UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
Mark
One
þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended September 30, 2010
OR
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________ to ____________
Commission
File Number 000-51717
SOLAR
ENERTECH CORP.
(Exact
name of registrant as specified in its charter)
DELAWARE
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98-0434357
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State
or other jurisdiction of incorporation or
organization
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(I.R.S.
Employer Identification
No.)
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655
West Evelyn Avenue, Suite #2
Mountain
View, CA 94041
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code
650-688-5800
Securities
registered under Section 12(b) of the Exchange Act:
Title
of each class
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Name
of each exchange on which registered
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None
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None
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Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 Par Value
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨
Yes
x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
x
Yes
¨
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
¨
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
¨
Large accelerated filer
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¨
Accelerated filer
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¨
Non-accelerated filer
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x
Smaller reporting company
|
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|
(Do not check if
a small reporting company)
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|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act).
¨
Yes
x
No
The
aggregate market value of the common stock held by non-affiliates of the
registrant, computed based on the closing sale price as of the last business day
of the registrant’s second fiscal quarter, March 31, 2010, was approximately
$14,493,578.
According
to the records of the registrant's registrar and transfer agent, the number of
shares of the registrant's common stock outstanding as of December 13,
2010 was 171,257,443.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1. Business
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4
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Item
1A. Risk Factors
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9
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Item
1B. Unresolved Staff Comments
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21
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Item
2. Properties
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21
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Item
3. Legal Proceedings
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21
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Item
4. Submission of Matters to a Vote of Security
Holders
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21
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PART
II
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Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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22
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Item
6. Selected Financial Data
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24
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Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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24
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Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
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33
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Item
8. Financial Statements and Supplementary Data
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33
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Item
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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62
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Item
9A. Controls and Procedures
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62
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Item
9B. Other Information
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63
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PART
III
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Item
10. Directors and Executive Officers and Corporate
Governance
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64
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Item
11. Executive Compensation
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66
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Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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69
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Item
13. Certain Relationship and Related Transactions, and Director
Independence
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71
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Item
14. Principal Accountant Fees and
Services
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71
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PART
IV
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Item
15. Exhibits and Financial Statement Schedules
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73
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Signatures
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76
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EXHIBIT
21.1
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EXHIBIT
31.1
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EXHIBIT
31.2
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EXHIBIT
32.1
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EXHIBIT
32.2
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, in particular
in our Management’s Discussion and Analysis of Financial Condition and Results
of Operations, which relate to our current expectations and views of future
events. These statements relate to events that involve known and unknown risks,
uncertainties and other factors, including those listed under the heading “Risks
Related to Our Business”, “Risks Related to Doing Business in China” and “Risks
Related To an Investment in Our Securities” in this document as well as other
relevant risks detailed in the our filings with the Securities and Exchange
Commission (the “SEC”) which may cause our actual results, performance or
achievements to be materially different from any future results, performances or
achievements expressed or implied by the forward-looking statements. The
information set forth in this report on Form 10-K should be read in light of
such risks.
In some
cases, these forward-looking statements can be identified by words or phrases
such as “may”, “will”, “expect”, “anticipate”, “aim”, “estimate”, “intend”,
“plan or planned”, “believe”, “potential”, “continue”, “is/are likely to”,
“hope” or other similar expressions. We have based these forward-looking
statements largely on our current expectations and projections about future
events and financial trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
These
forward-looking statements include, among other things, statements relating
to:
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our
expectations regarding the worldwide demand for electricity and the market
for solar energy in certain
countries;
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our
beliefs regarding the effects of environmental regulation, lack of
infrastructure reliability and long-term fossil fuel supply
constraints;
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our
beliefs regarding the inability of traditional fossil fuel-based
generation technologies to meet the demand for
electricity;
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our
beliefs regarding the importance of environmentally friendly power
generation;
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our
expectations regarding research and development agreements and
initiatives;
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our
expectations regarding governmental support and incentive programs for the
deployment of solar energy;
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our
beliefs regarding the acceleration of adoption of solar
technologies;
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our
beliefs regarding the competitiveness of photovoltaic (“PV”)
products;
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our
expectations regarding the creation and development of our manufacturing
capacity;
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our
expected benefits from manufacturing based on China’s favorable policies
and cost-effective workforce;
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our
expectations with respect to revenue and sales and our ability to achieve
profitability resulting from increases in production
volumes;
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our
expectations with respect to our ability to secure raw materials in the
future;
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our
future business development, results of operations and financial
condition; and
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competition
from other manufacturers of PV products and conventional energy
suppliers.
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YOU
SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS
The
forward-looking statements made in this report on Form 10-K relate only to
events or information as of the date on which the statements are made in this
report on Form 10-K. Except as required by law, we undertake no obligation to
update or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise, after the date on which the
statements are made or to reflect the occurrence of unanticipated events. You
should read this report and the documents that we reference in this report,
including documents referenced by incorporation, completely and with the
understanding that our actual future results may be materially different from
what we expect or hope.
PART
I
ITEM
1. BUSINESS
Our
Business
Solar
EnerTech Corp. was originally incorporated under the laws of the State of Nevada
on July 7, 2004. In April 2006, we changed our name to
Solar EnerTech Corp. and in August 2008, we reincorporated to the State of
Delaware through a merger whereby the predecessor Nevada entity merged with and
into a Delaware wholly-owned subsidiary. Solar EnerTech Corp. is a
solar product manufacturer with its headquarter based in Mountain View,
California, and with low-cost operations located in Shanghai,
China. Our principal products are monocrystalline silicon and
polycrystalline silicon solar cells and solar modules. Solar cells convert
sunlight to electricity through the photovoltaic effect, with multiple solar
cells electrically interconnected and packaged into solar modules to form the
building blocks for solar power generating systems. We primarily sell solar
modules to solar panel installers who incorporate our modules into their power
generating systems that are sold to end-customers located in Europe, Australia,
North America and China.
We have
established our manufacturing base in Shanghai, China to capitalize on the cost
advantages offered in manufacturing of solar power products. In our
67,107-square-foot manufacturing facility, we operate two 25MW solar cell
production lines and a 50MW solar module production facility. We
believe that the choice of Shanghai, China for our manufacturing base provides
us with convenient and timely access to key resources and conditions to support
our growth and low-cost manufacturing operations.
We have
been able to increase sales since our inception in 2006. Although our efforts to
reach profitability have been adversely affected by the global recession, credit
market contraction and volatile polysilicon market, during fiscal year 2010 we
had significantly improved our gross margin resulted from declines in raw
materials costs and the efficiencies gained from greater capacity utilization at
our facilities.
Our
Industry
Solar
power has emerged as one of the most rapidly growing renewable energy sources.
Through a process known as the photovoltaic (PV) effect, electricity is
generated by solar cells that convert sunlight into electricity. In general,
global solar cell production can be categorized by three different types of
technologies, namely, monocrystalline silicon, polycrystalline silicon and thin
film technologies. Crystalline silicon technology is currently the most commonly
used.
Although
PV technology has been used for several decades, the solar power market grew
significantly only in the past several years. Despite the contraction in demand
for solar power products during the second half of 2008 and the first half of
2009 resulting from the global recession, credit market contraction and volatile
polysilicon market, we believe that demand for solar power products has
recovered significantly in response to a series of factors, including the
recovery of the global economy and increasing availability of financing for
solar power projects. Although selling prices for solar power products,
including the average selling prices of our products, have generally stabilized
at levels substantially below pre-crisis prices, there is no assurance that such
prices may not decline again. In addition, demand for solar power products is
significantly affected by government incentives adopted to make solar power
competitive with conventional fossil fuel power. The widespread implementation
of such incentive policies, as has occurred in many countries in Europe, Asia
Pacific and North America, has significantly stimulated demand, whereas
reductions or limitations on such policies, as have recently been announced in
Germany, Spain and South Korea, can reduce demand for such products. We have
taken mitigating efforts to reduce this risk by developing customers in other
emerging markets and in our established markets. We are currently expanding our
niche market, which are customers who are often underserved by major
manufacturers who prefer to sell solar product in large volumes. Accordingly, we
believe that demand will continue to grow rapidly in the long term as solar
power becomes an increasingly important source of renewable energy.
We
believe the following factors will drive demand in the global solar power
industry, including demand for our products:
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environmental
and other advantages of solar
power;
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long-term
growth in demand for alternative sources of
energy;
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government
incentives for solar power; and
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decreasing
costs of producing solar
energy.
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We
believe the following are the key challenges presently facing the solar power
industry:
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higher
cost of solar power compared with other sources of energy to
consumers;
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difficulties
in obtaining cost-effective financing for solar power
projects;
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continual
reliance on government subsidies and
incentives;
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volatility
of prices in the polysilicon and solar power product markets;
and
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need
to promote awareness and acceptance of solar power
usage.
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Our
Competitive Strengths
We
believe that the following strengths enable us to compete successfully in the
solar power industry:
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our
focus on niche, “emerging markets” and “emerging customers” in existing
markets not typically covered by the major solar
manufacturers;
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our
ability to provide high-quality products enables us to increase our sales
and enhance our brand recognition;
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our
strategic locations provide us with convenient access to key resources and
conditions to support our low-cost manufacturing operations;
and
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our
modern production equipment enables us to enhance our
productivity.
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Our
Strategy
In order
to achieve our goal of becoming a leading supplier of solar power products, we
intend to pursue the following principal strategies:
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continuing
to diversify our customer base with a focus on quality, service and
competitive pricing, but with a focus on niche, “emerging markets” and
“emerging customers” in existing markets not typically covered by the
major solar manufacturers;
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developing
a vertically integrated business model where we can produce wafers to
capture additional margin;
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raising
additional capital or borrowings to continue to prudently invest in the
coordinated expansion of our production capacity to add 50MW, to bring our
total manufacturing capacity to
100MW;
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continuing
to enhance our research and development capability with a focus on
improving our manufacturing processes to increase overall cell efficiency,
reduce our average cost and improve the quality of our
products;
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establishing
regional sales and support offices and warehouses in Central Europe and
North America to expand our sales and marketing network and enhance our
sales and marketing channels; and
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establishing
strategic alliances with medium and small installers, who also serve as
distributors, and system integrators and securing silicon raw material
supplies at competitive cost.
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Our
Challenges
We
believe that the following are some of the major challenges, risks and
uncertainties that may materially affect us:
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we
have a limited amount of cash to fund our operations and we may not be
able to secure external financing when needed; and if available, financing
may not be obtained on terms favorable to us or our
stockholders;
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we
may be adversely affected by volatile market and industry trends, in
particular, the demand for our solar power products or the price at which
we can charge may decline, which may reduce our sales and
earnings;
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a
significant reduction in or discontinuation of government subsidies and
economic incentives for installation of solar energy systems may have a
material adverse effect on our results of
operations;
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our
limited operating history makes it difficult to evaluate our results of
operations and prospects;
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notwithstanding
our continuing efforts to further diversify our customer base, we derive,
and expect to continue to derive, a significant portion of our
sales from a limited number of customers. As a result, the loss of,
or a significant reduction in orders from, any of these customers would
significantly reduce our sales and harm our results of
operations;
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our
failure to successfully execute our business expansion plans would have a
material adverse effect on the growth of our sales and
earnings;
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we
may not be able to obtain sufficient silicon raw materials in a timely
manner, which could have a material adverse effect on our results of
operations and financial condition;
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volatility
in the prices of silicon raw materials makes our procurement planning
challenging and could have a material adverse effect on our results of
operations and financial condition;
and
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fluctuations
in exchange rates could adversely affect our results of operations because
the currency we generally do business in is the RMB Yuan, our financial
statements are expressed in U.S. dollars and a significant portion of our
sales and expenses are denominated in foreign
currencies.
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Principal
Products and Services
The
essential component in all solar panel applications is the
photovoltaic solar cell, which converts the sun’s visible light into
electricity. Solar cells are then assembled in modules for specific
applications. We manufacture PV solar cells, and we design and produce advanced
PV modules for a variety of applications, such as standard panels for solar
power stations, roof panels, solar arrays, and modules incorporated directly
into exterior walls.
Marketing
Strategy
The
primary solar market is currently in Europe and Australia, where significant
government incentive programs are helping fuel high demand for solar products.
Our secondary market is the United States, where the State of California has
launched an ambitious One Million Solar Roof incentive program for residences
and businesses. With a newly set-up marketing and sales office in the United
Sates, we are well-positioned to meet incremental market demand in the United
States.
Sales
Strategy
We
manufacture high-quality and high-conversion-rate solar products with
outstanding after-sale services. By keeping costs low, we expect to market our
panels, to be trademarked as “SolarE”, at prices generally lower than many of
our competitors.
Research
and Development
We have
established a joint Research and Development (“R&D”) laboratory with
Shanghai University to facilitate improvements to our products. The main focus
of this research laboratory is to:
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Research
and test theories of photovoltaics, thermo-physics, the physics of
materials and chemistry;
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Develop
efficient and ultra-efficient PV cells with light/electricity conversion
rate ranging from 20% to 35%;
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Develop
environmentally-friendly high-conversion-rate manufacturing technology for
chemical compound film PV cell
materials;
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Develop
highly-reliable, low-cost manufacturing technology and equipment for
thin-film PV cells;
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Research
and develop key materials for new low-cost flexible-film PV cells and
non-vacuum technology; and
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Research
and develop key technologies and fundamental theories for third-generation
PV cells.
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Our
management believes that the joint R&D laboratory will enable us to be at
the forefront of PV research and development, and hopes to create a valuable
comparative advantage over solar cell producers today, with the goal of enabling
us to become an important solar-cell manufacturer.
Competition
The solar
energy market is highly competitive. Outside China, our competitors include BP
Solar, Kyocera Corporation, Mitsubishi Electric Corporation, Motech Industries
Inc., Sharp Corporation, Q-Cells AG, Sanyo Electric Co., Ltd. and Sunpower
Corporation. In China, the Company’s primary competitors are Suntech Power
Holding’s Co., Ltd., Trina Solar Ltd., Baoding Tianwei Yingli New Energy
Resources Co., Ltd. and Nanjing PV-Tech Co., Ltd, Canadian Solar Inc. and
Solarfun Power Holdings Co., Ltd.
We
compete primarily on the basis of the power efficiency, quality, performance and
appearance of our products, price, strength of our supply chain and distribution
network, after-sales service and brand image. Many of our competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial and marketing resources than us.
Intellectual
Property
We are
not, at present, the holder of any patents, trademarks or copyrights on our
products. We intend to trademark the trade name “SolarE” in Asia, Europe and
North America in the future and will, if we are successful in our conduct of
research and development activities seek intellectual property protection for
such products. Solar cells are in the public domain and our only protection in
producing them is in the know-how or experience of our employees and management
in producing our products.
The
Market
Energy
generated from PV cells continues to be researched and the resulting
products deployed. PV technology is relatively a simple concept: harness the
sun’s energy on a solid-state device and generate electricity. In many markets
around the world – especially Japan, Germany, Spain and the U.S. – PV
electricity has already become a favored energy choice, and within this
established base, the technology of PV’s is poised to help transform the energy
landscape within the next decade.
Photovoltaic
Industry and the World
The
photovoltaic industry has made huge improvements in solar cell efficiencies as
well as having achieved significant cost reductions. The global photovoltaic
industry is expanding rapidly: In the last few years, most solar
production has moved and continues to move to Europe and China. Countries like
Germany and Spain have had government-incentive programs that have made solar
systems more attractive. In the United States, Energy Policy Act (EPACT) enacted
a 30% investment tax credit for solar, and in January 2006, California approved
the largest solar program in the country's history that provides for long term
subsidies in the form of rebates to encourage use of solar energy where
possible. As the current administration in the United States pursues a
“Green Economy”, we expect both federal and state incentives to play an
important role in boosting the use of solar electricity in the near
future.
The price
of electricity produced from solar cells is still significantly more expensive
than from fossil fuels, such as coal and oil, especially when environmental
costs are not considered. The competitiveness of solar-generated electricity in
grid-connected applications is largely a function of electricity rates, which
are subject to regulations and taxes that vary from country to country across
the world.
With a
solar boom being expected globally in the near future and with renewable energy
laws being implemented as best-practice models often with attractive solar
energy delivery compensation rules as in Germany, solar companies are currently
expanding their activities in Europe (e.g., Spain, Italy, France and Greece, and
Holland). With growing markets in Southern Europe, Asia and the United States,
numerous opportunities exist for competitors in the photovoltaic
market.
Compared
to other energy technologies, solar power’s benefits include:
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Environmental
Superiority. Solar power is one of the most benign electric generation
resources. Solar cells and concentrated solar power (“CSP”) systems
generate electricity without significant air or water emissions, habitat
impact or waste generation;
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Price
Stability. Unlike fossil fuels, solar energy has no fuel price volatility
or delivery risk. Although there is variability in the amount and timing
of sunlight, it is predictable, and a properly configured system can be
designed to be highly reliable while providing long-term, fixed price
electricity;
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Location
Flexibility. Unlike other renewable resources such as hydroelectric or
wind power, solar power can be generated where it is needed. This limits
the expense and energy losses associated with transmission and
distribution of large, centralized power
stations;
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Peak
Generation. Solar power is well-suited to match peak energy needs as
maximum sunlight hours generally correspond to peak demand periods when
electricity prices are at their
highest;
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System
Modularity. Solar power products can be deployed in many sizes and
configurations to meet the specific needs of the user;
and
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Reliability.
With no moving parts or regular required maintenance, photovoltaic systems
are among the most reliable forms of electricity
generation.
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Environmental
Regulations
In our
manufacturing process, we will use, generate and discharge toxic, volatile or
otherwise hazardous chemicals and wastes in our manufacturing activities. We are
subject to a variety of foreign, federal, state and local governmental laws and
regulations related to the purchase, storage, use and disposal of hazardous
materials. If we fail to comply with present or future environmental laws and
regulations, we could be subject to fines, suspension of production or a
cessation of operations. In addition, under some foreign, federal, state and
local statutes and regulations, a governmental agency may seek recovery and
response costs from operators of property where releases of hazardous substances
have occurred or are ongoing, even if the operator was not responsible for the
release or otherwise was not at fault.
Management
believes that we have all environmental permits necessary to conduct our
business and have obtained all necessary environmental permits for our facility
in Shanghai. Management also believes that we have properly handled our
hazardous materials and wastes and have appropriately remediated any
contamination at any of our premises. We are not aware of any pending or
threatened environmental investigation, proceeding or action by foreign,
federal, state or local agencies, or third parties involving our current
facilities. Any failure by us to control the use of or to restrict adequately
the discharge of, hazardous substances could subject us to substantial financial
liabilities, operational interruptions and adverse publicity, any of which could
materially and adversely affect our business, results of operations and
financial condition.
Principal
Suppliers
We
currently purchase silicon wafer, our key raw material, from the spot
market. In 2010 and 2009, our five largest suppliers supplied in the
aggregate approximately 87.5% and 76.7%, respectively, of our total silicon
wafer material purchases by value.
Employees
As of
September 30, 2010, we employed approximately 393 people, as follows: our
California office currently has 2 employees and the manufacturing plant in
Shanghai currently has 391 employees.
ITEM
1A. RISK FACTORS
Any
investment in our common stock involves a high degree of
risk. Investors should carefully consider the risks described below
and all of the information contained in this prospectus before deciding whether
to purchase our common stock. Our business, financial condition or
results of operations could be materially adversely affected by these risks if
any of them actually occur. The trading price could decline due to
any of these risks, and an investor may lose all or part of an investor’s
investment. Some of these factors have affected our financial
condition and operating results in the past or are currently affecting our
company. Our filings with the SEC also contain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including the risks we face described below. See “Special Note
Regarding Forward-Looking Statements.” In assessing these risks, investors
should also refer to the other information contained or incorporated by
reference in this Annual Report on Form 10-K, including our September 30, 2010
consolidated financial statements and related notes.
