible notes		-			-			-			814,000
Less: Gain on change in fair markert value of Advisor warrants		-			-			-			(765,000	)
Less: Gain on change in fair market value of Series B warrants		-			-			-			(7,786,000	)
Net income (loss) assuming dilution	$	(6,781,000	)	$	(3,532,000	)	$	(16,124,000	)	$	(11,638,000	)

Weighted-average number of common shares outstanding		88,256,706			104,528,145			87,669,839			97,518,130
Effect of potentially dilutive securities:
Warrants issued to advisors		-			-			-			511,102
Convertible notes		-			-			-			21,397,371
Options to officers		-			-			-			-
Series B warrants		-			-			-			1,104,878
Weighted-average number of common shares outstanding assuming dilution		88,256,706			104,528,145			87,669,839			120,531,481

Net income (loss) per share - diluted	$	(0.08	)	$	(0.03	)	$	(0.18	)	$	(0.10	)

NOTE 12 — COMMITMENTS AND CONTINGENCIES

Capital investments

Pursuant to a joint research and development laboratory agreement with Shanghai University, dated December 15, 2006 and expiring on December 15, 2016, 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 6.8319.

Year	Amount
2009 (Remaining balance)*	$	1,735,000
2010		937,000
2011		1,112,000
Total	$	3,784,000

The amount includes approximately $0.8 million of 2008 commitments, respectively, which remained unpaid as of June 30, 2009. The Company intends to increase research and development spending as we grow our business. The payment to Shanghai University will be used to fund program expenses and equipment purchase. The delay in the payment of the remaining fiscal year 2008 commitments of $0.8 million could lead to Shanghai University requesting the Company pay the committed amount within a short time frame. If the Company does not pay and 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 the date of this report, the Company 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 Statement of Financial Accounting Standard No. 2 – ‘Accounting for Research and Development Costs’ and expensed as incurred.

NOTE 13 — RELATED PARTY TRANSACTIONS

At June 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.

NOTE 14 — SUBSEQUENT EVENTS

Pursuant to SFAS 165, the Company has reviewed all subsequent events and transactions that occurred through August 14, 2009, which is the date the Company's quarterly report was filed with the Securities and Exchange Commission.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All references to “Solar EnerTech”, the “Company,” “we,” “our,” and “us” refer to Solar EnerTech Corp. and its subsidiaries.

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under the heading “Risks Related to Our Business,” “Risks Related to an Investment in Our Securities” and under the heading “Risks Related To an Investment in Our Securities” in our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on December 22, 2008 as well as other relevant risks detailed in our filings with the SEC which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The information set forth in this report on Form 10-Q should be read in light of such risks and in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.

Overview

We originally incorporated under the laws of the State of Nevada on July 7, 2004 and reincorporated to the State of Delaware on August 13, 2008. We engaged in a variety of businesses, including home security assistance, until March 2006, when we began our current operations. We manufacture and sell photovoltaic (commonly known as “PV”) cells and modules. PV modules consist of solar cells that produce electricity from the sun’s rays. Our manufacturing operations consisted of two 25MW solar cell production lines and 50MW of solar module production facility. Our 63,000 square foot manufacturing facility is located in Shanghai, China.

Our solar cells and modules are sold under the brand name “SolarE”. Our total revenue for the three and nine months ended June 30, 2009 were $10.1 million and $19.6 million, respectively. Total revenue for the three and nine months ended June 30, 2008 were $10.3 million and $18.6 million, respectively. Our end users are mainly in Europe. In anticipation of entering the US market, we had established a marketing, purchasing and distribution office in Menlo Park, California and have since moved to Mountain View, California. Our goal is to become a worldwide supplier of PV cells and modules.