RISKS
RELATED TO OUR BUSINESS AND OUR INDUSTRY
We have
a limited amount of cash to fund our operations. If we cannot obtain
additional sources of cash, our growth prospects and future profitability
may be materially adversely affected and we may not be able to continue as a
going concern.
As of
September 30, 2010, we had cash and cash equivalents of $6.6 million. We will
require a significant amount of cash to fund our operations. In order
to continue as a going concern, we will need to continue to generate new sales
while controlling our costs. If we are unable to successfully
generate enough revenues to cover our costs, we only have limited cash resources
to bear operating losses. To the extent our operations are not
profitable, we may not continue as a going concern.
We
may be adversely affected by volatile market and industry trends and, in
particular, the demand or pricing for our solar power products may decline,
which may reduce our sales and earnings.
We are
affected by solar power market and industry trends. Beginning in the fourth
fiscal quarter 2008, many of our key markets, including Belgium, Germany, and
Australia, experienced a period of economic contraction and significantly slower
economic growth. In particular, from late 2008 through mid 2009, the credit
crisis, weak consumer confidence and diminished consumer and business spending
contributed to a significant slowdown in market demand for solar power products.
Meanwhile, manufacturing capacity for solar power products increased during the
same period. This resulted in prices for solar power products declining
significantly. These same trends continued for the remainder of 2009
and caused prices for solar power products to continue to decline.
In
addition, many of our customers and end-users of our products depend on debt
financing to fund the initial capital expenditure required to purchase our
products. Due to the global credit crisis, our customers and end-users have
experienced difficulty in obtaining financing or have experienced an increase in
the cost of financing. This may have affected their decision on
whether to purchase our products and/or the timing of their
purchases. The global economy has begun recovering since the first
half of 2009 and this resulted in an increased availability of financing for
solar power projects. Taken in conjunction with decreased average
selling prices for solar power products, demand for solar power products has
increased since the second half of 2009. However, if demand for solar power
products declines again and the supply of solar power products continues to
grow, the average selling price of our products will be materially and adversely
affected.
Also,
demand for solar power products is influenced by available supply and prices for
other energy products, such as oil, coal and natural gas, as well as government
regulations and policies concerning the electric utility industry. A decrease in
oil prices, for example, may reduce demand for investment in alternative energy
like solar. If these negative market and industry trends continue and the prices
of our solar power products continue to decrease as a result, our business and
results of operations may be materially and adversely affected.
A
significant reduction in or discontinuation of government subsidies and economic
incentives for installation of solar energy systems may have a material adverse
effect on our results of operations.
A
majority of our products sold are eventually incorporated into solar power
systems. We believe that the near-term growth of the market for solar power
systems depends substantially on government incentives because the cost of solar
power continues to substantially exceed the cost of conventional power in many
locations around the world. Various governments have used different policy
initiatives to encourage or accelerate the development and adoption of solar
power and other renewable energy sources. Countries in Europe, most notably
Germany and Spain, certain countries in Asia, including China, Japan and South
Korea, as well as Australia and the United States have adopted renewable energy
policies. Examples of government-sponsored financial incentives include capital
cost rebates, feed-in tariffs, tax credits, net metering and other incentives to
end-users, distributors, system integrators and manufacturers of solar power
products to promote the use of solar power in both on-grid and off-grid
applications and reduced dependency on other forms of
energy. However, political changes in a particular country could
result in significant reductions or eliminations of subsidies or economic
incentives, and the effects of the recent global financial crisis may affect the
fiscal ability of governments to offer certain types of incentives, such as tax
credits.
A
significant reduction in the scope or discontinuation of government incentive
programs, especially those in our target overseas markets, such as Germany,
Spain and South Korea could cause demand for our products and our sales to
decline, and have a material adverse effect on our business, financial
condition, results of operations and prospects. Governments may decide to reduce
or eliminate these economic incentives for political, financial or other
reasons. Reductions in, or eliminations of government subsidies and economic
incentives before the solar power industry reaches a sufficient scale to be
cost-effective in a non-subsidized marketplace could reduce demand for our
products and adversely affect our business prospects and results of operations.
A significant reduction in the scope or discontinuation of government incentive
programs, especially those in the target markets of our major customers, could
cause demand for our products and our sales to decline and have a material
adverse effect on our business, financial condition, results of operations and
prospects. We have taken mitigating efforts to reduce this risk by developing
customers in other emerging markets and in our established markets. We are
currently expanding our niche market, which are customers who are often
underserved by major manufacturers who prefer to sell solar product in large
volumes. Accordingly, we believe that demand will continue to grow rapidly in
the long term as solar power becomes an increasingly important source of
renewable energy.
We have a history
of losses and cash outflow from operations which may continue if we do not
continue to increase our sales
and/or further
reduce our costs.
While we
have been able to increase sales since our inception, we have generated an
operating loss in each financial period since inception. After various cost
cutting efforts, our operational expenses have been reduced significantly. In
order to improve our profitability, we will need to continue to generate new
sales while controlling our costs. As we plan on continuing to invest to grow
our business, we may not be able to successfully generate
sufficient sales to reach profitability. Our ability to achieve
profitability also depends on the growth rate of the photovoltaic portion of the
market, the continued market acceptance of photovoltaic products, the
competitiveness of our products as well as our ability to provide new products
and services to meet the demands of our customers. If we fail to reduce the cash
consumption from operations and to generate cash from these other sources on a
timely basis, or if the cash requirements of our business change as the result
of changes in terms from vendors or other causes, we could no longer have the
cash resources required to run our business.
Our
limited operating history makes it difficult to evaluate our results of
operations and prospects.
We have
only been operating since 2006 and have limited operating history. Our future
success will require us to scale up our production capacity beyond our existing
capacity and further expand our customer base. Although we have experienced
sales growth in certain periods, we cannot assure you that our sales will
increase at previous rates or at all, or that we will be able to operate
profitably in future periods. Our limited operating history makes the prediction
of future results of operations difficult, and therefore, past sales growth
experienced by us should not be taken as indicative of the rate of sales growth,
if any, that can be expected in the future. We believe that period to period
comparisons of our operating results are not meaningful and that the results for
any period should not be relied upon as an indication of future performance. You
should consider our business and prospects in light of the risks, uncertainties,
expenses and challenges that we will face as an early-stage company seeking to
manufacture and sell new products in a volatile and challenging
market.
Notwithstanding
our continuing efforts to further diversify our customer base, we derive, and
expect to continue to derive, a significant portion of our
sales
from a limited
number of customers. As a result, the loss of, or a significant reduction in
orders from, any of these customers would significantly reduce our sales and
harm our results of operations.
We expect
that our results of operations will, for the foreseeable future, continue to
depend on the sale of our products to a relatively small number of customers.
For the fiscal years ended September 30, 2010 and 2009, sales to two and four
customers, respectively, exceeded 10% of our sales and accounted for
approximately 66.6% and 70.7% respectively, of our sales. Consequently, any one
of the following events may cause material fluctuations or declines in our sales
and have a material adverse effect on our results of operations
:
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reduction,
delay or cancellation of orders from one or more significant
customers;
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loss
of one or more significant customers and failure to identify additional or
replacement customers;
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failure
of any significant customers to make;
and
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timely
payment for products.
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We cannot
assure you that these customers will continue to generate significant sales for
us or that we will be able to maintain these customer relationships. We also
cannot assure you that we will be successful in diversifying our number of
customers, which diversification in itself may create additional financial
risk. In addition, our business is affected by competition in the
market for products that many of our major customers sell, and any decline in
the businesses of our customers could reduce the purchase of our products by
these customers. The loss of sales to any of these customers could also have a
material adverse effect on our business, prospects and results of
operations.
Our
failure to successfully execute our business expansion plans would have a
material adverse effect on the growth of our sales and earnings.
Our
future success depends, to a large extent, on our ability to expand our
production capacity, increase vertical integration and continue technological
development of cell efficiencies. If we are able to raise sufficient capital, we
plan to increase our annual silicon solar cell and module production capacity
from 50 MW to approximately 100 MW. If we are unable to do so, we will not
be able to attain the production capacity and desired level of economies of
scale in our operations or cut the marginal production cost to the level
necessary to effectively maintain our pricing and other competitive advantages.
This expansion has required and will continue to require substantial capital
expenditures, significant engineering efforts, timely delivery of manufacturing
equipment and dedicated management attention, and is subject to significant
risks and uncertainties, including:
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in
order to finance our production capacity expansion, we will need to raise
additional capital beyond what is raised by this offering through bank
borrowings or the issuance of our equity or debt securities, which may not
be available on reasonable terms or at all, and which could be dilutive to
our existing stockholders;
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we
will be required to obtain government approvals, permits or documents of
similar nature with respect to any acquisitions or new expansion projects,
and we cannot assure you that such approvals, permits or documents will be
obtained in a timely manner or at
all;
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we
may experience cost overruns, construction delays, equipment problems,
including delays in manufacturing equipment deliveries or deliveries of
equipment that does not meet our specifications, and other operating
difficulties; and
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we
may not have sufficient management resources to properly oversee capacity
expansion as currently planned.
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Any of
these or similar difficulties could significantly delay or otherwise constrain
our ability to undertake our capacity expansion as currently planned, which in
turn would limit our ability to increase sales, reduce marginal manufacturing
costs or otherwise improve our prospects and profitability.
In
addition, we may have limited access to financing to fund working capital
requirements, or may have to adjust the terms of our contracts with our
suppliers or customers to accommodate their requests, or our suppliers and
customers may be unable to perform their obligations under our existing
contracts with them. For example, if we are required to prepay for
raw materials or to buy equipment for our manufacturing facilities, we will need
to maintain sufficient working capital for such payments and we may not be
unable to obtain on reasonable terms to finance such payments or at
all. The occurrence of any of these events would affect our ability
to achieve economies of scale and higher utilization rates, which may in turn
hinder our ability to increase vertical integration and expand our production
capacity as planned.
Volatility
in the prices of raw materials makes our procurement planning challenging and
could have a material adverse effect on our results of operations and financial
condition.
We
procure raw materials primarily through spot market purchases. We
expect that the prices of raw materials may become increasingly volatile, making
our procurement planning challenging. For example, if we refrain from entering
into more fixed-price, long-term supply contracts, we may miss opportunities to
secure long-term supplies of raw materials at favorable prices if the price of
raw materials increases significantly in the future.
On the
other hand, if we enter into more fixed-price, long-term supply contracts, we
may not be able to renegotiate or otherwise adjust the purchase prices under
such long-term supply contracts if the price declines. If we fail to obtain
silicon wafer, our key raw material from the spot market, due to the volatility
of raw material prices, we may be unable to manufacture our
products. If we are able to manufacture our products, our products
may be available at a higher cost or after a long delay in connection with our
efforts to obtain silicon wafer. The inability to obtain silicon wafers could
prevent us from delivering our products to potential customers and meeting their
required quantities and prices that are profitable to us. The failure to obtain
materials and components that meet quality, quantity and cost requirements in a
timely manner could impair our ability to manufacture products or increase our
expected costs, or could cause us to experience order cancellations and loss of
market share. In each case, our business, financial condition and results of
operations may be materially and adversely affected.
We
currently do not have sufficient funds to meet the registered capital
requirement for our Yizheng subsidiary and Shanghai subsidiary.
On
January 15, 2010, we incorporated a wholly-owned subsidiary in Yizheng, Jiangsu
Province of China to supplement our existing production facilities to meet
increased sales demands. The subsidiary was formed with a registered
capital requirement of $33 million, of which $23.4 million is to be funded by
October 16, 2011. As of September 30, 2010, the outstanding
registered capital requirement for the Yizheng subsidiary was $23.4
million. In addition, our wholly-owned subsidiary in Shanghai, China
has a registered capital requirement of $47.5 million and as of September 30,
2010, our paid-in-capital was approximately $32 million, with the remaining
balance of $15.5 million to be originally funded by September 21, 2010. In
August 2010, we received the approval of the Shanghai government to extend the
funding requirement date by nine months to June 2011. In order to fund the
registered capital requirement, we will have to raise funds or otherwise obtain
the approval of local authorities to reduce the amount of registered capital for
each of our subsidiaries. We cannot assure you that we will be able to raise
funds or obtain local authority approval to reduce the amount of registered
capital. See “Note 15 — Commitments and Contingencies”, in the notes to
consolidated financial statements for the fiscal year ended September 30,
2010.
We
may not have sufficient funds to complete construction of a manufacturing
facility in Yizheng as required.
On
February 8, 2010, we acquired land use rights of a parcel of land at the price
of approximately $0.7 million. This piece of land is 68,025 square meters and is
located in Yizheng, Jiangsu Province of China, which will be used to house
our second manufacturing facility. As part of the acquisition of the land use
right, we are required to complete construction of the facility by February 8,
2012. We cannot assure you that we will have sufficient funds to complete
construction of the facility by the required date or obtain local authority
approval to delay such required date. See “Note 15 — Commitments and
Contingencies”, in the notes to consolidated financial statements for the fiscal
year ended September 30, 2010.
We
have not fully funded our research and development commitments with Shanghai
University.
Pursuant
to a joint research and development laboratory agreement with Shanghai
University, dated December 15, 2006 (amended on November 12, 2010) expiring on
December 15, 2016, we committed to fund the establishment of laboratories and
completion of research and development activities at no less than RMB 30 million
($4.5 million) cumulatively within eight years (extended from five years). The
funding requirements are based on specific milestones agreed upon by us. For the
fiscal year ended September 30, 2010, we funded $0.7 million, of which $0.1
million is recorded as “research and development expense” in the consolidated
statements of operations and $0.6 million is related to capital expenditures. As
of September 30, 2010, there are $3.1 million remained to be funded in full by
December 15, 2014. If we fail to make funding payments when requested, we may be
deemed to be in breach of the agreement. If we are unable to correct the breach
within the requested time frame, Shanghai University could seek compensation of
up to an additional 15% of the total committed amount for approximately $0.7
million. As of September 30, 2010, we are not in breach as we have not
received any additional compensation requests from Shanghai University.
We, however, cannot assure you that we will be able to fund our commitments to
Shanghai University when requested to do so. See “Note 15 — Commitments and
Contingencies”, in the notes to consolidated financial statements for the fiscal
year ended September 30, 2010.
The
terms of one of our debt instruments contains certain requirements and
covenants which limit our ability to raise funds. In addition, if we fail to
comply with our covenants, our debt may be accelerated.
Our
Series B-1 Note contains certain provisions which, under certain
circumstances, require us to redeem certain amounts of the indebtedness in
an equity financing. In connection with certain future equity financings
that we may pursue, we would be required to utilize a portion of the proceeds
towards redemption of our Series B-1 Note, which may make it more difficult for
us to raise capital. In addition, our credit facility with Industrial Bank
Co., Ltd. (“IBC”) contains provisions whereby IBC can demand repayment of
outstanding debt if we do not comply with any of the covenants, including but
not limited to, maintaining our creditworthiness, complying with all our
contractual obligations, providing true and accurate records as requested by
IBC, fulfillment of other indebtedness (if any), maintaining our business
license and continuing operations, ensuring our financial condition does not
deteriorate, remaining solvent, and other conditions, as defined in the credit
facility agreement. Since certain of the covenants are broadly constructed and
subjective in nature, IBC may have the right to demand repayment of any
outstanding debt as it may determine in its own discretion.
Our dependence on
a limited number of suppliers for a substantial majority of raw materials,
especially our silicon wafers, could prevent us from delivering our products in
a timely manner to our customers in the required quantities, which could result
in order cancellations, decreased sales
and loss of
market share.
In fiscal
years 2010 and 2009, our five largest suppliers supplied in the aggregate
approximately 87.5% and 76.7%, respectively, of our total silicon wafer material
purchases by value. If we fail to develop or maintain our relationships with
these or our other suppliers, we may be unable to manufacture our products, our
products may only be available at a higher cost or after a long delay, or we
could be prevented from delivering our products to our customers in the required
quantities, at competitive prices and on acceptable terms of delivery. Problems
of this kind could cause us to experience order cancellations, decreased sales
and loss of market share. In general, the failure of a supplier to supply
silicon wafer materials that meet our quality, quantity and cost requirements in
a timely manner due to lack of supplies or other reasons could impair our
ability to manufacture our products or could increase our costs, particularly if
we are unable to obtain these materials and components from alternative sources
in a timely manner or on commercially reasonable terms. Some of our suppliers
have a limited operating history and limited financial resources, and the
contracts we entered into with these suppliers do not clearly provide for
remedies to us in the event any of these suppliers is not able to, or otherwise
does not, deliver, in a timely manner or at all, any materials it is
contractually obligated to deliver. Any disruption in the supply of silicon
wafer materials to us may adversely affect our business, financial condition and
results of operations.
We
face intense competition in solar power product markets. If we fail to adapt to
changing market conditions and to compete successfully with existing or new
competitors, our business prospects and results of operations would be
materially and adversely affected.
The
markets for solar cells and solar modules are intensely
competitive. As we build up our solar cell and solar module
production capacity and increase the output of our products, we compete with
manufacturers of solar cells and solar modules both outside as well as inside
China. Outside China, our competitors include BP Solar, Kyocera
Corporation, Mitsubishi Electric Corporation, Motech Industries Inc., Sharp
Corporation, Q-Cells AG, Sanyo Electric Co., Ltd. and Sunpower Corporation. In
China, our primary competitors are Suntech Power Holding’s Co., Ltd., Trina
Solar Ltd., Baoding Tianwei Yingli New Energy Resources Co., Ltd., Nanjing
PV-Tech Co., Ltd, Canadian Solar Inc., JA Solar Holdings Co. Ltd. and Solarfun
Power Holdings Co., Ltd. We compete primarily on the basis of the
power efficiency, quality, performance and appearance of our products, price,
strength of supply chain and distribution network, after-sales service and brand
image. Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial and
marketing resources than we do. They may also have existing
relationships with suppliers of silicon wafers, which may give them an advantage
in the event of a silicon shortage.
Moreover,
we expect an increase in the number of competitors entering our markets over the
next few years. The key barriers to entry into our industry at present consist
of availability of financing and availability of experienced technicians and
executives familiar with the industry. If these barriers disappear or become
more easily surmountable, new competitors may successfully enter into our
industry, resulting in loss of our market share and increased price competition,
which could adversely affect our operating and net margins.
We also
compete with alternative solar technologies. Some companies have spent
significant resources in the research and development of proprietary solar
technologies that may eventually produce photovoltaic products at costs similar
to, or lower than, those of monocrystalline or polycrystalline wafers without
compromising product quality. For example, some companies are developing or
currently producing photovoltaic products based on thin film photovoltaic
materials, which require significantly less polysilicon to produce than
monocrystalline or polycrystalline solar power products. These alternative
photovoltaic products may cost less than those based on monocrystalline or
polycrystalline technologies while achieving the same level of conversion
efficiency, and therefore, may decrease the demand for monocrystalline and
polycrystalline wafers, which may adversely affect our business prospects and
results of operations.
In
addition, the solar power market in general also competes with other sources of
renewable energy and conventional power generation. If prices for conventional
and other renewable energy sources decline, or if these sources enjoy greater
policy support than solar power, the solar power market could suffer and our
business and results of operations may be adversely affected.
If
solar power technology is not suitable for widespread adoption, or sufficient
demand for solar power products do not develop or takes longer to develop than
we anticipate, sufficient sales may not develop, which may have an adverse
effect on our business and results of operations.
The solar
power market is at a relatively early stage of development and the extent to
which solar power products will be widely adopted is uncertain. Market data in
the solar power industry is not as readily available as those in other more
established industries where trends can be assessed more reliably from data
gathered over a longer period of time. If solar power technology proves
unsuitable for widespread adoption or if the demand for solar power products
fails to develop sufficiently, we may not be able to grow our business or
generate sufficient sales to become profitable or sustain profitability. In
addition, demand for solar power products in targeted markets, including China,
may not develop or may develop to a lesser extent than we anticipate. Many
factors may affect the viability of widespread adoption of solar power
technology and the demand for solar power products, including:
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cost-effectiveness
of solar power products compared to conventional and other non-solar
energy sources and products;
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performance
and reliability of solar power products compared to conventional and other
non-solar energy sources and
products;
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availability
of government subsidies and incentives to support the development of the
solar power industry;
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success
of other alternative energy generation technologies, such as wind power,
hydroelectric power and biofuels;
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fluctuations
in economic and market conditions that affect the viability of
conventional and non- solar alternative energy sources, such as increases
or decreases in the prices of oil and other fossil
fuels;
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capital
expenditures by end users of solar power products, which tend to decrease
when economy slows down; and
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deregulation
of the electric power industry and broader energy
industry.
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If solar
power technology proves unsuitable for wide commercial adoption and application
or if demand for solar power products fails to develop sufficiently, we may not
be able to grow our business or generate sufficient sales to sustain our
profitability.
Technological
changes in the solar power industry could render our products uncompetitive or
obsolete, which could reduce our market share and cause our
sales
and net income to
decline.
The solar
power industry is characterized by evolving technologies and standards. These
technological evolutions and developments place increasing demands on the
improvement of our products, such as solar cells with higher conversion
efficiency and larger and thinner silicon wafers and solar cells. Other
companies may develop production technologies enabling them to produce silicon
wafers that could yield higher conversion efficiencies at a lower cost than our
products. Some of our competitors are developing alternative and competing solar
technologies that may require significantly less silicon than solar cells and
modules, or no silicon at all. Technologies developed or adopted by others may
prove more advantageous than ours for commercialization of solar power products
and may render our products obsolete. As a result, we may need to invest
significant resources in research and development to maintain our market
position, keep pace with technological advances in the solar power industry and
effectively compete in the future. Our failure to further refine and enhance our
products or to keep pace with evolving technologies and industry standards could
cause our products to become uncompetitive or obsolete, which could in turn
reduce our market share and cause our sales and net loss to
increase.
We
face risks associated with the marketing, distribution and sale of PV products
internationally, and if we are unable to effectively manage these risks, they
could impair our ability to expand our business abroad.
We market
PV products outside of China. The marketing, international distribution and sale
of PV products exposes us to a number of risks, including:
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fluctuations
in currency exchange rates;
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difficulty
in engaging and retaining distributors who are knowledgeable about and,
can function effectively in, overseas
markets;
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increased
costs associated with maintaining marketing efforts in various
countries;
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difficulty
and cost relating to compliance with the different commercial and legal
requirements of the overseas markets in which we offer our anticipated
products;
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inability
to obtain, maintain or enforce intellectual property rights;
and
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trade
barriers such as export requirements, tariffs, taxes and other
restrictions and expenses, which could increase the prices of our
anticipated products and make us less competitive in some
countries.
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A
significant portion of our sales and expenses are now denominated in
foreign currencies. It has not been our recent practice to engage in the hedging
of foreign currency transactions to mitigate foreign currency risk. For example,
if the Euro depreciates against the RMB Yuan, the currency use to purchase most
of our raw materials, then our profits may be negatively impacted because a
large amount of our sales are in Euros and US dollars. We are attempting to
limit the impact of a declining Euro by quoting our prices in U.S. dollars, but
this exposes us to the fluctuations between the RMB Yuan and the US
dollar. Therefore, fluctuations in the value of foreign currencies
have and can continue to have a negative impact on the profitability of our
global operations, which would seriously harm our business, results of
operations, and financial condition.
We
are subject to risks associated with currency fluctuations, and changes in the
exchange rates of applicable currencies could impact our results of
operations.
Historically,
most of our revenues are primarily denominated in Euros and US dollars and
greater than the majority of our operating expenses and costs of sales are
denominated in the RMB Yuan, and we expect that this will remain true in the
future. Because we report our results of operations in U.S. dollars, changes in
the exchange rate between the RMB Yuan and the U.S. dollar and the Euro and the
U.S. dollar could materially impact our reported results of operations and
distort period to period comparisons. In particular, because of the difference
in the amount of our consolidated revenues and expenses that are in U.S. dollars
relative to RMB Yuan, a depreciation in the U.S. dollar relative to the RMB Yuan
could result in a material increase in reported costs relative to revenues, and
therefore could cause our profit margins and operating income to appear to
decline materially, particularly relative to prior periods. The converse is true
if the U.S. dollar were to appreciate relative to the RMB Yuan. Fluctuations in
foreign currency exchange rates also impact the reporting of our receivables and
payables in non-U.S. currencies. As a result of foreign currency fluctuations,
it could be more difficult to detect underlying trends in our business and
results of operations. In addition, to the extent that fluctuations in currency
exchange rates cause our results of operations to differ from our expectations
or the expectations of our investors, the trading price of our stock following
the completion of this offering could be adversely affected.
Existing
regulations and policies and changes to these regulations and policies may
present technical, regulatory and economic barriers to the purchase and use of
solar power products, which may significantly reduce demand for our
products.
The
market for electricity generation products is heavily influenced by government
regulations and policies concerning the electric utility industry, as well as
policies adopted by electric utilities companies. These regulations and policies
often relate to electricity pricing and technical interconnection of
customer-owned electricity generation. In a number of countries, these
regulations and policies are being modified and may continue to be modified.
Customer purchases of, or further investment in the research and development of,
alternative energy sources, including solar power technology, could be deterred
by these regulations and policies, which could result in a significant reduction
in the demand for our products. For example, without a regulatory mandated
exception for solar power systems, utility customers are often charged
interconnection or standby fees for putting distributed power generation on the
electric utility grid. These fees could increase the cost of solar power and
make it less desirable, thereby decreasing the demand for our products, harming
our business, prospects, results of operations and financial
condition.
In
addition, we anticipate that solar power products and their installation will be
subject to oversight and regulation in accordance with national and local
regulations relating to building codes, safety, environmental protection,
utility interconnection, and metering and related matters. Any new government
regulations or utility policies pertaining to solar power products may result in
significant additional expenses to the users of solar power products and, as a
result, could eventually cause a significant reduction in demand for our
products.
We
require a significant amount of cash to fund our operations and business
expansion; if we cannot obtain additional capital on terms satisfactory to us
when we need it, our growth prospects and future profitability may be materially
and adversely affected.
We
require a significant amount of cash to fund our operations, including payments
to suppliers of our raw materials. We will also need to raise funds for the
expansion of our production capacity and other investing activities, as well as
our research and development activities in order to remain competitive. Future
acquisitions, expansions, market changes or other developments may cause us to
require additional funds. Our ability to obtain external financing is subject to
a number of uncertainties, including:
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our
future financial condition, results of operations and cash
flows;
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the
state of global credit markets;
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general
market conditions for financing activities by companies in our industry;
and
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economic,
political and other conditions in China and
elsewhere.
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If we are
unable to obtain funding in a timely manner or on commercially acceptable terms,
or at all, our growth prospects and future profitability may be materially and
adversely affected.
Our
research and development initiatives may fail to enhance manufacturing
efficiency or quality of our products.
We are
making efforts to improve our manufacturing processes and improve the conversion
efficiency and quality of our products. We plan to focus our research and
development efforts on improving each step of our production process, making us
an industry leader in technological innovation. In addition, we undertake
research and development to enhance the quality of our products. We cannot
assure you that such efforts will improve the efficiency of manufacturing
processes or yield products with expected quality. In addition, the failure to
realize the intended benefits from our research and development initiatives
could limit our ability to keep pace with rapid technological changes, which in
turn would hurt our business and prospects.
Failure
to achieve satisfactory production volumes of our products could result in a
decline in sales.
The
production of solar cells and solar modules involves complex processes.
Deviations in the manufacturing process can cause a substantial decrease in
output and, in some cases, disrupt production significantly or result in no
output. We have from time to time experienced lower-than-anticipated
manufacturing output during the ramp-up of production lines. This often occurs
during the introduction of new products, the installation of new equipment or
the implementation of new process technologies. As we bring additional lines or
facilities into production, we may operate at less than intended capacity during
the ramp-up period. This would result in higher marginal production costs and
lower than expected output, which could have a material adverse effect on our
results of operations.
Because
a majority of our products are sold with warranties extending for 25 years,
problems with product quality or product performance may cause us to incur
warranty expenses. If these expenses are significant, they could have a material
adverse affect on our business and results of operations.
Our
standard solar modules are typically sold with a two-year warranty for defects
in materials and workmanship and a ten-year and twenty-five-year warranty
against declines of more than 10.0% and 20.0%, respectively, of the initial
minimum power generation capacity at the time of delivery. Due to the
long warranty period, we bear the risk of extensive warranty claims long after
we have shipped the product and recognized the sale. Because our products are
new to the market, we are not able to evaluate their performance for the entire
warranty period before we offer them for sale. If our products fail to perform
as expected and we experience a significant increase in warranty claims, we may
incur significant repair and replacement costs associated with such claims. In
addition, product defects could cause significant damage to our market
reputation and reduce our product sales and market share, and our failure to
maintain the consistency and quality throughout our production process could
result in substandard quality or performance of our products. If we deliver our
products with defects, or if there is a perception that our products are of
substandard quality, we may incur substantially increased costs associated with
returns or replacements of our products, our credibility and market reputation
could be harmed and our sales and market share may be adversely
affected.
Our
operations are subject to natural disasters, adverse weather conditions,
operating hazards and labor disputes.
We may
experience earthquakes, floods, snowstorms, typhoon, power outages, labor
disputes or similar events beyond our control that would affect our operations.
Our manufacturing processes involve the use of hazardous equipment, and we also
use, store and generate volatile and otherwise dangerous chemicals and wastes
during our manufacturing processes, which are potentially destructive and
dangerous if not properly handled or in the event of uncontrollable or
catastrophic circumstances, including operating hazards, fires and explosions,
natural disasters, adverse weather conditions and major equipment failures, for
which we cannot obtain insurance at a reasonable cost or at all.
Our
CEO and a significant stockholder collectively hold a controlling interest in
us, they have significant influence over our management and their interests may
not be aligned with our interests or the interests of our other
stockholders.
As of
September 30, 2010, our director, president and chief executive officer, Leo Shi
Young, beneficially owns 15,284,286 shares of our common stock, or approximately
9%, of our common stock. As of September 30, 2010, The Quercus Trust, which
nominated David Anthony to our Board of Directors, beneficially owns 125,734,189
shares of our common stock, or approximately 59%, of our common stock.
Therefore, our CEO and the Quercus Trust have substantial control over our
business, including decisions regarding mergers, consolidations and the sale of
all or substantially all of our assets, election of directors, dividend policy
and other significant corporate actions. They may take actions that are not in
the best interest of our company or our securities holders. For example, this
concentration of ownership may discourage, delay or prevent a change in control
of our company, which could deprive our stockholders of an opportunity to
receive a premium for their shares as part of a sale of our company and might
reduce the price of our common stock. On the other hand, if our chief executive
officer and the Quercus Trust are in favor of any of these actions, these
actions may be taken even if they are opposed by our other stockholders,
including you and those who invest in our common stock.
We
have limited insurance coverage and may incur losses resulting from product
liability claims, business interruption or natural disasters.
We are
exposed to risks associated with product liability claims in the event that the
use of our products results in property damage or personal injury. Since our
products are ultimately incorporated into electricity generating systems, it is
possible that users could be injured or killed by devices that use our products,
whether as a result of product malfunctions, defects, improper installations or
other causes. Due to our limited operating history, we are unable to predict
whether product liability claims will be brought against us in the future or to
predict the impact of any resulting adverse publicity on our business. The
successful assertion of product liability claims against us could result in
potentially significant monetary damages and require us to make significant
payments. We carry limited product liability insurance and may not have adequate
resources to satisfy a judgment in the event of a successful claim against us.
In addition, we do not carry any business interruption insurance. As the
insurance industry in China is still in its early stage of development, even if
we decide to take out business interruption coverage, such insurance available
in China offers limited coverage compared with that offered in many other
countries. Any business interruption or natural disaster could result in
substantial losses and diversion of our resources and materially and adversely
affect our business, financial condition and results of
operations.
Our
lack of sufficient patent protection in and outside of China may undermine our
competitive position and subject us to intellectual property disputes with third
parties, both of which may have a material adverse effect on our business,
results of operations and financial condition.
We have
developed various production process related know-how and technologies in the
production of our products. Such know-how and technologies play a critical role
in our quality assurance and cost reduction. In addition, we have implemented a
number of research and development programs with a view to developing techniques
and processes that will improve production efficiency and product quality. Our
intellectual property and proprietary rights arising out of these research and
development programs will be crucial in maintaining our competitive edge in the
solar power industry. However, we have not sought to protect our
intellectual property and proprietary knowledge by applying for patents for
them. We use contractual arrangements with employees and trade secret
protections to protect our intellectual property and proprietary rights.
Nevertheless, contractual arrangements afford only limited protection and the
actions we may take to protect our intellectual property and proprietary rights
may not be adequate.
In
addition, others may obtain knowledge of our know-how and technologies through
independent development. Our failure to protect our production process, related
know-how and technologies and/or our intellectual property and proprietary
rights may undermine our competitive position. Third parties may infringe or
misappropriate our proprietary technologies or other intellectual property and
proprietary rights. Policing unauthorized use of proprietary technology can be
difficult and expensive. Litigation, which can be costly and divert management
attention and other resources away from our business, may be necessary to
enforce our intellectual property rights, protect our trade secrets or determine
the validity and scope of our proprietary rights. We cannot assure you that the
outcome of such potential litigation will be in our favor. An adverse
determination in any such litigation will impair our intellectual property and
proprietary rights and may harm our business, prospects and
reputation.
We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely to us, could cause us to pay significant damage
awards.
Our
success also depends largely on our ability to use and develop our technology
and know-how without infringing the intellectual property rights of third
parties. The validity and scope of claims relating to photovoltaic technology
patents involve complex scientific, legal and factual questions and analysis
and, therefore, may be highly uncertain. We may be subject to litigation
involving claims of patent infringement or violation of intellectual property
rights of third parties. The defense and prosecution of intellectual property
suits and related legal and administrative proceedings can be both costly and
time consuming and may significantly divert the efforts and resources of our
technical and management personnel. An adverse determination in any such
litigation or proceedings to which we may become a party could subject us to
significant liability to third parties, require us to seek licenses from third
parties, to pay ongoing royalties, or to redesign our anticipated products or
subject us to injunctions prohibiting the manufacture and sale of our
anticipated products or the use of our technologies. Protracted litigation could
also result in our customers or potential customers deferring or limiting their
purchase or use of our anticipated products until resolution of such
litigation.
Our
business depends substantially on the continuing efforts of our president and
chief executive officer and key technical personnel, as well as our ability to
maintain a skilled labor force. Our business may be materially and adversely
affected if we lose their services.
Our
future success depends to a significant extent on Leo Shi Young, our president
and chief executive officer. We do not maintain key man life insurance on our
executive officers. If Mr. Young becomes unable or unwilling to continue in
his present position, we may not be able to replace him readily. In that
case our business could be severely disrupted, and we may incur substantial
expenses to recruit and retain new officers. Furthermore, recruiting
and retaining capable personnel, particularly experienced engineers and
technicians familiar with our products and manufacturing processes, is vital to
maintain the quality of our products and improve our production methods. There
is substantial competition for qualified technical personnel, and we cannot
assure you that we will be able to attract or retain qualified technical
personnel. If we are unable to attract and retain qualified employees, key
technical personnel and our executive officers, our business may be materially
and adversely affected.
Compliance
with environmental, safe production and construction regulations can be costly,
while non-compliance with such regulations may result in adverse publicity and
potentially significant monetary damages, fines and suspension of our business
operations.
We use,
store and generate volatile and otherwise dangerous chemicals and wastes during
our manufacturing processes, and are subject to a variety of government
regulations related to the use, storage and disposal of such hazardous chemicals
and waste. We are required to comply with all People’s Republic of China
(“PRC”), national and local environmental protection regulations. Under such
regulations, we are prohibited from commencing commercial operations of our
manufacturing facilities until we have obtained the relevant approvals from PRC
environmental protection authorities. In addition, the PRC government may issue
more stringent environmental protection, safe production and construction
regulations in the future and the costs of compliance with new regulations could
be substantial. If we fail to comply with the future environmental, safe
production and construction laws and regulations, we may be required to pay
fines, suspend construction or production, or cease operations. Moreover, any
failure by us to control the use of, or to adequately restrict the discharge of,
dangerous substances could subject us to potentially significant monetary
damages and fines or the suspension of our business operations.
We
are subject to corporate governance and internal control reporting requirements,
and our costs related to compliance with, or our failure to comply with existing
and future requirements, could adversely affect our business.
We face
corporate governance requirements under the Sarbanes-Oxley Act of 2002, as well
as rules and regulations subsequently adopted by the SEC and the Public Company
Accounting Oversight Board. These laws, rules and regulations continue to evolve
and may become increasingly stringent in the future. In particular, under SEC
rules, we are required to include management’s report on internal controls as
part of our annual reports pursuant to Section 404 of the Sarbanes-Oxley
Act. The financial cost of compliance with these laws, rules and regulations is
expected to be substantial. We cannot assure you that we will be able to fully
comply with these laws, rules and regulations that address corporate governance,
internal control reporting and similar matters. Failure to comply with these
laws, rules and regulations could materially adversely affect our reputation,
financial condition and the value of our securities.
Our
management discovered material weaknesses in our internal controls over
financial reporting that, if not properly remediated, could result in material
misstatements in our financial statements, which could cause inventors to lose
confidence in our reported financial information and have a negative effect on
the trading price of our stock.
Our
management identified material weaknesses. The conclusion that our
disclosure controls and procedures were not effective was due to the lack of
finance and accounting personnel with an appropriate level of knowledge,
experience and training in the application of U.S. GAAP. Our fiscal year 2010
financial reporting close process was ineffective in recording certain
transactions according to the applicable accounting pronouncement and preparing
certain critical financial statement disclosures. Our plan to remediate the
material weakness primarily consisted of hiring finance and accounting personnel
with an appropriate level of knowledge, experience and training in the
application of U.S. GAAP and training, educating and equipping our existing
personnel on U.S. GAAP accounting matters. We have improved the training,
education and equipment of our accounting personnel in U.S. GAAP, hired a new
accounting supervisor and engaged a consulting firm to provide us with
professional advice on how to improve our disclosure controls and
procedures. We are, however, still looking to hire additional finance and
accounting personnel. Accordingly, management has determined that this
control deficiency continues to constitute a material weakness. Management
anticipates that such disclosure controls and procedures will not be effective
until the material weaknesses are remediated.
We are in
the process of implementing the following measures to remediate these material
weaknesses: (a) hiring additional financial reporting and accounting personnel
with relevant account experience, skills, and knowledge in the preparation of
financial statements under the requirements of U.S. GAAP; and (b) continuing to
work with internal and external consultants to improve the process for
collecting and reviewing information required for the preparation of financial
statements. Material weaknesses in internal control over financial reporting may
materially impact our reported financial results and the market price of our
stock could significantly decline. Additionally, adverse publicity related to a
material failure of internal control over financial reporting could have a
negative impact on our reputation and business.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our anticipated products and materially and adversely
affect our competitive position.
All of
our business operations are conducted in China. Accordingly, our business,
financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The
Chinese economy differs from the economies of most developed countries in many
respects, including:
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the
amount of government involvement;
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the
level of development;
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the
control of foreign exchange; and
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·
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the
allocation of resources.
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While the
Chinese economy has grown significantly in the past 20 years, the growth
has been uneven, both geographically and among various sectors of the economy.
The PRC government has implemented various measures to encourage economic growth
and guide the allocation of resources, some of which benefit us and some of
which may have a negative effect on us. For example, our financial condition and
results of operations may be adversely affected by government control over
capital investments or changes in tax regulations that are applicable to
us.