We purchase our key raw materials, silicon wafer, from the spot market. We do not have a long term contract with any silicon supplier. However, on August 21, 2008, we entered into an equity purchase agreement with 21-Century Silicon, Inc., a polysilicon manufacturer based in Dallas, Texas (“21-Century Silicon”) to acquire two million shares of common stock, for $1 million cash. The two million shares acquired by the Company constitute approximately 7.8% of 21-Century Silicon’s outstanding equity. Related to the equity purchase agreement, the Company has also signed a memorandum of understanding with 21-Century Silicon for a four-year supply framework agreement for polysilicon shipments. Through its proprietary technology, processes and methods, 21-Century Silicon is planning to manufacture solar-grade polysilicon at a lower manufacturing and plant setup cost, as well as a shorter plant setup time than those of its major competitors.

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. The research and development we will undertake pursuant to this agreement includes the following:

	•		we plan to research and test theories of PV, thermo-physics, physics of materials and chemistry;

	•		we plan to develop efficient and ultra-efficient PV cells with light/electricity conversion rates ranging from 20% to 35%;

•

we plan to develop environmentally friendly high conversion rate manufacturing technology of chemical compound film PV cell materials;

	•		we plan to develop highly reliable, low-cost manufacturing technology and equipment for thin film PV cells;

	•		we plan to research and develop key material for low-cost flexible film PV cells and non-vacuum technology; and

	•		we plan to research and develop key technology and fundamental theory for third-generation PV cells.

To date, we have raised money for the development of our business through the sale of our equity securities. On January 11, 2008, we sold 24,318,181 shares of our common stock and 24,318,181 Series C warrants to purchase shares of common stock for an aggregate purchase price of $21.4 million in a private placement offering to accredited investors. The exercise price of the warrants is $1.00 per share. The warrants are exercisable for a period of 5 years from the date of issuance of the warrants. We used the net proceeds from the offering for working capital and general corporate purposes. In March 2007 we also raised $17.3 million through sales of units consisting of our Series A and Series B Convertible Notes and warrants. The proceeds were used to complete our production line and working capital purpose.

Our future operations are dependent upon the identification and successful completion of additional long-term or permanent equity financing, the support of creditors and shareholders, and, ultimately, the achievement of profitable operations. Other than as discussed in this report, we know of no trends, events or uncertainties that are reasonably likely to impact our future liquidity.

Critical Accounting Policies

We consider our accounting policies related to principles of consolidation, revenue recognition, inventory reserve, and stock based compensation, fair value of equity instruments and derivative financial instruments to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in determining our consolidation policy, when to recognize revenue, how to evaluate our equity instruments and derivative financial instruments, and the calculation of our inventory reserve and stock-based compensation expense. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. Management believes that there have been no significant changes during the nine months ended June 30, 2009 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis or Plan of Operations in our Annual Report on Form 10-K filed for the year ended September 30, 2008 with the Securities and Exchange Commission. For a description of those critical accounting policies, please refer to our 2008 Annual Report on Form 10-K.

Recent Accounting Pronouncements

For recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, see “Note 2 – Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements of this Form 10-Q.

Results of Operations for the three and nine months ended June 30, 2009 and 2008

The following discussion of the financial condition, results of operations, cash flows and changes in financial position of our Company should be read in conjunction with our audited consolidated financial statements and notes filed with the SEC on Form 10-K and its subsequent amendments.

Revenues, Cost of Sales and Gross Profit (Loss)

	Quarter Ended June 30, 2009						Quarter Ended June 30, 2008						Year-Over-Year Change
	Amount			% of net sales			Amount			% of net sales			Amount			% of change
Net sales	$	10,143,000			100.0	%	$	10,272,000			100.0	%	$	(129,000	)		(1.3	)%
Cost of sales		(9,657,000	)		(95.2	)%		(10,235,000	)		(99.6	)%		578,000			(5.6	)%
Gross profit (loss)	$	486,000			4.8	%	$	37,000			0.4	%	$	449,000			1,213.5	%

	Nine Months Ended June 30, 2009						Nine Months Ended June 30, 2008						Year-Over-Year Change
	Amount			% of net sales			Amount			% of net sales			Amount			% of change
Net sales	$	19,639,000			100.0	%	$	18,582,000			100.0	%	$	1,057,000			5.7	%
Cost of sales		(22,791,000	)		(116.0	)%	$	(19,680,000	)		(105.9	)%		(3,111,000	)		15.8	%
Gross profit (loss)	$	(3,152,000	)		(16.0	)%	$	(1,098,000	)		(5.9	)%	$	(2,054,000	)		187.1	%