The
Chinese economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years the PRC government has reduced
state ownership of productive assets, a substantial portion of the productive
assets in China is still owned by the PRC government. The continued control of
these assets and other aspects of the national economy by the PRC government
could materially and adversely affect our business. The PRC government also
exercises significant control over Chinese economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies. Efforts by the PRC government to slow the
pace of growth of the Chinese economy could result in decreased capital
expenditure by solar energy users, which in turn could reduce demand for our
anticipated products.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
renewable energy investments and expenditures in China, which in turn could lead
to a reduction in the demand for our anticipated products and consequently have
a material adverse effect on our businesses.
Uncertainties
with respect to the Chinese legal system could have a material adverse effect on
us.
We
conduct substantially all of our business through a subsidiary in China. This
subsidiary is generally subject to laws and regulations applicable to foreign
investment in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential value. Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
since these laws and regulations are relatively new and the PRC legal system
continues to rapidly evolve, the interpretations of many laws, regulations and
rules are not always uniform and enforcement of these laws, regulations and
rules involve uncertainties, which may limit legal protections available to us.
In addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management.
We
conduct a substantial portion of our operations in China and the majority of our
assets are located in China. In addition, all of our executive officers reside
within China. As a result, it may not be possible to effect service of process
within the United States or in China against us or upon our executive officers,
including with respect to matters arising under United States federal securities
laws or applicable state securities laws. Moreover, there is uncertainty that
the courts of China would enforce judgments of United States courts against us
or our directors and officers based on the civil liability provisions of the
securities laws of the United States or any state, or entertain an original
action brought in China based upon the securities laws of the United States or
any state.
Restrictions on
currency exchange may limit our ability to receive and use our
sales
effectively.
Foreign
exchange transactions by our Shanghai subsidiary under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of PRC governmental authorities, including the State Administration of
Foreign Exchange (SAFE). We will need to fund our Shanghai subsidiary by
means of capital contributions. We cannot assure you that we will be
able to obtain government approvals on a timely basis, if at all, with respect
to future capital contributions by the U.S. Company to our Shanghai subsidiary.
If we fail to receive such approvals, our ability to use the proceeds we have
received from our fund raising to capitalize our PRC operations may be
negatively affected, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.
RISKS
RELATED TO AN INVESTMENT IN OUR SECURITIES
Our
stock price is volatile. There is no guarantee that our shares will appreciate
in value or that our shareholders will be able to sell their shares at a price
that is greater than the price they paid for them.
The
trading price of our common stock has been and continues to be subject to
fluctuations. The stock price may fluctuate in response to a number of events
and factors, such as quarterly variations in operating results, the operating
and stock performance of other companies that investors may deem comparable and
news reports relating to trends in the marketplace, among other factors.
Significant volatility in the market price of our common stock may arise due to
factors such as:
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our
developing business;
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a
continued negative cash flow;
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relatively
low price per share;
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relatively
low public float;
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variations
in quarterly operating results;
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general
trends in the industries in which we do
business;
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the
number of holders of our common stock;
and
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the
interest of securities dealers in maintaining a market for our common
stock.
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We cannot
guarantee that the shares our shareholders purchase will appreciate in value or
that our shareholders will be able to sell the shares at a price equal to or
greater than what they paid for them.
The
OTC Bulletin Board is a quotation system, not an issuer listing service, market
or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is
not as efficient as buying and selling stock through an exchange. As a result,
it may be difficult for our shareholders to sell their common stock or they may
not be able to sell their common stock for an optimum trading
price.
The OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices and volume limitations in over-the-counter securities. Because
trades and quotations on the OTC Bulletin Board involve a manual process, the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmations may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.
When
fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Lower trading volumes in a security may
result in a lower likelihood of an individual’s orders being executed, and
current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.
Orders
for OTC Bulletin Board securities may not be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices. The dealer’s spread (the difference between the bid and
ask prices) may be large and may result in substantial losses to the seller of
securities on the OTC Bulletin Board if the common stock or other security must
be sold immediately. Further, purchasers of securities may incur an immediate
“paper” loss due to the price spread. Moreover, dealers trading on the OTC
Bulletin Board may not have a bid price for securities bought and sold through
the OTC Bulletin Board. Due to the foregoing, demand for securities that are
traded through the OTC Bulletin Board may be decreased or
eliminated.
We
are subject to the penny stock rules and these rules may adversely affect
trading in our common stock.
Our
common stock is a “low-priced” security under rules promulgated under the
Securities Exchange Act of 1934. In accordance with these rules, broker-dealers
participating in transactions in low-priced securities must first deliver a risk
disclosure document which describes the risks associated with such stocks, the
broker-dealer duties in selling the stock, the customer’s rights and remedies
and certain market and other information. Furthermore, the broker-dealer must
make a suitability determination approving the customer for low-priced stock
transactions based on the customer’s financial situation, investment experience
and objectives. Broker-dealers must also disclose these restrictions in writing
to the customer, obtain specific written consent from the customer, and provide
monthly account statements to the customer. The effect of these restrictions
probably decreases the willingness of broker-dealers to make a market in our
common stock, decreases liquidity of our common stock and increases transaction
costs for sales and purchases of our common stock as compared to other
securities.
There
may be a limited market for our securities and we may fail to qualify for
another listing.
In the
event that our common stock fails to qualify for continued inclusion on OTC
Bulletin Board, our common stock could become quoted in what are commonly
referred to as the “pink sheets.” Under such circumstances, it may be more
difficult to dispose of, or to obtain accurate quotations, for our common stock,
and our common stock would become substantially less attractive to certain
investors, such as financial institutions and hedge funds.
We
have raised substantial amounts of capital in private placements and if we
inadvertently failed to comply with the applicable securities laws, ensuing
rescission rights or lawsuits would severely damage our financial
position.
Some
securities offered in our private placements were not registered under the
Securities Act of 1933, as amended, or any state “blue sky” law in reliance upon
exemptions from such registration requirements. Such exemptions are highly
technical in nature and if we inadvertently failed to comply with the
requirements or any of such exemptions, investors would have the right to
rescind their purchase of our securities or sue for damages. If one or more
investors were to successfully seek such rescission or prevail in any such suit,
we would face severe financial demands that could materially and adversely
affect our financial position. Financings that may be available to us under
current market conditions frequently involve sales at prices below the prices at
which our common stock currently is reported on the OTC Bulletin Board, as well
as the issuance of warrants or convertible securities at a discount to market
price.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM
2. PROPERTIES
All of
our properties are leased and we do not own any real property.
We lease
a 45,601 square foot manufacturing and research facility in Shanghai’s Jinqiao
Modern Science and Technology Park. The lease expires on February 19, 2014.
The termination clause in the agreement requires a notice of three months.
Monthly costs are $22,000. We added 21,506 square feet to our existing facility
with monthly rent of $11,000. The lease expires in
August 2012.
We also
have an operating lease for 3,365 square foot of office space in
Shanghai. The monthly rent for this space is $11,000. The lease
expires on December 31, 2011 and can be renewed with three-month advanced
notice.
On
February 8, 2010, we acquired land use rights for a parcel of land at the price
of approximately $0.7 million. This piece of land is 68,025 square meters and is
located in Yizheng, Jiangsu Province of China, and it will be used to house our
second manufacturing facility. As part of the acquisition of the land use right,
we are required to complete construction of the facility by February 8,
2012. All land in the PRC is owned by the PRC government and cannot be sold
to any individual or entity. The government in the PRC, according to relevant
PRC law, may sell the right to use the land for a specified period of time.
Thus, the land we purchased in the PRC is considered to be leasehold
estate.
Finally,
we lease 678 square feet of office space on a month-to-month basis in Mountain
View, in Northern California’s Silicon Valley, to handle our United States
operations.
We
consider these facilities adequate to meet our current needs.
ITEM
3. LEGAL PROCEEDINGS
We are
involved in various claims and actions arising in the ordinary course of
business. In the opinion of management, based on consultation with
legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on us. We believe appropriate accruals have
been made for the disposition of these matters. We establish an
accrual for a liability when it is both probable that the liability has been
incurred and the amount of the loss can be reasonably
estimated. These accruals are reviewed quarterly and adjusted to
reflect the impact of negotiations, settlements and payments, rulings, advice of
legal counsel, and other information and events pertaining to a particular
case. Legal expenses related to defense, negotiations, settlements,
rulings, and advice of outside legal counsel are expensed as
incurred.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on the Over-The-Counter Bulletin Board (“OTCBB”)
operated by the Financial Industry Regulatory Authority (FINRA) under the symbol
“SOEN”. The following table shows, for the periods indicated, the high and low
closing prices of common stock.
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Year Ended September 30,
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Year Ended September 30,
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2010
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2009
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High
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Low
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High
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Low
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First Quarter
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$
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0.30
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$
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0.24
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$
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0.40
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$
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0.17
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Second
Quarter
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$
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0.32
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$
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0.19
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$
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0.26
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$
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0.12
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Third
Quarter
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$
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0.21
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$
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0.12
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$
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0.45
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$
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0.19
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Fourth
Quarter
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$
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0.17
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$
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0.11
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$
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0.44
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$
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0.28
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As of
November 30, 2010, there were 46 stockholders of record of the common stock
(which does not include the number of persons or entities holding stock in
nominee or street name through various brokerage firms).
Dividends
We have
neither declared nor paid any cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. Our current policy
is to retain any earnings in order to finance the expansion of our operations.
Our Board of Directors will determine future declaration and payment of
dividends, if any, in light of the then-current conditions they deem relevant
and in accordance with applicable corporate law.
Authorized
Shares
On May 5,
2008, the Company’s stockholders approved an increase of the Company’s
authorized capital stock from 200 million common shares with a par value of
$0.001 to 400 million common shares with a par value of $0.001. The increase in
the Company’s authorized capital was affected in conjunction with the Company’s
reincorporation into the State of Delaware.
Amended
and Restated 2007 Equity Incentive Plan
On
September 24, 2007, our Board of Directors approved the adoption of the
2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the
issuance of a maximum of 10 million shares of common stock in connection
with awards under the 2007 Plan. Such awards may include stock options,
restricted stock purchase rights, restricted stock bonuses and restricted stock
unit awards. The 2007 Plan may be administered by the Company’s Board of
Directors or a committee duly appointed by the Board of Directors and has a term
of 10 years. Participation in the 2007 Plan is limited to employees,
directors and consultants of the Company and its subsidiaries and other
affiliates. Options granted under the 2007 Plan must have an exercise price per
share not less than the fair market value of the Company’s common stock on the
date of grant. Options granted under the 2007 Plan may not have a term exceeding
10 years. Awards will vest upon conditions established by the Board of
Directors or it’s duly appointed Committee. Subject to the requirements and
limitations of section 409A of the Internal Revenue Code of 1986, as amended, in
the event of a Change in Control (as defined in the 2007 Plan), the Board of
Directors may provide for the acceleration of the exercisability or vesting
and/settlement of any award, the Board of Directors may provide for a cash-out
of awards or the Acquirer (as defined in the 2007 Plan) may either assume or
continue the Company’s rights and obligations under any awards.
On
February 5, 2008, the Board of Directors adopted the Amended and Restated 2007
Equity Incentive Plan (the “Amended 2007 Plan”), which increases the number of
shares authorized for issuance from 10 million to 15 million shares of common
stock and was to be effective upon approval of the Company’s stockholders and
upon the Company’s reincorporation into the State of Delaware.
On May 5,
2008, at the Company’s Annual Meeting of Stockholders, the Company’s
stockholders approved the Amended 2007 Plan. On August 13, 2008, the Company
reincorporated into the State of Delaware.
On May 9,
2008, the Compensation Committee of the Board of Directors of the Company
authorized the repricing of all outstanding options issued to current employees,
directors, officers and consultants prior to February 5, 2008 under the 2007
Plan to $0.62, determined in accordance with the 2007 Plan as the closing price
for shares of Common Stock on the Over-the-Counter Bulletin Board on the date of
the repricing.
As of
September 30, 2010, the Board of Directors has granted options to purchase
2,140,000 shares of our common stock to our employees, director and consultants
pursuant to the Amended 2007 Plan.
2008
Restricted Stock Plan
On August
19, 2008, Mr. Leo Young, our Chief Executive Officer, entered into a Stock
Option Cancellation and Share Contribution Agreement with Jean Blanchard, a
former officer, to provide for (i) the cancellation of a stock option agreement
by and between Mr. Young and Ms. Blanchard dated on or about March 1, 2006 and
(ii) the contribution to the Company by Ms. Blanchard of the remaining
25,250,000 shares of common stock underlying the cancelled Option
Agreement.
On the
same day, an Independent Committee of the Company’s Board adopted the 2008
Restricted Stock Plan (the “2008 Plan”) providing for the issuance of 25,250,000
shares of restricted common stock to be granted to the Company’s employees
pursuant to forms of restricted stock agreements.
The 2008
Plan provides for the issuance of a maximum of 25,250,000 shares of restricted
stock in connection with awards under the 2008 Plan. The 2008 Plan is
administered by the Company’s Compensation Committee, a subcommittee of our
Board of Directors, and has a term of 10 years. Participation is limited to
employees, directors and consultants of the Company and its subsidiaries and
other affiliates. During any period in which shares acquired pursuant
to the 2008 Plan remain subject to vesting conditions, the participant shall
have all of the rights of a stockholder of the Company holding shares of stock,
including the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares. If a participant
terminates his or her service for any reason (other than death or disability),
or the participant’s service is terminated by the Company for cause, then the
participant shall forfeit to the Company any shares acquired by the participant
which remain subject to vesting Conditions as of the date of the participant’s
termination of service. If a participant’s service is terminated by the Company
without cause, or due to the death or disability of the participant, then the
vesting of any restricted stock award shall be accelerated in full as of the
effective date of the participant’s termination of service.
Equity
Compensation Plan Information
Plan Category
|
|
Number of securities to
be
issued upon exercise
of
outstanding options,
warrants and rights (a)
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
|
Number of securities
remaining available for
future
issuance under
equity
compensation plans
(excluding securities
reflected
in column a) (c)
|
|
Equity
compensation plans approved by security holders
|
|
|
2,140,000
|
(1)
|
|
$
|
0.49
|
|
|
|
12,860,000
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
(1)
Represents options to purchase common stock issued pursuant to the terms of 2007
Plan, as amended and restated.
a — Our
common stock is currently quoted by the Over-The-Counter Bulletin Board under
the symbol “SOEN”.
b — We
have approximately 46 record holders on November 30, 2010.
c — No
cash dividend has been declared.
Rules Governing
Low-Price Stocks that May Affect Our Stockholders’ Ability to Resell Shares of
Our Common Stock
Our stock
trades under the symbol “SOEN” on FINRA’s OTCBB.
Quotations
on the OTCBB reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not reflect actual transactions. Our common stock may be
subject to certain rules adopted by the SEC that regulate broker-dealer
practices in connection with transactions in “penny stocks”. Penny stocks
generally are securities with a price of less than $5.00, other than securities
registered on certain national exchanges or quoted on the NASDAQ system,
provided that the exchange or system provides current price and volume
information with respect to transaction in such securities. The additional sales
practice and disclosure requirements imposed upon broker-dealers may discourage
broker-dealers from effecting transactions in our shares which could severely
limit the market liquidity of the shares and impede the sale of our shares in
the secondary market.
The penny
stock rules require broker-dealers, prior to a transaction in a penny stock not
otherwise exempt from the rules, to make a special suitability determination for
the purchaser to receive the purchaser’s written consent to the transaction
prior to sale, to deliver standardized risk disclosure documents prepared by the
SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock. In addition,
the penny stock regulations require the broker-dealer to deliver, prior to any
transaction involving a penny stock, a disclosure schedule prepared by the SEC
relating to the penny stock market, unless the broker-dealer or the transaction
is otherwise exempt. A broker-dealer is also required to disclose commissions
payable to the broker-dealer and the registered representative and current
quotations for the securities. Finally, a broker-dealer is required to send
monthly statements disclosing recent price information with respect to the penny
stock held in a customer’s account and information with respect to the limited
market in penny stocks.
ITEM
6. SELECTED FINANCIAL DATA
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item 6.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. In some cases,
readers can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue.” These statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different from
those stated herein. Factors that might cause or contribute to such differences
include, but are not limited to, those discussed in Item 1A, “Risks Related
to Our Business,” “Risks Related to Doing Business in China” and “Risks Related
to an Investment in Our Securities” as well as in Item 1, “Business” and
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in this Annual Report on Form 10-K. You should
carefully review these risks and also review the risks described in other
documents we file from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q that we will file. You are
cautioned not to place undue reliance on these forward-looking statements, and
we expressly assume no obligations to update the forward-looking statements in
this report that occur after the date hereof.
Company
Description and Overview
Solar
EnerTech Corp. is a solar product manufacturer with its headquarter based in
Mountain View, California, and with low-cost operations located in Shanghai,
China. Our principal products are monocrystalline silicon and
polycrystalline silicon solar cells and solar modules. Solar cells convert
sunlight to electricity through the photovoltaic effect, with multiple solar
cells electrically interconnected and packaged into solar modules to form the
building blocks for solar power generating systems. We primarily sell solar
modules to solar panel installers who incorporate our modules into their power
generating systems that are sold to end-customers located in Europe, Australia,
North America and China.
We have
established our manufacturing base in Shanghai, China to capitalize on the cost
advantages offered in manufacturing of solar power products. In our
67,107-square-foot manufacturing facility we operate two 25MW solar cell
production lines and a 50MW solar module production facility. We
believe that the choice of Shanghai, China for our manufacturing base provides
us with convenient and timely access to key resources and conditions to support
our growth and low-cost manufacturing operations.
Our solar
cells and modules are sold under the brand name “SolarE”. Our total
sales for the fiscal year ended September 30, 2010 was $70.0 million and our end
users are mainly in Europe and Australia. In anticipation of entering
the US market, we have established a headquarter office which also serves as
marketing, purchasing and distribution office in Mountain View, California. Our
goal is to become a worldwide supplier of PV cells and modules.
We
purchase our key raw materials, silicon wafer, from the spot
market. We do not have a long term contract with any silicon
supplier.
We have
been able to increase sales since our inception in 2006. Although our efforts to
reach profitability have been adversely affected by the global recession, credit
market contraction and volatile polysilicon market, during fiscal year 2010 we
had significantly improved our gross margin resulted from declines in raw
materials costs and the efficiencies gained from greater capacity utilization at
our facilities.
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
|
|
•
|
`
plan to research and develop key technology and fundamental theory for
third-generation PV cells.
|
On
January 7, 2010 (the “Conversion Date”), we entered into a Series A and Series B
Notes Conversion Agreement (the “Conversion Agreement”) with the holders of
Notes representing at least seventy-five percent of the aggregate principal
amounts outstanding under the Notes to restructure the terms of the Notes. On
January 7, 2010, as part of the Conversion Agreement, approximately $9.8 million
of convertible notes outstanding were successfully converted into shares of our
common stock. On January 19, 2010, a holder of approximately $1.8 million of our
formerly outstanding Series B Notes and Series B Warrants disputed the
effectiveness of the Conversion Agreement and the Warrant
Amendment. Accordingly, such holder did not tender its Series B Notes
for conversion. After negotiations with such holder, on March 19, 2010, the
Company entered into an Exchange Agreement with the holder (“Exchange
Agreement”), whereby the Company issued the Series B-1 Note with a principal
amount of $1.8 million (the “Series B-1 Note”) due on March 19, 2012, which
extended the original maturity date by 24 month, in exchange for the Series B
Notes.
Our
future operations are dependent upon the achievement of profitable operations.
Other than as discussed in this report, we know of no trends, events or
uncertainties that are reasonably likely to impact our future
liquidity.
Environmental,
Health and Safety Regulations
We will
use, generate and discharge toxic, volatile or otherwise hazardous chemicals and
wastes in our manufacturing activities. We are subject to a variety of federal,
state and local governmental laws and regulations related to the purchase,
storage, use and disposal of hazardous materials. We are also subject to
occupational health and safety regulations designed to protect worker health and
safety from injuries and adverse health effects from exposure to hazardous
chemicals and working conditions. If we fail to comply with present or future
environmental laws and regulations, we could be subject to fines, suspension of
production or a cessation of operations. In addition, under some federal, state
and local statutes and regulations, a governmental agency may seek recovery and
response costs from operators of property where releases of hazardous substances
have occurred or are ongoing, even if the operator was not responsible for the
release or otherwise was not at fault.
Any
failure by us to control the use of, or to restrict adequately the discharge of,
hazardous substances could subject us to substantial financial liabilities,
operational interruptions and adverse publicity, any of which could materially
and adversely affect our business, results of operations and financial
condition.
Solar
Energy Industry
We
believe that economic and national security issues, technological advances,
environmental regulations seeking to limit emissions by fossil fuel, air
pollution regulations restricting the release of greenhouse gasses, aging
electricity transmission infrastructure and depletion and limited supply of
fossil fuels, has made reliance on traditional sources of fuel for generating
electricity less attractive. Government policies, in the form of both regulation
and incentives, have accelerated the adoption of solar technologies by
businesses and consumers. For example, in the U.S., Energy Policy Act (EPACT)
enacted a 30% investment tax credit for solar, and in January 2006, California
approved the largest solar program in the country's history that provides for
long term subsidies in the form of rebates to encourage use of solar energy
where possible.
Government
Subsidies and Incentives
Various
subsidies and tax incentive programs exist at the federal and state level to
encourage the adoption of solar power including capital cost rebates,
performance-based incentives, feed-in tariffs, tax credits and net metering.
Capital cost rebates provide funds to customers based on the cost of size of a
customer's solar power system. Performance-based incentives provide funding to a
customer based on the energy produced by their solar system. Under a feed-in
tariff subsidy, the government sets prices that regulated utilities are required
to pay for renewable electricity generated by end-users. The prices are set
above market rates and may be differentiated based on system size or
application. Feed-in tariffs pay customers for solar power system generation
based on kilowatt-hours produced, at a rate generally guaranteed for a period of
time. Tax credits reduce a customer's taxes at the time the taxes are due. Under
net metering programs, a customer can generate more energy than used, during
which periods the electricity meter will spin backwards. During these periods,
the customer "lends" electricity to the grid, retrieving an equal amount of
power at a later Net time metering programs enable end-users to sell excess
solar electricity to their local utility in exchange for a credit against their
utility bills. Net metering programs are usually combined with rebates, and do
not provide cash payments if delivered solar electricity exceeds their utility
bills. In addition, several states have adopted renewable portfolio standards,
which mandate that a certain portion of electricity delivered to customers come
from a set of eligible renewable energy resources. Under a renewable portfolio
standard, the government requires regulated utilities to supply a portion of
their total electricity in the form of renewable electricity. Some programs
further specify that a portion of the renewable energy quota must be from solar
electricity.
Despite
the benefits of solar power, there are also certain risks and challenges faced
by solar power. Solar power is heavily dependent on government subsidies to
promote acceptance by mass markets. We believe that the near-term growth in the
solar energy industry depends significantly on the availability and size of
these government subsidies and on the ability of the industry to reduce the cost
of generating solar electricity. The market for solar energy products is, and
will continue to be, heavily dependent on public policies that support growth of
solar energy. There can be no assurances that such policies will continue.
Decrease in the level of rebates, incentives or other governmental support for
solar energy would have an adverse affect on our ability to sell our
products.
Results
of Operations
Comparison
of the Fiscal Years Ended September 30, 2010 and 2009
Revenues,
Cost of Sales and Gross Margin
|
|
Year Ended September 30, 2010
|
|
|
Year Ended September 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Sales
|
|
$
|
70,029,000
|
|
|
|
100.0
|
%
|
|
$
|
32,835,000
|
|
|
|
100.0
|
%
|
|
$
|
37,194,000
|
|
|
|
113.3
|
%
|
Cost
of sales
|
|
|
(64,820,000
|
)
|
|
|
(92.6
|
)%
|
|
|
(33,876,000
|
)
|
|
|
(103.2
|
)%
|
|
|
(30,944,000
|
)
|
|
|
91.3
|
%
|
Gross
profit (loss)
|
|
$
|
5,209,000
|
|
|
|
7.4
|
%
|
|
$
|
(1,041,000
|
)
|
|
|
(3.2
|
)%
|
|
$
|
6,250,000
|
|
|
|
(600.4
|
)%
|
For the
fiscal year ended September 30, 2010, the Company reported total revenue of
$70.0 million, representing an increase of $37.2 million or 113.3% compared to
$32.8 million of revenue in the same period of fiscal year 2009. The increase in
revenue resulted from an increase in solar module shipments from 10.50 MW in
fiscal year 2009 to 34.92 MW in fiscal year 2010, partially offset by a 41.7%
decrease in average selling prices for solar modules from $3.07 per watt in
fiscal year 2009 to $1.79 per watt in fiscal year 2010. In addition, strong
growth in the Australian market contributed to the increase in sales
volume to Aussie Solar Installations during the fiscal year 2010 amounting to
$31 million as compared to $9.9 million in fiscal year 2009.
For the
fiscal year ended September 30, 2010, we incurred a positive gross margin of
$5.2 million compared to a negative gross margin of $1.0 million in fiscal year
2009. The improvement in gross profit margin was primarily due to economies of
scale generated from higher production volume, which lowered per unit production
cost and continued efforts by our technical group in improving the efficiency of
our cells (the conversion rate of silicon wafer to cell increased from 16.8% in
fiscal year 2009 to 17.6% in fiscal year 2010). In addition, we have continued
with various cost cutting programs and renegotiated most of our vendor contracts
to reduce raw material cost.
Selling,
general and administrative
|
|
Year Ended September 30, 2010
|
|
|
Year Ended September 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Selling,
general and administrative
|
|
$
|
9,565,000
|
|
|
|
13.7
|
%
|
|
$
|
9,224,000
|
|
|
|
28.1
|
%
|
|
$
|
341,000
|
|
|
|
3.7
|
%
|
For the
fiscal year ended September 30, 2010, we incurred selling, general and
administrative expense of $9.6 million, representing an increase of $0.3 million
or 3.7% from $9.2 million in the same period of fiscal year 2009. Selling,
general and administrative expense as a percentage of net sales for the fiscal
year ended September 30, 2010 decreased to 13.7% from 28.1% for fiscal year
2009. The increase in the selling, general and administrative expenses were
primarily due to an increase in shipping and handling costs of $1.5 million
resulted from higher revenue, partially offset by a decrease of $1.2 million in
provision for bad debts in fiscal year 2010.
Research
and development
|
|
Year Ended September 30, 2010
|
|
|
Year Ended September 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Research
and development
|
|
$
|
347,000
|
|
|
|
0.5
|
%
|
|
$
|
700,000
|
|
|
|
2.1
|
%
|
|
$
|
(353,000
|
)
|
|
|
(50.4
|
)%
|
Research
and development expenses in the fiscal year ended September 30, 2010 were $0.3
million, representing a decrease of $0.4 million, or 50.4%, from $0.7 million
for the fiscal year ended September 30, 2009. Research and development expenses
as a percentage of net sales for the fiscal year ended September 30, 2010
decreased to 0.5% from 2.1% for the fiscal year ended September 30, 2009. The
decrease in research and development expenses were mainly due to a decrease of
$0.3 million in stock-based compensation expenses related to employee options
and restricted stock from $0.4 million for the fiscal year ended September 30,
2009 to $0.1 million for the fiscal year ended September 30, 2010.
In
accordance with our joint research and development laboratory agreement with
Shanghai University, dated December 15, 2006 (amended on November 12, 2010)
expiring on December 15, 2016, we committed to fund the establishment of
laboratories and completion of research and development activities at no less
than RMB 30 million ($4.5 million) cumulatively within eight years (extended
from five years). The funding requirements are based on specific milestones
agreed upon by Shanghai University and us. For the fiscal year ended September
30, 2010, we funded $0.7 million, of which $0.1 million is recorded as “research
and development expense” in the consolidated statements of operations and $0.6
million is related to capital expenditures. As of September 30, 2010, there are
$3.1 million remained to be funded in full by December 15,
2014.
Loss
on debt extinguishment
|
|
Year Ended September 30, 2010
|
|
|
Year Ended September 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Loss on debt extinguishment
|
|
$
|
18,540,000
|
|
|
|
26.5
|
%
|
|
$
|
527,000
|
|
|
|
1.6
|
%
|
|
$
|
18,013,000
|
|
|
|
3,418.
|
%
|
For the
fiscal year ended September 30, 2010, we incurred a loss on debt extinguishment
of $18.5 million as a result of the Conversion Agreement and the Exchange
Agreement dated January 7, 2010. For the fiscal year ended September 30, 2009,
we incurred a loss on debt extinguishment of $0.5 million as a result of the
conversion of $0.9 million of Series A and Series B Convertible Notes into the
1,455,069 shares of the Company’s common stock.
Impairment
Loss on Property and Equipment
|
|
Year Ended September 30, 2010
|
|
|
Year Ended September 30, 2009
|
|
|
Year-Over-Year Change
|
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of net sales
|
|
|
Amount
|
|
|
% of change
|
|
Impairment
loss on
property
and equipment
|
|
$
|
-
|
|
|
|
0.0
|
%
|
|
$
|
960,000
|
|
|
|
2.9
|
%
|
|
$
|
(960,000
|
)
|
|
|
(100.0
|
)%
|
During
the fourth quarter of fiscal year 2009 we recognized an impairment loss on
property and equipment of $960,000 on the idle production equipment which was
below standard quality.
There was
no impairment loss on property and equipment recorded during the fiscal year
ended September 30, 2010
Other
income (expense)
|
|
Year
Ended September 30, 2010
|
|
|
Year
Ended September 30, 2009
|
|
|
Year-Over-Year
Change
|
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of net sales
|
|
|
Amount
|
|
|
%
of change
|
|
Interest
income
|
|
$
|
7,000
|
|
|
|
0.0
|
%
|
|
$
|
16,000
|
|
|
|
0.0
|
%
|
|
$
|
(9,000
|
)
|
|
|
(56.3
|
)%
|
Interest
expense
|
|
|
(5,446,000
|
)
|
|
|
(7.8
|
)%
|
|
|
(3,998,000
|
)
|
|
|
(12.2
|
)%
|
|
|
(1,448,000
|
)
|
|
|
36.2
|
%
|
Gain
(loss) on change in fair market value of compound embedded
derivative
|
|
|
1,235,000
|
|
|
|
1.8
|
%
|
|
|
770,000
|
|
|
|
2.3
|
%
|
|
|
465,000
|
|
|
|
60.4
|
%
|
Gain
(loss) on change in fair market value of warrant liability
|
|
|
4,511,000
|
|
|
|
6.4
|
%
|
|
|
1,344,000
|
|
|
|
4.1
|
%
|
|
|
3,167,000
|
|
|
|
235.6
|
%
|
Impairment
loss on investment
|
|
|
(1,000,000
|
)
|
|
|
(1.4
|
)%
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(1,000,000
|
)
|
|
|
(100.0
|
)%
|
Other
expense
|
|
|
(1,078,000
|
)
|
|
|
(1.5
|
)%
|
|
|
139,000
|
|
|
|
0.4
|
%
|
|
|
(1,217,000
|
)
|
|
|
(875.5
|
)%
|
Total
other income (expense)
|
|
$
|
(1,771,000
|
)
|
|
|
(2.5
|
)%
|
|
$
|
(1,729,000
|
)
|
|
|
(5.3
|
)%
|
|
$
|
(42,000
|
)
|
|
|
2.4
|
%
|
For the
fiscal years ended September 30, 2010 and 2009, total other expenses were flat
at $1.8 million. Other expenses as a percentage of net sales for the fiscal year
ended September 30, 2010 decreased to 2.5% from 5.3% for the fiscal year ended
September 30, 2009. In the fiscal year ended September 30, 2010, we recorded a
gain on change in fair market value of compound embedded derivative of $1.2
million and a gain on change in fair market value of warrant liability of $4.5
million compared to a gain on change in fair market value of compound embedded
derivative of $0.8 million and a gain on change in fair market value of warrant
liability of $1.3 million during the fiscal year ended September 30, 2009. The
lower conversion price of the compound embedded derivative and warrant in the
fiscal year ended September 30, 2010 compared to that in the fiscal year
ended September 30, 2009, resulted in greater decreases in the fair value
of the compound embedded derivative and warrant liability and higher gains on
change in fair market value of the compound embedded derivative and warrant
liability. We incurred interest expenses of $5.4 million and $4.0 million in the
fiscal years ended September 30, 2010 and 2009, respectively, primarily related
to the amortization of the discount on the convertible notes and deferred
financing cost, and 6% interest charges on Series A and Series B notes, which
was converted to our common stock on January 7, 2010 and 6% interest charges on
Series B-1 Convertible Notes. Other expense of $1.1 million for the fiscal year
ended September 30, 2010 and other income of $0.1 million for the fiscal year
ended September 30, 2009 were primarily related to foreign exchange gain
(loss).
Liquidity
and Capital Resources
|
|
Year Ended September 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,578,000
|
|
|
$
|
1,719,000
|
|
|
$
|
4,859,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
4,277,000
|
|
|
$
|
(1,142,000
|
)
|
|
$
|
5,419,000
|
|
Investing
activities
|
|
|
(770,000
|
)
|
|
|
(383,000
|
)
|
|
|
(387,000
|
)
|
Financing
activities
|
|
|
1,312,000
|
|
|
|
-
|
|
|
|
1,312,000
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
40,000
|
|
|
|
6,000
|
|
|
|
34,000
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
4,859,000
|
|
|
$
|
(1,519,000
|
)
|
|
$
|
6,378,000
|
|
As of
September 30, 2010 and 2009, we had cash and cash equivalents of
$6.6 million and $1.7 million, respectively. We will require a significant
amount of cash to fund our operations. Changes in our operating plans, an
increase in our inventory, increased expenses, or other events, may cause us to
seek additional equity or debt financing in the future. In order to continue as
a going concern, we will need to continue to generate new sales while
controlling our costs. If we are unable to successfully generate enough sales to
cover our costs, we only have limited cash resources to bear operating losses to
the extent our operations are not profitable, we may not continue as a going
concern.
Our
liquidity is impacted to a large extent based on both the nature of the products
we sell and also the geographical location of our customers, as our payment
terms on sale vary greatly depending on both factors. With respect to the
products we sell, while in the past we have engaged in transactions where we
have resold our raw materials due to our overstock of materials relative to our
then limited production capacity, as our production capacity has increased over
the years, our sales now consist primarily of solar modules to solar panel
installers in Europe and Australia who incorporate our modules into their power
generating systems that are sold to end-customers. Payment terms for the sale of
our modules are generally longer than payment terms where we resell our raw
materials in China and as a result, our payment terms have lengthened relative
to prior years. In addition, with respect to the geographic location of our
customers, the payment terms for the sale of our solar modules are generally
longer for our customers in the United States than for our customers in Europe
and Australia. While our current sales to customers in the United States are
limited, if we are able to increase our sales in the U.S. market or in other
markets that may have longer payment terms, our payment terms may lengthen.
Payment terms for our solar module sales generally range from 0 to 60 days. In
some cases, these terms are extended up to 200 days for certain qualifying
customers of whom the Company applied rigorous credit requirements. If we have
more sales of products or in geographies with longer payment terms, the longer
payment terms will impact the timing of our cash flows.
Net cash
provided by operating activities were $4.3 million and $1.1 million for fiscal
years 2010 and 2009, respectively. Cash flow from operating activities reflected
a net loss of $25.0 million adjusted for non-cash items, including depreciation
of property and equipment, stock-based compensation, the change in the fair
market value of the compound derivative liabilities and warrants liabilities,
impairment loss on investment, amortization of note discount and deferred
financing cost, and loss on debt extinguishment. The increase of $5.4 million in
cash flow from operating activities from fiscal year 2009 to fiscal year 2010
was mainly attributable to the improved cash generating ability resulting from
enlarged sales, positive gross margin and strong collection efforts. The net
loss excluding non-cash expenses for fiscal year 2010 decreased compared to the
same period in 2009, partially offset by higher balances of VAT receivables and
advance payments and others.
Net cash
used in investing activities were $0.8 million and $0.4 million in fiscal years
2010 and 2009, respectively. The increase of $0.4 million in net cash used in
investing activities was primarily due to higher property and equipment
acquisitions during fiscal year 2010 compared to the fiscal year
2009.
Net cash
provided by financing activities was $1.3 million in fiscal year 2010
because our draw from a credit facility with Industrial Bank Co., Ltd
(“IBC”). There was no cash provided by financing activities for fiscal year
2009.
Our
consolidated balance sheet, statements of operations and cash flows have been
prepared on the assumption that the Company will continue as a
going concern, which contemplates the realization of assets and liquidation
of liabilities in the normal course of business.
After
consummating the transactions contemplated under the Conversion Agreement and
Exchange Agreement, our only outstanding convertible note is the Series
B-1 Note. As of September 30, 2010, the principal outstanding and the
carrying value of the Series B-1 Note were $1.8 million and 1.5 million,
respectively. The Series B-1 Note bears interest at 6% per annum and the
principal of $1,531,000 is due on March 19, 2012. The holders of the Series B-1
Note can demand repayment from us upon the occurrence of any of the triggering
events detailed in the Series B-1 Note. In addition, we have certain commitments
as disclosed in the “Off-Balance Sheet Arrangements” section below.
On March
25, 2010, we entered into a one year contract with China Export & Credit
Insurance Corporation (“CECIC”) to insure the collectability of outstanding
accounts receivable for two of the our key customers. We pay a fee based on a
fixed percentage of the accounts receivable outstanding and expense this
fee when it is incurred. In addition, on March 30, 2010, we entered into a one
year revolving credit facility arrangement with IBC that is secured by the
accounts receivable balances of the our two key customers insured by CECIC
above. We can draw up to the lower of $2.0 million or the cumulative amount of
accounts receivable outstanding from the respective two key customers. If
any of the insured customers fail to repay the amounts outstanding due to us,
the insurance proceeds will be remitted directly to IBC instead of us.
The interest rate of the credit facility is variable and ranged from 3.3%
to 4.5% during the fiscal year ended September 30, 2010. As of September
30, 2010, we drew on this credit facility with IBC in the amount of $1.3 million
and there have been no insurance claims submitted to CECIC. The credit
facility contains certain non-financial ratios related covenants, including
maintaining creditworthiness, complying with all contractual obligations,
providing true and accurate records as requested by IBC, fulfillment of other
indebtedness (if any), maintaining its business license and continuing
operations, ensuring its financial condition does not deteriorate, remaining
solvent, and other conditions, as defined in the credit facility agreement. We
complied with these covenants as of September 30, 2010.
If we
experience a material shortfall versus our operating plans, we have a range of
actions we can take to remediate the cash shortage, including but not limited to
raising additional funds through debt financing, securing a credit facility,
entering into secured or unsecured bank loans, or undertaking equity offerings
such as a rights offering to existing shareholders. However, due to the
tight capital and credit markets, we cannot be sure that external financing will
be available when needed or that, if available, financing will be obtained on
terms favorable to us or our stockholders.