For the three months ended June 30, 2009, the Company reported total revenue of $10.1 million, representing a decrease of $0.1 million or 1.3% compared to $10.3 million of revenue in the same period of the prior year. The $10.1 million of revenue generated during the third fiscal quarter of 2009 comprised of $6.6 million in solar modules sales and $3.5 million in cell sales, whereas the $10.3 million of our third fiscal quarter of 2008 revenue related to solar modules sales of $9.0 million and contract manufacturing revenue of $1.3 million. Our solar modules sales decreased significantly in the third fiscal quarter of 2009 compared to the same period of the prior year because the average sales price of the solar modules declined significantly in the third fiscal quarter of 2009.

For the nine months ended June 30, 2009, the Company recorded $19.6 million in revenue which comprised of $15.6 million in solar modules sales and $4.0 million in cell sales compared to $18.6 million of revenue in the same period of the prior year which comprised of $14.3 million in solar modules sales, $1.3 million in contract manufacturing revenue, $0.7 million in solar cell sales, and $2.3 million in the resale of raw materials, which include materials such as silicon wafer. On a transaction by transaction basis, we determined that revenue should be recorded on a gross or net basis based on criteria discussed in EITF 99-19. We considered the following factors when determining the gross versus net presentation: (i) whether the Company acted as principal in the transaction; (ii) whether the Company took title to the products; (iii) the Company’s risks and rewards of ownership, such as the risk of loss for collection, delivery or return; and (iv) whether the Company acted as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis. Our revenue increased in the nine months ended June 30, 2009 compared to the same period of the prior year due to a newly structured sales team, organic growth of our current customers and entry into new markets.

For the three months ended June 30, 2009, we incurred a gross profit of $0.5 million, representing an increase of $0.4 million or 1,213.5% compared to $37,000 in the same period of the prior year. The increase in gross profit was primarily due to recent cost restructuring, promoting leaner production and strengthening of our procuring group under our new Chief Financial Officer’s leadership. This is a significant turnaround, and we will continue to benefit from cost efficiency opportunities, as we identify them.

For the nine months ended June 30, 2009, we incurred a gross loss of $3.2 million, representing an increase of $2.1 million or 187.1% compared to $1.1 million in the same period of the prior year. During the nine months ended June 30, 2009, we incurred high manufacturing costs due to high raw material cost and production inefficiencies associated with our low production volume. In addition, due to a drop in silicon wafer market price, our inventories were written down by $1.0 million in the first fiscal quarter of 2009 as a result of a lower of cost or market inventory valuation analysis.

Selling, general & administrative

	Quarter Ended June 30, 2009					Quarter Ended June 30, 2008					Year-Over-Year Change
	Amount		% of net sales			Amount		% of net sales			Amount		% of change
Selling, general and administrative	$	2,577,000		25.4	%	$	1,606,000		15.6	%	$	971,000		60.5	%

	Nine Months Ended June 30, 2009					Nine Months Ended June 30, 2008					Year-Over-Year Change
	Amount		% of net sales			Amount		% of net sales			Amount		% of change
Selling, general and administrative	$	8,224,000		41.9	%	$	8,185,000		44.0	%	$	39,000		0.5	%

For the three months ended June 30, 2009, our selling, general and administrative expenses were $2.6 million, representing an increase of $1.0 million or 60.5% from $1.6 million in the three months ended June 30, 2008. Selling, general and administrative expenses as a percentage of net sales for the three months ended June 30, 2009 increased to 25.4% from 15.6% for the three months ended June 30, 2008. The increase in the selling, general and administrative expenses were primarily due to an increase of $0.6 million in stock-based compensation expenses related to employee options and restricted stock from $0.5 million for the three months ended June 30, 2008 to $1.1 million for the three months ended June 30, 2009. Excluding stock-based compensation expenses, our selling, general & administrative expenses increased by approximately $0.4 million primarily from a legal settlement with former employee and increased sales and marketing activities.