Off-Balance
Sheet Arrangements
Future
minimum payments under all non-cancelable lease obligations and payments under
our agreement with Shanghai University are as follows as of September 30,
2010:
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1 to 3 years
|
|
|
4 to 5 year
|
|
|
More than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease
|
|
$
|
1,389,000
|
|
|
$
|
548,000
|
|
|
$
|
841,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Research
and development commitment
|
|
|
3,147,000
|
|
|
|
|
|
|
|
3,147,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
4,536,000
|
|
|
$
|
548,000
|
|
|
$
|
3,988,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Pursuant
to a joint research and development laboratory agreement with
Shanghai University, dated December 15, 2006 and expiring on
December 15, 2016, we are committed to funding the establishment of
laboratories and completion of research and development activities. On November
12, 2010, we amended the agreement with Shanghai University and extended the
commitment from five years to eight years, and consequently the agreement will
end on December 15, 2014. Based on the amendment, we committed to fund no less
than RMB 30 million ($4.5 million) cumulatively across the eight
years. The funding requirements are based on specific milestones agreed upon by
Shanghai University and us. For the fiscal year ended September 30, 2010, we
funded $0.7 million, of which $0.1 million is recorded as “research and
development expense” in the consolidated statements of operations and $0.6
million is related to capital expenditures. As of September 30, 2010, there are
$3.1 million remained to be funded in full by December 15, 2014.
We intend
to increase research and development spending as we grow our business. The
payment to Shanghai University will be used to fund program expenses and
equipment purchase. If we fail to make payments, when requested, we will be
deemed to be in breach of the agreement. If we are unable to correct the breach
within the requested time frame, Shanghai University could seek
compensation up to an additional 15% of the total committed amount for
approximately $0.7 million. As of September 30, 2010, we are not in breach as we
have not received any additional compensation requests from
Shanghai University.
On August
21, 2008, we entered into an equity purchase agreement in which we acquired two
million shares of common stock of 21-Century Silicon for $1.0 million in cash.
However, 21-Century Silicon’s production facilities and technical development
were significantly below expected standards and was in a working capital
deficit. Therefore, we considered the above findings as indicators that a
significant adverse effect on the fair value of our investment in 21-Century
Silicon had occurred. Accordingly, an impairment loss of $1.0 million was
recorded to fully write-down the carrying amount of the investment as of June
30, 2010. See “Note 3 — Summary of Significant Accounting Policies –
Investments” in the Notes to Consolidated Financial Statements of this
Form 10-K.
On
September 22, 2008, the registered capital of Solar EnerTech (Shanghai) Co., Ltd
was increased from $25 million to $47.5 million, which was approved by our Board
of Directors and authorized by Shanghai Municipal Government (the “Shanghai
Government”). The paid-in capital as of September 30, 2010 was $32 million, with
an outstanding remaining balance of $15.5 million, originally to be funded by
September 21, 2010. In August 2010, we received the approval of the Shanghai
Government to extend the funding requirement date by nine months to June 2011.
We plan to raise funds to meet this capital requirement through participation in
the capital markets, such as undertaking equity offerings. If external financing
is not available, we will file an application with the Shanghai Government to
reduce the capital requirement, which is legally permissible under PRC
law.
On
January 15, 2010, we incorporated a wholly-owned subsidiary in Yizheng, Jiangsu
Province of China to supplement our existing production facilities to meet
increased sales demands. The subsidiary was formed with a registered
capital requirement of $33 million, of which $23.4 million is to be funded by
October 16, 2011. In order to fund the registered capital
requirement, we will have to raise funds or otherwise obtain the approval of
local authorities to extend the payment of registered capital for the
subsidiary. The registered capital requirement outstanding as of September 30,
2010, is $23.4 million.
On
February 8, 2010, we acquired land use rights of a parcel of land at the price
of approximately $0.7 million. This piece of land is 68,025 square meters and is
located in Yizheng, Jiangsu Province of China, which will be used to house our
second manufacturing facility. As part of the acquisition of the land use right,
we are required to complete construction of the facility by February 8,
2012.
Critical
Accounting Policies
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.
Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the probable future resolution of the uncertainties increase, these
judgments become even more subjective and complex. We have identified the
following accounting policies, described below, as the most important to an
understanding of our current financial condition and results of
operations.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined by the
weighted-average method. Market is defined principally as net
realizable value. Raw material cost is based on purchase costs while
work-in-progress and finished goods are comprised of direct materials, direct
labor and an allocation of manufacturing overhead costs. Inventory
in-transit is included in finished goods and consists of products shipped but
not recognized as revenue because it does not meet the revenue recognition
criteria. Provisions are made for excess, slow moving and obsolete inventory as
well as inventory whose carrying value is in excess of net realizable
value.
Impairment
of Long Lived Assets
We review
our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. When such
factors and circumstances exist, management compares the projected undiscounted
future cash flows associated with the future use and disposal of the related
asset or group of assets to their respective carrying values. Impairment, if
any, is measured as the excess of the carrying value over the fair value, based
on market value when available, or discounted expected cash flows, of those
assets and is recorded in the period in which the determination is made. During
the fiscal year ended September 30, 2009 we recorded an impairment loss on
property and equipment of approximately $960,000 to reflect the idle machinery
which could not meet the quality requirements and could not be put into mass
production. No loss on property and equipment impairment was recorded during
fiscal year ended September 30, 2010.
Investment
Investment
in an entity where we own less than twenty percent of the voting stock of the
entity and do not exercise significant influence over operating and financial
policies of the entity are accounted for using the cost method. Investment in
the entity where we own twenty percent or more, but not in excess of fifty
percent of the voting stock of the entity or less than twenty percent and
exercises significant influence over operating and financial policies of the
entity are accounted for using the equity method. We have a policy in place to
review our investments at least annually and to evaluate the carrying value of
the investments in these companies. The cost method investment is subject to
impairment assessment if there are identified events or changes in circumstance
that may have a significant adverse affect on the fair value of the investment.
If we believe that the carrying value of an investment is in excess of estimated
fair value, it is our policy to record an impairment charge to adjust the
carrying value to the estimated fair value, if the impairment is considered
other-than-temporary.
On August
21, 2008, we entered into an equity purchase agreement in which we acquired two
million shares of common stock of 21-Century Silicon for $1.0 million in cash.
See “Note 3 – Summary of Significant Accounting Policies – Investments” in the
Notes to Consolidated Financial Statements of this Form 10-K.
Warranty
Cost
We
provide product warranties and accrue for estimated future warranty costs in the
period in which revenue is recognized. Our standard solar modules are typically
sold with a two-year warranty for defects in materials and workmanship and a
ten-year and twenty five-year warranty against declines of more than 10.0% and
20.0%, respectively, of the initial minimum power generation capacity at the
time of delivery. We therefore maintain warranty reserves to cover potential
liabilities that could arise from our warranty obligations and accrue the
estimated costs of warranties based primarily on management’s best estimate. In
estimating warranty costs, we applied 460 – Guarantees, specifically paragraphs,
460-10-25-5 to 460-10-25-7 of the FASB Accounting Standards Codification. This
guidance requires that we make a reasonable estimate of the amount of a warranty
obligation. It also provides that in the case of an entity that has no
experience of its own, reference to the experience of other entities in the same
business may be appropriate. Because we began to commercialize our products in
fiscal year 2007, there is insufficient experience and historical data that can
be used to reasonably estimate the expected failure rate of our solar modules.
Thus, we consider warranty cost provisions of other China-based manufacturers
that produce photovoltaic products that are comparable in engineering design,
raw material input and functionality to our products, and sold to a similar
target and class of customer with similar warranty coverage. In determining
whether such peer information can be used, we also consider the years of
experience that these manufacturers have in the industry. Because our industry
is relatively young as compared to other traditional manufacturing industries,
the selected peer companies that we consider have less than ten years in
manufacturing and selling history. In addition, they have a manufacturing base
in China, offer photovoltaic products with comparable engineering design, raw
material input, functionality and similar warranty coverage, and sell in
markets, including the geographic areas and class of customer, where we
compete. Based on the analysis applied, we accrue warranty at 1% of
sales. We have not experienced any material warranty claims to date in
connection with declines of the power generation capacity of its solar modules
and will prospectively revise its actual rate to the extent that actual warranty
costs differ from the estimates.
Income
Taxes
We
account for income taxes under the liability method per the provisions of FASB
ASC 740, “Income Taxes”, formerly referenced as SFAS No. 109, “Accounting
for Income Taxes”.
Under the
provisions of FASB ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between their
financial statement carrying values and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Valuation
Allowance
Significant
judgment is required in determining any valuation allowance recorded against
deferred tax assets. In assessing the need for a valuation allowance, we
consider all available evidence including past operating results, estimates of
future taxable income, and the feasibility of tax planning strategies. In
the event that we change our determination as to the amount of deferred tax
assets that can be realized, we will adjust 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, we adopted the provisions related to uncertain tax positions
under FASB ASC 740, “Income Taxes”, formerly referenced as FIN 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109”. Under FASB ASC 740, the impact of an uncertain income
tax position on the income tax return must be recognized at the largest amount
that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority based solely on the technical merits of the associated tax
position. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. We also elected the accounting
policy that requires interest and penalties to be recognized as a component
of tax expense. We classify the unrecognized tax benefits that are expected to
result in payment or receipt of cash within one year as current
liabilities, otherwise, the unrecognized tax benefits will be classified as
non-current liabilities.
Fair
Value of Warrants
Our
management used the binomial valuation model to value the warrants issued in
conjunction with convertible notes entered into in March 2007. The model
uses inputs such as implied term, suboptimal exercise factor, volatility,
dividend yield and risk free interest rate. Selection of these inputs
involves management’s judgment and may impact estimated value. Management
selected the binomial model to value these warrants as opposed to
the Black-Scholes-Merton model primarily because management believes the
binomial model produces a more reliable value for these instruments because
it uses an additional valuation input factor, the suboptimal exercise
factor, which accounts for expected holder exercise behavior which management
believes is a reasonable assumption with respect to the holders of these
warrants.
Stock-Based
Compensation
On
January 1, 2006, Solar EnerTech began recording compensation expense associated
with stock options and other forms of employee equity compensation in
accordance with FASB ASC 718, “Compensation – Stock Compensation”.
We
estimate the fair value of stock options granted using the Black-Scholes-Merton
option-pricing formula and a single option approach. This fair value is
then amortized on a straight-line basis over the requisite service periods of
the awards, which is generally the vesting period. The
following assumptions are used in the Black-Scholes-Merton option pricing
model:
Expected
Term — Our expected term represents the period that our stock-based awards are
expected to be outstanding.
Expected
Volatility — We expected volatilities are based on historical volatility of
our stock, adjusted where determined by management for unusual and
non-representative stock price activity not expected to recur. Due to the
limited trading history, we also considered volatility data of guidance
companies.
Expected
Dividend —The Black-Scholes-Merton valuation model calls for a single expected
dividend yield as an input. We currently pay no dividends and do not expect
to pay dividends in the foreseeable future.
Risk-Free
Interest Rate— We base the risk-free interest rate on the implied yield
currently available on U.S. Treasury zero-coupon issues with an equivalent
remaining term.
Estimated
Forfeitures— When estimating forfeitures, We take into consideration the
historical option forfeitures over the expected term.
Revenue
Recognition
We
recognize revenues from product sales in accordance with guidance in FASB ASC
605, “Revenue Recognition”, which states that revenue is realized or
realizable and earned when all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred or services have
been rendered; the price to the buyer is fixed or determinable; and
collectability is reasonably assured. Where a revenue transaction does not meet
any of these criteria it is deferred and recognized once all such criteria
have been met. In instances where final acceptance of the product, system, or
solution is specified by the customer, revenue is deferred until all
acceptance criteria have been met.
On a
transaction by transaction basis, the Company determines if the revenue should
be recorded on a gross or net basis based on criteria discussed in
the Revenue Recognition topic of the FASB Subtopic 605-405, “Reporting
Revenue Gross as a Principal versus Net as an Agent”. The Company considers
the following factors to determine the gross versus net presentation: if
the Company (i) acts as principal in the transaction; (ii) takes title to the
products; (iii) has risks and rewards of ownership, such as the risk of
loss for collection, delivery or return; and (iv) acts as an agent or broker
(including performing services, in substance, as an agent or broker) with
compensation on a commission or fee basis.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are carried at net realizable value. We record our allowance for
doubtful accounts based upon its assessment of various factors. We consider
historical experience, the age of the accounts receivable balances, credit
quality of our customers, current economic conditions, and other factors
that may affect customers’ ability to pay.
Recent Accounting
Pronouncements
For
recent accounting pronouncements, including the expected dates of adoption and
estimated effects, if any, on our consolidated condensed financial statements,
see “Note 3 – Summary of Significant Accounting Policies” in the Notes to
Consolidated Financial Statements included in this Form 10-K.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a
Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in
item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
obligations and therefore are not required to provide the information requested
by this Item 7A.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Item 15 (a) for an index to the Consolidated Financial Statements and
Supplementary Financial Information, which are attached hereto and incorporated
by reference herein.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Solar
EnerTech Corp.
We have
audited the accompanying consolidated balance sheets of Solar Enertech Corp.
(the "Company") as of September 30, 2010 and 2009, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended September 30, 2010. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. We were not
engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Solar Enertech
Corp. at September 30, 2010 and 2009, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
September 30, 2010, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 2 to the consolidated financial statements, the Company's
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans as to these matters also are
described in Note 2. The fiscal 2010 consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst
& Young Hua Ming
Shanghai,
Peoples Republic of China
December
17, 2010
Consolidated
Balance Sheets
|
|
September
30, 2010
|
|
|
September
30, 2009
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,578,000
|
|
|
$
|
1,719,000
|
|
Accounts
receivable, net of allowance for doubtful account of $42,000 and
$96,000 at September 30, 2010 and 2009, respectively
|
|
|
6,546,000
|
|
|
|
7,395,000
|
|
Advance
payments and other
|
|
|
1,274,000
|
|
|
|
799,000
|
|
Inventories,
net
|
|
|
4,083,000
|
|
|
|
3,995,000
|
|
Deferred
financing costs, net of accumulated amortization
|
|
|
-
|
|
|
|
1,250,000
|
|
VAT
receivable
|
|
|
870,000
|
|
|
|
334,000
|
|
Other
receivable
|
|
|
690,000
|
|
|
|
408,000
|
|
Total
current assets
|
|
|
20,041,000
|
|
|
|
15,900,000
|
|
Property
and equipment, net
|
|
|
8,874,000
|
|
|
|
10,509,000
|
|
Other
assets
|
|
|
735,000
|
|
|
|
-
|
|
Investment
|
|
|
-
|
|
|
|
1,000,000
|
|
Deposits
|
|
|
102,000
|
|
|
|
87,000
|
|
Total
assets
|
|
$
|
29,752,000
|
|
|
$
|
27,496,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,895,000
|
|
|
$
|
5,794,000
|
|
Customer
advance payment
|
|
|
2,032,000
|
|
|
|
27,000
|
|
Accrued
expenses
|
|
|
2,596,000
|
|
|
|
1,088,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
5,817,000
|
|
|
|
5,646,000
|
|
Short-term
loans
|
|
|
1,312,000
|
|
|
|
-
|
|
Convertible
notes, net of discount
|
|
|
-
|
|
|
|
3,061,000
|
|
Derivative
liabilities
|
|
|
-
|
|
|
|
178,000
|
|
Total
current liabilities
|
|
|
19,652,000
|
|
|
|
15,794,000
|
|
Convertible
notes, net of discount
|
|
|
1,531,000
|
|
|
|
-
|
|
Derivative
liabilities
|
|
|
422,000
|
|
|
|
-
|
|
Warrant
liabilities
|
|
|
902,000
|
|
|
|
2,068,000
|
|
Total
liabilities
|
|
|
22,507,000
|
|
|
|
17,862,000
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock - 400,000,000 shares authorized at $0.001 par value
170,338,954 and 111,406,696 shares issued and outstanding at
September 30, 2010 and 2009, respectively
|
|
|
170,000
|
|
|
|
111,000
|
|
Additional
paid in capital
|
|
|
97,656,000
|
|
|
|
75,389,000
|
|
Other
comprehensive income
|
|
|
2,755,000
|
|
|
|
2,456,000
|
|
Accumulated
deficit
|
|
|
(93,336,000
|
)
|
|
|
(68,322,000
|
)
|
Total
stockholders' equity
|
|
|
7,245,000
|
|
|
|
9,634,000
|
|
Total
liabilities and stockholders' equity
|
|
$
|
29,752,000
|
|
|
$
|
27,496,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Operations
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
70,029,000
|
|
|
$
|
32,835,000
|
|
Cost
of sales
|
|
|
(64,820,000
|
)
|
|
|
(33,876,000
|
)
|
Gross
profit (loss)
|
|
|
5,209,000
|
|
|
|
(1,041,000
|
)
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
9,565,000
|
|
|
|
9,224,000
|
|
Research
and development
|
|
|
347,000
|
|
|
|
700,000
|
|
Loss
on debt extinguishment
|
|
|
18,540,000
|
|
|
|
527,000
|
|
Impairment
loss on property and equipment
|
|
|
-
|
|
|
|
960,000
|
|
Total
operating expenses
|
|
|
28,452,000
|
|
|
|
11,411,000
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(23,243,000
|
)
|
|
|
(12,452,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7,000
|
|
|
|
16,000
|
|
Interest
expense
|
|
|
(5,446,000
|
)
|
|
|
(3,998,000
|
)
|
Gain
on change in fair market value of compound embedded
derivative
|
|
|
1,235,000
|
|
|
|
770,000
|
|
Gain
on change in fair market value of warrant liability
|
|
|
4,511,000
|
|
|
|
1,344,000
|
|
Impairment
loss on investment
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
Other
income (expense)
|
|
|
(1,078,000
|
)
|
|
|
139,000
|
|
Net
loss
|
|
$
|
(25,014,000
|
)
|
|
$
|
(14,181,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share - basic
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
Net
loss per share - diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
135,557,265
|
|
|
|
87,817,762
|
|
Weighted
average shares outstanding - diluted
|
|
|
135,557,265
|
|
|
|
87,817,762
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Stockholders’ Equity
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
Comprehensive
|
|
|
|
Number
|
|
|
Amount
|
|
|
In
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2008
|
|
|
112,052,012
|
|
|
$
|
112,000
|
|
|
$
|
71,627,000
|
|
|
$
|
2,485,000
|
|
|
$
|
(54,141,000
|
)
|
|
$
|
20,083,000
|
|
|
$
|
(51,656,000
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
3,446,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,446,000
|
|
|
|
-
|
|
Issuance
of stock for convertible notes
|
|
|
1,454,684
|
|
|
|
1,000
|
|
|
|
314,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
315,000
|
|
|
|
-
|
|
Cancellation
of unvested restricted stock
|
|
|
(2,100,000
|
)
|
|
|
(2,000
|
)
|
|
|
2,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(29,000
|
)
|
|
|
-
|
|
|
|
(29,000
|
)
|
|
|
(29,000
|
)
|
Net
loss for the year ended September 30, 2009
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,181,000
|
)
|
|
|
(14,181,000
|
)
|
|
|
(14,181,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
111,406,696
|
|
|
$
|
111,000
|
|
|
$
|
75,389,000
|
|
|
$
|
2,456,000
|
|
|
$
|
(68,322,000
|
)
|
|
$
|
9,634,000
|
|
|
$
|
(65,866,000
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,705,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,705,000
|
|
|
|
-
|
|
Issuance
of common stock to Board of Director and non-employees
|
|
|
800,000
|
|
|
|
1,000
|
|
|
|
211,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
212,000
|
|
|
|
-
|
|
Issuance
of stock for warrants
|
|
|
450,878
|
|
|
|
-
|
|
|
|
157,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157,000
|
|
|
|
-
|
|
Issuance
of stock for convertible notes
|
|
|
67,681,380
|
|
|
|
68,000
|
|
|
|
19,184,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,252,000
|
|
|
|
-
|
|
Cancellation
of unvested restricted stock
|
|
|
(10,000,000
|
)
|
|
|
(10,000
|
)
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Currency
translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
299,000
|
|
|
|
-
|
|
|
|
299,000
|
|
|
|
299,000
|
|
Net
loss for the year ended September 30, 2010
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,014,000
|
)
|
|
|
(25,014,000
|
)
|
|
|
(25,014,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
|
170,338,954
|
|
|
$
|
170,000
|
|
|
$
|
97,656,000
|
|
|
$
|
2,755,000
|
|
|
$
|
(93,336,000
|
)
|
|
$
|
7,245,000
|
|
|
$
|
(90,581,000
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Consolidated
Statements of Cash Flows
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(25,014,000
|
)
|
|
$
|
(14,181,000
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment
|
|
|
2,408,000
|
|
|
|
2,308,000
|
|
Loss
on disposal of property and equipment
|
|
|
51,000
|
|
|
|
15,000
|
|
Amortization
of other assets
|
|
|
11,000
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
2,916,000
|
|
|
|
3,446,000
|
|
Loss
on debt extinguishment
|
|
|
18,540,000
|
|
|
|
527,000
|
|
Impairment
loss on investment
|
|
|
1,000,000
|
|
|
|
-
|
|
Impairment
loss on property and equipment
|
|
|
-
|
|
|
|
960,000
|
|
Payment
of interest by issuance of shares
|
|
|
237,000
|
|
|
|
-
|
|
Amortization
of note discount and deferred financing cost
|
|
|
5,177,000
|
|
|
|
3,298,000
|
|
Gain
on change in fair market value of compound embedded
derivative
|
|
|
(1,235,000
|
)
|
|
|
(770,000
|
)
|
Gain
on change in fair market value of warrant liability
|
|
|
(4,511,000
|
)
|
|
|
(1,344,000
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
1,057,000
|
|
|
|
(5,518,000
|
)
|
Advance
payments and other
|
|
|
(54,000
|
)
|
|
|
2,371,000
|
|
Inventories,
net
|
|
|
2,000
|
|
|
|
884,000
|
|
VAT
receivable
|
|
|
(523,000
|
)
|
|
|
2,097,000
|
|
Other
receivable
|
|
|
(263,000
|
)
|
|
|
321,000
|
|
Accounts
payable, accrued liabilities and customer advance payment
|
|
|
4,320,000
|
|
|
|
4,132,000
|
|
Deposits
|
|
|
(13,000
|
)
|
|
|
116,000
|
|
Accounts
payable and accrued liabilities, related parties
|
|
|
171,000
|
|
|
|
196,000
|
|
Net
cash provided by (used in) operating activities
|
|
|
4,277,000
|
|
|
|
(1,142,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(779,000
|
)
|
|
|
(419,000
|
)
|
Proceeds
from sales of property and equipment
|
|
|
9,000
|
|
|
|
36,000
|
|
Net
cash used in investing activities
|
|
|
(770,000
|
)
|
|
|
(383,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowing
under short-term loans
|
|
|
2,842,000
|
|
|
|
-
|
|
Short-term
loans repayment
|
|
|
(1,530,000
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,312,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash and cash equivalents
|
|
|
40,000
|
|
|
|
6,000
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
4,859,000
|
|
|
|
(1,519,000
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
1,719,000
|
|
|
|
3,238,000
|
|
Cash
and cash equivalents, end of period
|
|
$
|
6,578,000
|
|
|
$
|
1,719,000
|
|
|
|
|
|
|
|
|
|
|
Cash
paid:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
7,000
|
|
|
$
|
530,000
|
|
Supplemental
disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
Extinguishment
of convertible notes by issuance of common stocks
|
|
$
|
(5,779,000
|
)
|
|
$
|
104,000
|
|
Extinguishment
of convertible notes by issuance of Series B-1 Note
|
|
$
|
(1,815,000
|
)
|
|
$
|
-
|
|
Issuance
of Series B-1 Note
|
|
$
|
1,535,000
|
|
|
$
|
-
|
|
Acquisition
of other assets
|
|
$
|
746,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
NOTE
1 — ORGANIZATION AND NATURE OF OPERATIONS
Solar
EnerTech Corp. was originally incorporated under the laws of the State of Nevada
on July 7, 2004 as Safer Residence Corporation and was reincorporated to
the State of Delaware on August 13, 2008 (“Solar EnerTech” or the
“Company”). The Company engaged in a variety of businesses until
March 2006, when the Company began its current operations as a photovoltaic
(“PV”) solar energy cell (“PV Cell”) manufacturer. The Company’s management
decided that, to facilitate a change in business that was focused on the PV Cell
industry, it was appropriate to change the Company’s name. A plan of merger
between Safer Residence Corporation and Solar EnerTech Corp., a wholly-owned
inactive subsidiary of Safer Residence Corporation, was approved on March 27,
2006, under which the Company was to be renamed “Solar EnerTech Corp.” On
April 7, 2006, the Company changed its name to Solar EnerTech
Corp. On August 13, 2008, the Company reincorporated to the State of
Delaware.