For the nine months ended June 30, 2009 and 2008, we incurred similar selling, general and administrative expenses of $8.2 million. Selling, general and administrative expenses as a percentage of net sales for the nine months ended June 30, 2009 decreased to 41.9% from 44.0% for the nine months ended June 30, 2008. The increase in the selling, general and administrative expenses were primarily due to a $0.8 million in write-off of advance payment to a supplier, partially offset by a decrease of $1.3 million in stock-based compensation expenses related to employee options and restricted stock from $4.7 million for the nine months ended June 30, 2008 to $3.4 million for the nine months ended June 30, 2009. Excluding stock-based compensation expenses, our selling, general & administrative expenses increased by approximately $0.5 million primarily from a legal settlement with former employee and increased sales and marketing activities.

Research & development

	Quarter Ended June 30, 2009					Quarter Ended June 30, 2008					Year-Over-Year Change
	Amount		% of net sales			Amount		% of net sales			Amount		% of change
Research and development	$	463,000		4.6	%	$	198,000		1.9	%	$	265,000		133.8	%

	Nine Months Ended June 30, 2009					Nine Months Ended June 30, 2008					Year-Over-Year Change
	Amount		% of net sales			Amount		% of net sales			Amount		% of change
Research and development	$	1,234,000		6.3	%	$	483,000		2.6	%	$	751,000		155.5	%

Research and development expenses represent expenses incurred in-house as well through the joint research and development program with Shanghai University. Research and development expenses in the three months ended June 30, 2009 were $0.5 million, representing an increase of $0.3 million or 133.8% over $0.2 million for the three months ended June 30, 2008. Research and development expenses as a percentage of net sales for the three months ended June 30, 2009 increased to 4.6% from 1.9% for the three months ended June 30, 2008. The increase in research and development expenses were mainly due to an increase of $0.2 million in stock-based compensation expenses related to employee options and restricted stock from $0.1 million for the three months ended June 30, 2008 to $0.3 million for the three months ended June 30, 2009.

Research and development expenses in the nine months ended June 30, 2009 were $1.2 million, representing an increase of $0.8 million or 155.5% over $0.5 million for the nine months ended June 30, 2008. Research and development expenses as a percentage of net sales for the nine months ended June 30, 2009 increased to 6.3% from 2.6% for the nine months ended June 30, 2008. The increase in research and development expenses were mainly due to an increase of $0.6 million in stock-based compensation expenses related to employee options and restricted stock from $0.3 million for the nine months ended June 30, 2008 to $0.9 million for the nine months ended June 30, 2009. Excluding stock-based compensation expenses, our research and development expenses increased by approximately $0.2 million primarily as a result of our commitments to fund our development contract with Shanghai University.

Loss on debt extinguishment

	Quarter Ended June 30, 2009					Quarter Ended June 30, 2008					Year-Over-Year Change
	Amount		% of net sales			Amount		% of net sales			Amount			% of change
Loss on debt extinguishment	$	36,000		0.4	%	$	1,529,000		14.9	%	$	(1,493,000	)		(97.6	)%

	Nine Months Ended June 30, 2009					Nine Months Ended June 30, 2008					Year-Over-Year Change
	Amount		% of net sales			Amount		% of net sales			Amount			% of change
Loss on debt extinguishment	$	527,000		2.7	%	$	3,996,000		21.5	%	$	(3,469,000	)		(86.8	)%

For the three months ended June 30, 2009 and 2008, we incurred losses on debt extinguishment of $36,000 and $1.5 million, respectively. During the quarter ended June 30, 2009, part of our Series B Convertible Notes was converted into common stock which resulted in the loss of $36,000. During the quarter ended June 30, 2008, part of our Series A and B Convertible Notes were converted into common stock which resulted in the non-cash loss of $1.5 million.