The
Company conducts a substantial part of its operations under a wholly-owned
subsidiary in Shanghai, China named Solar EnerTech (Shanghai) Co.,
Ltd.
On
January 15, 2010, the Company incorporated a wholly-owned subsidiary in Yizheng,
Jiangsu Province of China to supplement its existing production facilities to
meet increased sales demands.
On
February 8, 2010, the Company acquired land use rights of 68,025 square meter
parcel of land located in Yizheng, Jiangsu Province of China, which will be used
to house the Company’s second manufacturing facility.
NOTE
2 — LIQUIDITY AND GOING CONCERN ISSUES
The
Company has incurred significant net losses during each period from inception
through September 30, 2010 and has an accumulated deficit of approximately $93.3
million at September 30, 2010. For the fiscal year ended September 30, 2010, the
Company incurred an operating loss and net loss of approximately $23.2 million
and $25.0 million, respectively. The conditions described raise substantial
doubt about the Company’s ability to continue as a going concern. The Company’s
consolidated financial statements have been prepared on the assumption that it
will continue as a going concern, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Throughout
the fiscal year 2010, significant steps were taken to reach positive gross
margins including securing sales contracts from recurring customers and
establishing new customer relationships, which has generated more operating cash
inflows. In addition, the Company engaged in various cost cutting programs and
renegotiated most of the contacts to reduce operating expenses. On March 30,
2010, the Company secured a one year revolving credit facility arrangement
with Industrial Bank Co., Ltd. (“IBC”) that is secured by the accounts
receivable balances of two key customers. The Company can draw up to the lower
of $2.0 million or the cumulative amount of accounts receivable outstanding from
the respective two key customers. Due to the above efforts
taken, the Company has been generating positive gross margins throughout all
quarters in fiscal year 2010. Based on the continuous growth of the solar
industry, the Company believes that the cash expected to be generated from
operations during fiscal year 2011, along with its existing cash resources will
be sufficient to meet the Company’s projected operating requirements through at
least the next twelve months and enable it to continue as a going
concern.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Accounting
Prior to
August 19, 2008, the Company operated its business in the People’s Republic of
China through Infotech Hong Kong New Energy Technologies, Limited (“Infotech
HK”) and Solar EnerTech (Shanghai) Co., Ltd (“Infotech Shanghai” and together
with Infotech HK, “Infotech”). While the Company did not own Infotech, the
Company’s financial statements have included the results of the financials of
each of Infotech HK and Infotech Shanghai since these entities were
wholly-controlled variable interest entities of the Company through an Agency
Agreement dated April 10, 2006 by and between the Company and Infotech (the
“Agency Agreement”). Under the Agency Agreement the Company engaged Infotech to
undertake all activities necessary to build a solar technology business in
China, including the acquisition of manufacturing facilities and equipment,
employees and inventory. The Agency Agreement continued through April 10,
2008 and then on a month to month basis thereafter until terminated by either
party.
To
permanently consolidate Infotech with the Company through legal ownership, the
Company acquired Infotech at a nominal amount on August 19, 2008 through a
series of agreements. In connection with executing these agreements, the Company
terminated the original agency relationship with Infotech.
The
Company had previously consolidated the financial statements of Infotech with
its financial statements pursuant to FASB ASC 810-10 “Consolidations”, formerly
referenced as FASB Interpretation No. 46(R), due to the agency
relationship between the Company and Infotech and, notwithstanding the
termination of the Agency Agreement, the Company continues to consolidate the
financial statements of Infotech with its financial statements since Infotech
became a wholly-owned subsidiary of the Company as a result of the
acquisition.
The
Company’s consolidated financial statements include the accounts of Solar
EnerTech Corp. and its subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. These consolidated financial statements
have been prepared in U.S. dollars and in accordance with U.S. generally
accepted accounting principles (“U.S. GAAP”).
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
Cash and
cash equivalents are defined as cash on hand, demand deposits and short-term,
highly liquid investments that are readily convertible to known amounts of cash
within ninety days of deposit.
Currency
and Foreign Exchange
The
Company’s functional currency is the Renminbi as substantially all of the
Company’s operations are in China. The Company’s reporting currency is the U.S.
dollar.
Transactions
and balances originally denominated in U.S. dollars are presented at their
original amounts. Transactions and balances in other currencies are converted
into U.S. dollars in accordance with FASB ASC 830, “Foreign Currency Matters,”
formerly referenced as SFAS No. 52,
“Foreign Currency
Translation”, and are included in determining net income or loss.
For
foreign operations with the local currency as the functional currency, assets
and liabilities are translated from the local currencies into U.S. dollars at
the exchange rate prevailing at the balance sheet date. Revenues and expenses
are translated at weighted average exchange rates for the period to approximate
translation at the exchange rates prevailing at the dates those elements are
recognized in the consolidated financial statements. Translation adjustments
resulting from the process of translating the local currency consolidated
financial statements into U.S. dollars are included in determining comprehensive
loss.
Property
and Equipment
The
Company’s property and equipment are stated at cost net of accumulated
depreciation. Depreciation is provided using the straight-line method over the
related estimated useful lives, as follows:
|
|
Useful Life (Years)
|
Office
equipment
|
|
3
to 5
|
Machinery
|
|
10
|
Production equipment
|
|
5
|
Automobiles
|
|
5
|
Furniture
|
|
5
|
Leasehold
improvement
|
|
the
shorter of the lease term or 5
years
|
Expenditures
for maintenance and repairs that do not improve or extend the lives of the
related assets are expensed to operations. Major repairs that improve or extend
the lives of the related assets are capitalized.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined by the
weighted-average method. Market is defined principally as net realizable value.
Raw material cost is based on purchase costs while work-in-progress and finished
goods are comprised of direct materials, direct labor and an allocation of
manufacturing overhead costs. Inventory in-transit is included in finished goods
and consists of products shipped but not recognized as revenue because it does
not meet the revenue recognition criteria. Provisions are made for excess, slow
moving and obsolete inventory as well as inventory whose carrying value is in
excess of net realizable value.
Warranty
Cost
The
Company provides product warranties and accrues for estimated future warranty
costs in the period in which revenue is recognized. The Company’s standard solar
modules are typically sold with a two-year warranty for defects in materials and
workmanship and a ten-year and twenty five-year warranty against declines of
more than 10.0% and 20.0%, respectively, of the initial minimum power generation
capacity at the time of delivery. The Company therefore maintains warranty
reserves to cover potential liabilities that could arise from its warranty
obligations and accrues the estimated costs of warranties based primarily on
management’s best estimate. In estimating warranty costs, the Company applied
460 – Guarantees, specifically paragraphs, 460-10-25-5 to 460-10-25-7 of the
FASB Accounting Standards Codification. This guidance requires that the Company
make a reasonable estimate of the amount of a warranty obligation. It also
provides that in the case of an entity that has no experience of its own,
reference to the experience of other entities in the same business may be
appropriate. Because the Company began to commercialize its products in fiscal
year 2007, there is insufficient experience and historical data that can be used
to reasonably estimate the expected failure rate of its solar modules. Thus, the
Company considers warranty cost provisions of other China-based manufacturers
that produce photovoltaic products that are comparable in engineering design,
raw material input and functionality to the Company’s products, and sold to a
similar target and class of customer with similar warranty coverage. In
determining whether such peer information can be used, the Company also
considers the years of experience that these manufacturers have in the industry.
Because the Company’s industry is relatively young as compared to other
traditional manufacturing industries, the selected peer companies that the
Company considers have less than ten years in manufacturing and selling history.
In addition, they have a manufacturing base in China, offer photovoltaic
products with comparable engineering design, raw material input, functionality
and similar warranty coverage, and sell in markets, including the geographic
areas and class of customer, where the Company competes. Based on the analysis
applied, the Company accrues warranty at 1% of sales. The Company has not
experienced any material warranty claims to date in connection with declines of
the power generation capacity of its solar modules and will prospectively revise
its actual rate to the extent that actual warranty costs differ from the
estimates. As of September 30, 2010 and 2009, the Company’s warranty liability
was $1,125,000 and $515,000, respectively. The Company’s warranty costs for the
fiscal years ended September 30, 2010 and 2009 were $595,000 and $263,000,
respectively. The Company did not make any warranty payments during the fiscal
years ended September 30, 2010 and 2009.
Other
Assets
The
Company acquired land use rights to a parcel of land from the government in the
People’s Republic of China (“PRC”). All land in the PRC is owned by the PRC
government and cannot be sold to any individual or entity. The government in the
PRC, according to relevant PRC law, may sell the right to use the land for a
specified period of time. Thus, the Company’s land purchase in the PRC is
considered to be leasehold land and recorded as other assets at cost less
accumulated amortization. Amortization is provided over the term of the land use
right agreements on a straight-line basis, which is for 46.5 years from February
8, 2010 through August 31, 2056.
Impairment
of Long Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. When such factors and circumstances exist, management compares the
projected undiscounted future cash flows associated with the future use and
disposal of the related asset or group of assets to their respective carrying
values. Impairment, if any, is measured as the excess of the carrying value over
the fair value, based on market value when available, or discounted expected
cash flows, of those assets and is recorded in the period in which the
determination is made. During the fiscal year ended September 30, 2009 the
Company recorded an impairment loss on property and equipment of approximately
$960,000 to reflect the idle machinery which could not meet the quality
requirements and could not be put into mass production. No loss on property and
equipment impairment was recorded during fiscal year ended September 30,
2010.
Investments
Investments
in an entity where the Company owns less than twenty percent of the voting stock
of the entity and does not exercise significant influence over operating and
financial policies of the entity are accounted for using the cost method.
Investments in the entity where the Company owns twenty percent or more but not
in excess of fifty percent of the voting stock of the entity or less than twenty
percent and exercises significant influence over operating and financial
policies of the entity are accounted for using the equity method. The Company
has a policy in place to review its investments at least annually, to evaluate
the carrying value of the investments in these companies. The cost method
investment is subject to impairment assessment if there are identified events or
changes in circumstance that may have a significant adverse affect on the fair
value of the investment. If the Company believes that the carrying value of an
investment is in excess of estimated fair value, it is the Company’s policy to
record an impairment charge to adjust the carrying value to the estimated fair
value, if the impairment is considered other-than-temporary.
On August
21, 2008, the Company entered into an equity purchase agreement in which it
acquired two million shares of common stock of 21-Century Silicon, Inc., a
polysilicon manufacturer based in Dallas, Texas (“21-Century Silicon”), for $1.0
million in cash. The two million shares of common stock represented
approximately 7.8% of 21-Century Silicon’s outstanding equity. In connection
with the equity purchase agreement, the Company also signed a memorandum of
understanding with 21-Century Silicon for a four-year supply framework agreement
for polysilicon shipments. The first polysilicon shipment from
21-Century Silicon was initially expected in March 2009, but was subsequently
delayed to March 2010. On March 5, 2009, the Emerging Technology Fund, created
by the State of Texas, invested $3.5 million in 21-Century Silicon to expedite
production and commercialization of research. The Company’s ownership of
21-Century Silicon became 5.5% as a result of the dilution. This first
polysilicon shipment that was to be delivered in March 2010 was further delayed
without a specified date given by 21-Century Silicon. As a result of the
continued delays in shipment, in July 2010, members of the Company’s executive
team, including the CEO, visited 21-Century Silicon and conducted reviews of the
production facility and technical development. The review indicated
that 21-Century Silicon’s production facility and technical development were
significantly below expected standards. Based on the findings from this visit,
the timing of the first polysilicon shipment is unknown and it is unknown
whether it will even occur. In addition, management of 21-Century Silicon
expressed the need for more funding to sustain operations. Moreover, 21-Century
Silicon could not provide the Company with updated financial information
concerning 21-Century Silicon’s working capital condition and future cash
flows. The Company considered the above findings were indicators that
a significant adverse effect on the fair value of the Company’s investment in
21-Century Silicon had occurred. Accordingly, an impairment loss of $1.0 million
was recorded in the Consolidated Statements of Operations for the fiscal year
ended September 30, 2010 to fully write-down the carrying amount of the
investment. The Company may also be obligated to acquire an additional two
million shares of 21-Century Silicon upon the first polysilicon shipment meeting
the quality specifications determined solely by the Company. As of September 30,
2010, the Company has not yet acquired the additional two million shares as the
product shipment has not occurred. In connection with its impairment
of the investment in 21-Century Silicon, the Company considers the likelihood
that it will be required to acquire the additional two million shares to be
remote. On October 7, 2010, the X-Change Corporation announced that it has
acquired 21-Century Silicon, Inc. The terms of the acquisition is anticipated to
involve a change in control of the Company and the appointment of new directors.
The X-Change Corporation is anticipated to issue 20 million shares of its
unregistered, restricted common stock to the shareholders of the 21-Century
Silicon in exchange for 100% of the issued and outstanding stock of 21-Century
Silicon.
Income
Taxes
The
Company accounts for income taxes under the liability method per the provisions
of Accounting Standards Codification Topic 740 (“ASC 740”), “Income
Taxes”.
Under the
provisions of ASC 740, deferred tax assets and liabilities are determined based
on the differences between their financial statement carrying values and their
respective tax bases using enacted tax rates that will be in effect in the
period in which the differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Valuation
Allowance
In
assessing the realizability of deferred tax assets, the Company has considered
whether it is more-likely-than-not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The Company
records a valuation allowance to reduce deferred tax assets to a net amount that
management believes is more-likely-than-not of being realizable based on the
weight of all available evidence. In the event that the Company changes its
determination as to the amount of deferred tax assets that are
more-likely-than-not to be realized, the Company will adjust its valuation
allowance with a corresponding impact to the provision for income taxes in the
period in which such determination is made.
Unrecognized
Tax Benefits
Effective
on October 1, 2007, the Company adopted the provisions related to uncertain tax
positions under ASC 740, “Income Taxes”, formerly referenced as FIN 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109”. Under ASC 740, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority based on the technical merits of the associated tax position. An
uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. The Company 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 be effectively settled within one year as current liabilities, otherwise, the
unrecognized tax benefits will be classified as non-current
liabilities.
Derivative
Financial Instruments
FASB ASC
815,
“Derivatives
and Hedging”, formerly referenced as SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended, requires all
derivatives to be recorded on the balance sheet at fair value. These
derivatives, including embedded derivatives in the Company’s structured
borrowings, are separately valued and accounted for on the balance sheet. Fair
values for exchange-traded securities and derivatives are based on quoted market
prices. Where market prices are not readily available, fair values are
determined using market based pricing models incorporating readily observable
market data and requiring judgment and estimates.
FASB ASC
815 requires freestanding contracts that are settled in a company’s own stock,
including common stock warrants, to be designated as an equity instrument, an
asset or a liability. Under FASB ASC 815 guidance, a contract designated as an
asset or a liability must be carried at fair value on a company’s balance sheet,
with any changes in fair value recorded in the company’s results of
operations.
The
Company’s management used market-based pricing models to determine the fair
values of the Company’s derivatives. The model uses market-sourced inputs such
as interest rates, exchange rates and volatilities. Selection of these inputs
involves management’s judgment and may impact net income.
The
Company’s management used the binomial valuation model to value the derivative
financial instruments and warrant liabilities at each valuation date. The model
uses inputs such as implied term, suboptimal exercise factor, volatility,
dividend yield and risk free interest rate. Selection of these inputs involves
management’s judgment and may impact estimated value. Management selected the
binomial model to value these derivative financial instruments and warrants as
opposed to the Black-Scholes-Merton model primarily because management believes
the binomial model produces a more reliable value for these instruments because
it uses an additional valuation input factor, the suboptimal exercise factor,
which accounts for expected holder exercise behavior which management believes
is a reasonable assumption with respect to the holders of these derivative
financial instruments and warrants.