For the nine months ended June 30, 2009, we incurred a loss on debt extinguishment of $0.5 million. The loss of $0.5 million was related to converting Series A and B Convertible Notes into common stocks. For the nine months ended June 30, 2008, we incurred a loss on debt extinguishment of $4.0 million. That loss was the result of a loss of $4.4 million related to converting Series A and B Convertible Notes into common stocks. The loss was partially offset by a gain of approximately $0.4 million on the settlement of loan due to Coach Capital LLC and Infotech Essentials Ltd.

Other income (expense)

	Quarter Ended June 30, 2009						Quarter Ended June 30, 2008						Year-Over-Year Change
	Amount			% of net sales			Amount			% of net sales			Amount			% of change
Interest income	$	3,000			0.0	%	$	24,000			0.2	%	$	(21,000	)		(87.5	)%
Interest expense		(1,015,000	)		(10.0	)%		(238,000	)		(2.3	)%		(777,000	)		326.5	%
Gain (loss) on change in fair market value of compound embedded derivative		(238,000	)		(2.3	)%		(22,000	)		(0.2	)%		(216,000	)		981.8	%
Gain (loss) on change in fair market value of warrant liability		(3,158,000	)		(31.1	)%		107,000			1.0	%		(3,265,000	)		(3,051.4	)%
Other income (expense)		217,000			2.1	%		(107,000	)		(1.0	)%		324,000			(302.8	)%
Total other income (expense)	$	(4,191,000	)		(41.3	)%	$	(236,000	)		(2.3	)%	$	(3,955,000	)		1,675.8	%

	Nine Months Ended June 30, 2009						Nine Months Ended June 30, 2008						Year-Over-Year Change
	Amount			% of net sales			Amount			% of net sales			Amount			% of change
Interest income	$	13,000			0.1	%	$	80,000			0.4	%	$	(67,000	)		(83.8	)%
Interest expense		(1,938,000	)		(9.9	)%		(814,000	)		(4.4	)%		(1,124,000	)		138.1	%
Gain (loss) on change in fair market value of compound embedded derivative		350,000			1.8	%		12,267,000			66.0	%		(11,917,000	)		(97.1	)%
Gain (loss) on change in fair market value of warrant liability		(1,415,000	)		(7.2	)%		11,030,000			59.4	%		(12,445,000	)		(112.8	)%
Other income (expense)		3,000			0.0	%		(435,000	)		(2.3	)%		438,000			(100.7	)%
Total other income (expense)	$	(2,987,000	)		(15.2	)%	$	22,128,000			119.1	%	$	(25,115,000	)		(113.5	)%

For the three months ended June 30, 2009, total other expenses were $4.2 million, representing an increase of $4.0 million or 1,675.8% compared to $0.2 million for the same period of the prior year. Other expenses as a percentage of net sales for the three months ended June 30, 2009 increased to 41.3% from 2.3% for the three months ended June 30, 2008. In the three months ended June 30, 2009, we recorded a loss on change in fair market value of warranty liability of $3.2 million and a loss on change in fair market value of compound embedded derivative of $0.2 million compared to a gain on change in fair market value of warrant liability of $0.1 million and a loss on change in fair market value of compound embedded derivative of $22,000 during the three months ended June 30, 2008. We incurred interest expenses of $1.0 million and $0.2 million in the three months ended June 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 $0.2 million and other expenses of $0.1 million for the three months ended June 30, 2009 and 2008, respectively, were primarily related to foreign exchange gain (loss).

For the nine months ended June 30, 2009, total other expenses were $3.0 million, representing an increase of $25.1 million or 113.5% compared to total other income of $22.1 million for the same period of the prior year. Other expenses as a percentage of net sales for the nine months ended June 30, 2009 increased to negative 15.2% from positive 119.1% for the nine months ended June 30, 2008. In the nine months ended June 30, 2009, we recorded a loss on change in fair market value of warrant liability of $1.4 million and a gain on change in fair market value of compound embedded derivative of $0.4 million compared to a gain on change in fair market value of compound embedded derivative of $12.3 million and a gain on change in fair market value of warrant liability of $11.0 million during the nine months ended June 30, 2008. We incurred interest expenses of $1.9 million and $0.8 million in the nine months ended June 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 expenses of $0.4 million for the nine months ended June 30, 2008 were primarily related to foreign exchange loss.

Liquidity and Capital Resources

	June 30, 2009		September 30, 2008		Change

Cash and cash equivalents	$	3,323,000	$	3,238,000	$	85,000

As of June 30, 2009, we had cash and cash equivalents of $3.3 million, as compared to $3.2 million at September 30, 2008. We require a significant amount of cash to fund our operations. If we are not able to obtain funding in a timely manner or on commercially acceptable terms or at all, we may curtail our operations or take actions to reduce cost in order to continue our operations for the next 12 months.

	Nine Months Ended June 30,
	2009			2008			Change

Net cash provided by (used in):
Operating activities	$	369,000		$	(14,140,000	)	$	14,509,000
Investing activities		(289,000	)		(6,846,000	)		6,557,000
Financing activities		-			19,887,000			(19,887,000	)
Effect of exchange rate changes on cash and cash equivalents		5,000			(128,000	)		133,000
Net (decrease) increase in cash and cash equivalents	$	85,000		$	(1,227,000	)	$	1,312,000

Net cash provided by operating activities for the nine months ended June 30, 2009 was $0.4 million and net cash used in operating activities for the nine months ended June 30, 2008 was $14.1 million. The increase of net cash provided by operating activities of $14.5 million was primarily attributable to $23.0 million of higher non-cash items adjustments mainly from the loss on the change in fair market value of warrant liability and the gain on the change in fair market value of compound embedded derivatives, partially offset by lower loss on debt extinguishment and higher depreciation expenses. In addition, the increase in net cash provided by operating activities was attributable to the changes in operating assets and liabilities of $16.0 million, mainly from higher accounts payable, accrued liabilities and customer advance payments, lower VAT receivable and inventory purchases, partially offset by higher accounts receivable as a result of higher net sales. The increases in net cash provided by operating activities were offset by higher net loss of $24.5 million for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008.

Net cash used in investment activities were $0.3 million and $6.8 million for the nine months ended June 30, 2009 and 2008, respectively. The decrease of $6.6 million in net cash used in investing activities was primarily due to lower property and equipment acquisitions during the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008.

Net cash provided by financing activities totaled $19.9 million for the nine months ended June 30, 2008. The net cash provided by financing activities of $19.9 was mainly due to proceeds of $19.9 million in January 2008 from issuing common stocks and warrants, net of financing cost through private equity financing.

The exchange rate changes on cash and cash equivalents were primarily from exchange gains of balances held in Chinese Renminbi (RMB). The exchange rates at June 30, 2009 and 2008 were 1 U.S. dollar for RMB 6.8319 and 1 U.S. dollar for RMB 6.8591, respectively.

Our current cash requirements are significant because, aside from our operational expenses, we are building our inventory of silicon wafers. The average sales price of solar modules and cost of silicon wafers, which are the primary cost of sales for our SolarE solar modules, are currently volatile. We are uncertain of the extent to which these will negatively affect our working capital in the near future. A significant decrease in sale price or increase in the cost of silicon wafers could cause us to run out of cash more quickly than our current operational plans provide, requiring us to raise additional funds or curtail operations.

Contractual Obligations

On March 7, 2007, we issued $17.3 million of secured convertible notes and detachable stock purchase warrants. These notes bear interest at 6% per annum and are due on March 7, 2010 (see Note 7 – Convertible Notes). As of June 30, 2009, $ 11.6 million in principal under the secured convertible notes remains outstanding. We need a significant amount of cash to pay the principal amount of the convertible notes by March 7, 2010. Failure to generate sufficient income, potentially raise additional capital, or renegotiate the terms and conditions of the notes could have a material adverse effect on the Company’s financial condition.

Off-Balance Sheet Arrangements

On August 21, 2008 the Company entered into an equity purchase agreement in which it acquired two million shares of common stock of 21-Century Silicon, Inc., a polysilicon manufacturer based in Dallas, Texas (“21-Century Silicon”), for $1 million in cash. The Company would acquire an additional two million shares at the same per share price upon the first polysilicon shipment meeting the quality specifications determined solely by the Company. The two million shares acquired by the Company constitute approximately 7.8% of 21-Century Silicon’s outstanding equity. The equity purchase agreement further provides that the Company would acquire an additional two million shares upon 21-Century Silicon meeting certain milestones. In connection with the equity purchase agreement, the Company has also signed a memorandum of understanding with 21-Century Silicon for a four-year supply framework agreement for polysilicon shipments. As of the date of this report, the Company has not yet acquired the additional two million shares.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 3.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms because of the lack of finance and accounting personnel with an appropriate level of knowledge, experience and training in the application of U.S. GAAP. Accordingly, management has determined that this control deficiency constitutes a material weakness.

Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has concluded there were no changes in our internal controls over financial reporting that occurred during the fiscal quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

Except as set forth below, the Company’s risk factors are included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008 and have not materially changed.

Our debt obligations expose us to risks that could adversely affect our business, operating results or financial condition, and could prevent us from fulfilling our obligations under such indebtedness.

As of June 30, 2009, we had outstanding convertible notes with a principal balance of $11.6 million consisting of $2.5 million in principal amount of Series A Convertible Notes and $9.1 million in principal amount of Series B Convertible Notes, which were recorded at carrying amount at $1.4 million. These notes bear interest at 6% per annum and are due on March 7, 2010.

The level of our current or future indebtedness, among other things, could:

	•	Make it difficult for us to satisfy our payment obligations on our debt;
	•	Make us more vulnerable in the event of a downturn in our business;
	•	Reduce funds available for use in our operations;
	•	Make it difficult for us to incur additional debt or obtain any necessary financing in the future for working capital, capital expenditures, debt service, acquisitions or general corporate purposes;
	•	Limit our flexibility in planning for or reacting to changes in our business; or
	•	Place us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have greater access to capital resources.

Our ability to repay the convertible notes when they are due or to refinance or renegotiate our obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. There can be no assurance that we will generate a level of cash flows from operating activities sufficient to permit us to pay the principal and any interest, if any, owed under the convertible notes.

As of June 30, 2009, we had $3.3 million in cash and cash equivalents on hand. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, restructure, or refinance our indebtedness. Failure to generate sufficient income, potentially raise additional capital, or renegotiate the terms and conditions of the notes could have a material adverse effect on the Company’s financial condition.

Any default under our indebtedness could have a material adverse effect on our business, operating results and financial condition. If defaults under our indebtedness occur and are not cured, they may cause us to restructure or cease operations entirely. In addition, a material default on our indebtedness could suspend our eligibility to register securities using certain registration statement forms under SEC guidelines that permit incorporation by reference of substantial information regarding us, which could potentially hinder our ability to raise capital through the issuance of our securities and will increase the costs of such registration to us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(a) Pursuant to Rule 601 of Regulation S-K, the following exhibits are included herein or incorporated by reference.

2.1		Agreement and Plan of Merger with Solar EnerTech Corp., a Nevada corporation and our predecessor in interest, dated August 13, 2008, incorporated by reference from Exhibit 2.1 to our Form 8-K filed on August 14, 2008.

3.1		Certificate of Incorporation, incorporated by reference from Exhibit 3.1 to our Form 8-K filed on August 14, 2008.

3.2		By-laws, incorporated by reference from Exhibit 3.2 to our Form 8-K filed on August 14, 2008.

31.1		Section 302 Certification - Chief Executive Officer*

31.2		Section 302 Certification - Chief Financial Officer*

32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer.*

32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer.*

* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SOLAR ENERTECH CORP.

Date: August 14, 2009	By:	/s/ Steve Ye

		Steve Ye
		Chief Financial Officer

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