Stock-Based
Compensation
On
January 1, 2006, Solar EnerTech began recording compensation expense
associated with stock options and other forms of employee equity compensation in
accordance with FASB ASC 718, “Compensation – Stock Compensation”, formerly
referenced as SFAS 123R, “Share-Based Payment”.
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single option approach. This
fair value is then amortized on a straight-line basis over the requisite service
periods of the awards, which is generally the vesting period. The following
assumptions are used in the Black-Scholes-Merton option pricing
model:
Expected
Term — The Company’s expected term represents the period that the Company’s
stock-based awards are expected to be outstanding.
Expected
Volatility — The Company’s expected volatilities are based on historical
volatility of the Company’s stock, adjusted where determined by management for
unusual and non-representative stock price activity not expected to recur. Due
to the limited trading history, the Company also considered volatility data of
guidance companies.
Expected
Dividend — The Black-Scholes-Merton valuation model calls for a single expected
dividend yield as an input. The Company currently pays no dividends and does not
expect to pay dividends in the foreseeable future.
Risk-Free
Interest Rate — The Company bases the risk-free interest rate on the implied
yield currently available on U.S. Treasury zero-coupon issues with an equivalent
remaining term.
Estimated
Forfeitures — When estimating forfeitures, the Company takes into consideration
the historical option forfeitures over the expected term.
Revenue
Recognition
The
Company recognizes revenues from product sales to direct customers and
distributors in accordance with guidance provided in FASB ASC 605, “Revenue
Recognition”, which states that revenue is realized or realizable and earned
when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
price to the buyer is fixed or determinable; and collectability is reasonably
assured. Where a revenue transaction does not meet any of these criteria it is
deferred and recognized once all such criteria have been met. In instances where
final acceptance of the product, system, or solution is specified by a direct
customer, revenue is deferred until all acceptance criteria have been met.
Contracts with distributors do not have significant post-shipment obligations,
other than product warranty, which is accrued for as warranty costs at the time
revenue is recognized, based on the above criteria. The Company does not grant
price concessions to distributors after shipment.
On a
transaction by transaction basis, the Company determines if the revenue should
be recorded on a gross or net basis based on criteria discussed in the Revenue
Recognition topic of the FASB Subtopic 605-405, “Reporting Revenue Gross as a
Principal versus Net as an Agent”. The Company considers the following factors
to determine the gross versus net presentation: if the Company (i) acts as
principal in the transaction; (ii) takes title to the products; (iii) has risks
and rewards of ownership, such as the risk of loss for collection, delivery or
return; and (iv) acts as an agent or broker (including performing services, in
substance, as an agent or broker) with compensation on a commission or fee
basis.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are carried at net realizable value. The Company records provision
for bad debts based on an assessment of the recoverability of accounts
receivable. Specific provisions are made to the receivables where events or
changes in circumstances indicate that the balances may not be collectible. The
Company considers various factors, including historical experience, the age of
the accounts receivable balances, credit quality of the Company’s customers,
current economic conditions, and other factors that may affect customers’
ability to pay. The Company performs a specific provision review of the
outstanding accounts receivable at least quarterly.
Shipping
and Handling Costs
The
Company incurred shipping and handling costs of $1,761,000 and $239,000 for the
fiscal years ended September 30, 2010 and 2009, respectively, which are included
in selling expenses. Shipping and handling costs include costs incurred with
third-party carriers to transport products to customers.
Research
and Development Cost
Expenditures
for research activities relating to product development are charged to expense
as incurred. Research and development cost for the years ended September 30,
2010 and 2009 were $347,000 and $700,000, respectively.
Comprehensive
Loss
Comprehensive
loss is defined as the change in equity of the Company during a period from
transactions and other events and circumstances excluding transactions resulting
from investments by owners and distributions to owners. Comprehensive
loss is reported in the consolidated statements of shareholder’s
equity. Other comprehensive income of the Company consists of
cumulative foreign currency translation adjustments.
Segment
Information
The
Company identifies its operating segments based on its business activities. The
Company operates within a single operating segment - the manufacture of solar
energy cells and modules in China. The Company’s manufacturing operations and
fixed assets are all based in China. The solar energy cells and modules are
distributed to customers, located in Europe, Australia, North America and
China.
During
the fiscal years ended September 30, 2010 and 2009, the Company had two and four
customers, respectively that accounted for more than 10% of net
sales.
Recent
Accounting Pronouncements
In
January 2010, the FASB issued ASU 2010-06, which amended “Fair Value
Measurements and Disclosures” (ASC Topic 820) — “Improving Disclosures about
Fair Value Measurements”. This guidance amends existing authoritative guidance
to require additional disclosures regarding fair value measurements, including
the amounts and reasons for significant transfers between Level 1 and Level 2 of
the fair value hierarchy, the reasons for any transfers into or out of Level 3
of the fair value hierarchy, and presentation on a gross basis of information
regarding purchases, sales, issuances, and settlements within the Level 3
rollforward. This guidance also clarifies certain existing disclosure
requirements. The guidance is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements within the Level 3 rollforward,
which are effective for interim and annual reporting periods beginning after
December 15, 2010. The Company adopted this guidance on January 1, 2010.
The adoption of this guidance did not have a significant impact on the Company’s
financial statements.
In
February 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09,
which amended “Subsequent Events” (ASC Topic 855) — “Amendments to Certain
Recognition and Disclosure Requirements”. The amendments were made to address
concerns about conflicts with SEC guidance and other practice issues. Among the
provisions of the amendment, the FASB defined a new type of entity, termed an
“SEC filer,” which is an entity required to file or furnish its financial
statements with the SEC. Entities other than registrants whose financial
statements are included in SEC filings (e.g., businesses or real estate
operations acquired or to be acquired, equity method investees, and entities
whose securities collateralize registered securities) are not SEC filers. While
an SEC filer is still required by U.S. GAAP to evaluate subsequent events
through the date its financial statements are issued, it is no longer required
to disclose in the financial statements that it has done so or the date through
which subsequent events have been evaluated. The Company adopted this guidance
on February 24, 2010. The adoption of this guidance did not have a significant
impact on the Company’s financial statements.
NOTE
4 — FINANCIAL INSTRUMENTS
Concentration
of Credit risk
The
Company’s assets that are potentially subject to significant concentration of
credit risk are primarily cash and cash equivalents, advance payments to
suppliers and accounts receivable.
The
Company maintains cash deposits with financial institutions, which from time to
time may exceed federally insured limits. The Company has not experienced any
losses in connection with these deposits and believes it is not exposed to any
significant credit risk from cash. At September 30, 2010 and 2009, the
Company had approximately $82,000 and $144,000, respectively in excess of
insured limits.
Advance
payments to suppliers are typically unsecured and arise from deposits paid in
advance for future purchases of raw materials. The Company does not require
collateral or other security against the prepayments to suppliers for raw
materials. In the event of a failure by the Company’s suppliers to
fulfill their contractual obligations and to the extent that the Company is not
able to recover its prepayments, the Company would suffer losses. The Company’s
prepayments to suppliers have been steadily decreasing due to the change in the
industry practice from requiring full cash advance to secure key raw material
(silicon wafers) as a result of the financial crisis in 2008 to requiring less
or no cash advance during fiscal year 2009 as the economy is recovering from the
crisis. The economic crisis may affect the Company’s customers’ ability to pay
the Company for its products that the Company has delivered. If the
customers fail to pay the Company for its products and services, the Company’s
financial condition, results of operations and liquidity may be adversely
affected.
Other
financial instruments that potentially subject the Company to concentration of
credit risk consist principally of accounts
receivables. Concentrations of credit risk with respect to accounts
receivables are limited because a number of geographically diverse customers
make up the Company’s customer base, thus spreading the trade credit
risk. The Company controls credit risk through credit approvals,
credit limits and monitoring procedures. The Company performs credit
evaluations for all new customers but generally does not require collateral to
support customer receivables. All of the Company’s customers have gone
through a very strict credit approval process. The
Company diligently monitors the customers’ financial position. Payment
terms for our solar module sales generally range from 0 to 60 days. In some
cases, these terms are extended up to 200 days for certain qualifying customers
of whom the Company applied rigorous credit requirements. The Company has
also purchased insurance from the China Export & Credit Insurance
Company to insure the collectability of the outstanding accounts receivable
balances of two key customers. During the fiscal years ended September 30, 2010
and 2009, the Company had two and four customers, respectively that accounted
for more than 10% of net sales.
Foreign
exchange risk and translation
The
Company may be subject to significant currency risk due to the fluctuations of
exchange rates between the Chinese Renminbi, Euro and the United States
dollar.
The local
currency is the functional currency for the China subsidiary. Assets
and liabilities are translated at end of period exchange rates while revenues
and expenses are translated at the average exchange rates in effect during the
period. Equity is translated at historical rates and the resulting
cumulative translation adjustments, to the extent not included in net income,
are included as a component of other comprehensive income (loss) until the
translation adjustments are realized. Included in other comprehensive income was
a foreign currency translation adjustment gain of $299,000 and a foreign
currency translation adjustment loss of $29,000 for the fiscal years ended
September 30, 2010 and 2009, respectively. Foreign currency
transaction gains and losses are included in earnings. For fiscal years ended
September 30, 2010 and 2009, the Company recorded foreign exchange loss of $1.1
million and foreign exchange gain of $0.1 million,
respectively.
NOTE
5 — ADVANCE PAYMENTS AND OTHER
At
September 30, 2010 and 2009, advance payments and other consist of:
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
Prepayment
for raw materials
|
|
$
|
673,000
|
|
|
$
|
698,000
|
|
Prepayment
for equipments
|
|
|
402,000
|
|
|
|
-
|
|
Others
|
|
|
199,000
|
|
|
|
101,000
|
|
Total
advance payments and other
|
|
$
|
1,274,000
|
|
|
$
|
799,000
|
|
NOTE
6 — INVENTORY
At
September 30, 2010 and 2009, inventory consists of:
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
Raw
materials
|
|
$
|
2,639,000
|
|
|
$
|
1,708,000
|
|
Work
in process
|
|
|
-
|
|
|
|
945,000
|
|
Finished
goods
|
|
|
1,444,000
|
|
|
|
1,342,000
|
|
Total
inventories
|
|
$
|
4,083,000
|
|
|
$
|
3,995,000
|
|
NOTE
7 — PROPERTY AND EQUIPMENT
The
Company depreciates its assets over their estimated useful lives. A summary of
property and equipment at September 30, 2010 and 2009 is as
follows:
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
Production
equipment
|
|
$
|
8,130,000
|
|
|
$
|
7,383,000
|
|
Leasehold
improvements
|
|
|
3,709,000
|
|
|
|
3,620,000
|
|
Automobiles
|
|
|
366,000
|
|
|
|
496,000
|
|
Office
equipment
|
|
|
348,000
|
|
|
|
342,000
|
|
Machinery
|
|
|
2,916,000
|
|
|
|
2,749,000
|
|
Furniture
|
|
|
40,000
|
|
|
|
39,000
|
|
Construction
in progress
|
|
|
-
|
|
|
|
22,000
|
|
Total
property and equipment
|
|
|
15,509,000
|
|
|
|
14,651,000
|
|
Less: accumulated
depreciation
|
|
|
(6,635,000
|
)
|
|
|
(4,142,000
|
)
|
Total
property and equipment, net
|
|
$
|
8,874,000
|
|
|
$
|
10,509,000
|
|
Total
depreciation expenses for the years ended September 30, 2010 and 2009 were $2.4
million and $2.3 million, respectively.
NOTE
8 — OTHER ASSETS
Other
assets mainly consist of the following:
|
|
September 30, 2010
|
|
|
|
|
|
Land
use rights
|
|
|
|
Cost
|
|
$
|
746,000
|
|
Less:
Accumulated amortization
|
|
|
(11,000
|
)
|
|
|
|
|
|
Total
other assets
|
|
$
|
735,000
|
|
On
February 8, 2010, the Company acquired land use rights of 68,025 square meter
parcel of land located in Yizheng, Jiangsu Province of China, which will be used
to house the Company’s second manufacturing facility. For each of the next five
years, annual amortization expense of the land use rights will be approximately
$16,000 with an estimated useful life of 46.5 years
.
NOTE
9 — SHORT TERM LOANS
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
1,312,000
|
|
|
$
|
-
|
|
On March
25, 2010, the Company entered into a one year contract with China Export &
Credit Insurance Corporation (“CECIC”) to insure the collectability of
outstanding accounts receivable for two of the Company’s key customers. The
Company pays a fee based on a fixed percentage of the accounts
receivable outstanding and expenses this fee when it is incurred. The cost
of the insurance on accounts receivable is recorded as selling, general and
administrative costs in the Statement of Operation of the Company. In addition,
on March 30, 2010, the Company entered into a one year revolving credit
facility arrangement with IBC that is secured by the accounts receivable
balances of the two key customers insured by CECIC above. The interest rate
of this credit facility is variable and ranges from 3.30% to 4.48% during the
period from March 30, 2010 to September 30, 2010.
The
Company can draw up to the lower of $2,000,000 or the cumulative amount of
accounts receivable outstanding from the respective two key customers. If
any of the insured customers fail to repay the amounts outstanding due to the
Company, the insurance proceeds will be remitted directly to IBC instead of
the Company. Amounts drawn down as of September 30, 2010, amounted to
$1,312,000, of which US$335,000, $326,000 and $651,000 are due on November 4,
November 11 and November 17, 2010, respectively. As of September 30,
2010, the amount available to be drawn was $688,000. There have been no
insurance claims submitted to CECIC. There is no commitment fees associated
with the unused portion of the credit facility. The weighted average interest
rate on this credit facility as of September 30, 2010 was 3.794% per annum.
The
credit facility contains certain non-financial ratios related covenants,
including maintaining creditworthiness, complying with all contractual
obligations, providing true and accurate records as requested by IBC,
fulfillment of other indebtedness (if any), maintaining its business license and
continuing operations, ensuring its financial condition does not deteriorate,
remaining solvent, and other conditions, as defined in the credit facility
agreement. The Company complied with these covenants as of September 30,
2010.
NOTE
10 — INCOME TAXES
The
Company has no taxable income and no provision for federal and state income
taxes is required for 2010 and 2009, except certain state minimum
tax.
Accounting
income / (loss) before income taxes consists of:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
United
States
|
|
|
(23,280,000
|
)
|
|
|
(7,632,000
|
)
|
The
PRC
|
|
|
(1,734,000
|
)
|
|
|
(6,549,000
|
)
|
Total
|
|
|
(25,014,000
|
)
|
|
|
(14,181,000
|
)
|
The
Company conducts its business in the United States and in various foreign
locations and generally is subject to the respective local countries’ statutory
tax rates.
A
reconciliation of the statutory federal rate and the Company’s effective tax
rate for the fiscal years ended September 30, 2010 and 2009 are as
follows:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
U.S.
federal taxes (benefit)
|
|
|
|
|
|
|
At
statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Gain
(loss) on derivative/warrant and other permanents
|
|
|
(24
|
%)
|
|
|
(5
|
%)
|
Stock-based
compensation
|
|
|
(4
|
%)
|
|
|
(11
|
%)
|
Difference
between statutory rate and foreign effective rate
|
|
|
(4
|
%)
|
|
|
(3
|
%)
|
Change
in Valuation allowance
|
|
|
(4
|
%)
|
|
|
(15
|
%)
|
Deferred
tax expenses
|
|
|
2
|
%
|
|
|
0
|
%
|
Total
|
|
|
0
|
%
|
|
|
0
|
%
|
Significant
components of the Company’s deferred tax assets and liabilities as of
September 30, 2010 and 2009 are as follows:
|
|
Year
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
4,978,000
|
|
|
$
|
5,678,000
|
|
Stock-based
compensation
|
|
|
565,000
|
|
|
|
513,000
|
|
Allowances
and reserve
|
|
|
3,272,000
|
|
|
|
1,779,000
|
|
Depreciation
and amortization
|
|
|
281,000
|
|
|
|
151,000
|
|
Total
deferred tax assets
|
|
|
9,096,000
|
|
|
|
8,121,000
|
|
Less
valuation allowance
|
|
|
(9,096,000
|
)
|
|
|
(8,121,000
|
)
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of
September 30, 2010 and 2009, the Company had United States federal net
operating loss carry forwards of approximately $6.7 million and $5.7
million, respectively. These net operating loss carry forwards will expire at
various dates beginning in 2026 if not utilized. In addition, the Company had
U.S. state net operating loss carry forwards of approximately $4.0 million
and $4.5 million as of September 30, 2010 and 2009, respectively, and
these losses will begin to expire at various dates beginning in 2020 if not
utilized. In addition, the Company had foreign net operating loss carry forwards
of approximately $11.9 million and $14.0 million as of
September 30, 2010 and 2009, respectively. These net operating loss
carryforwards will begin to expire in 2012 if not utilized. The
Company has no tax credit carry forwards. The stock-based compensation amounts
above reported in the prior year have been reclassified to reflect the
limitations of its deductibility based on U.S. income tax rules upon future
vesting.
As of
September 30, 2010, due to the history of losses the Company has generated,
the Company believes that it is more-likely-than-not that the deferred tax
assets will not be realized. Therefore, the Company has a full valuation
allowance on the Company’s deferred tax assets of
$10.5 million. Utilization of the U.S. federal and state net operating
loss carry forwards may be subject to substantial annual limitation due to
certain limitations resulting from ownership changes provided by U.S. federal
and state tax laws. The annual limitation may result in the expiration of net
operating losses carryforwards and credits before utilization.
Under the
New Income Tax Law in PRC, dividends paid by PRC enterprises out of profits
earned post-2007 to non-PRC tax resident investors are subject to PRC
withholding tax of 10%. A lower withholding tax rate may be applied based on
applicable tax treaties with certain countries.
The New
Income Tax Law also provides that enterprises established under the laws of
foreign countries or regions and whose “place of effective management” is
located within the PRC are considered PRC tax resident enterprises and subject
to PRC income tax at the rate of 25% on worldwide income. The definition of
“place of effective management" refers to an establishment that exercises, in
substance, overall management and control over the production and business,
personnel, accounting, properties, etc. of an enterprise. As of September 30,
2010, no specific interpretation or guidance has been issued to define “place of
effective management”. Furthermore, as of September 30, 2010, the administrative
practice associated with interpreting and applying the concept of “place of
effective management” is unclear. If the Company or any of its
non-PRC subsidiaries is treated as a “resident enterprise” for PRC tax purposes,
the Company or such subsidiary will be subject to PRC income tax. The Company
will continue to monitor its tax status with regard to the PRC tax resident
enterprise regulation.
There are
no ongoing examinations by taxing authorities at this time. The Company’s tax
years starting from 2006 to 2009 remain open in various tax jurisdictions. The
Company has not recorded any unrecognized tax benefits; and does not anticipate
any significant changes within the next 12 months.
NOTE
11 — CONVERTIBLE NOTES
On
March 7, 2007, Solar EnerTech entered into a securities purchase agreement
to issue $17.3 million of secured convertible notes (the “Notes”) and detachable
stock purchase warrants the “Series A and Series B Warrants”). Accordingly,
during the quarter ended March 31, 2007, Solar EnerTech sold units
consisting of:
|
•
|
$5.0
million in principal amount of Series A Convertible Notes and
warrants to purchase 7,246,377 shares (exercise price of $1.21 per share)
of its common stock;
|
|
•
|
$3.3
million in principal amount of Series B Convertible Notes and
warrants to purchase 5,789,474 shares (exercise price of $0.90 per share)
of its common stock ; and
|
|
•
|
$9.0
million in principal amount of Series B Convertible Notes and
warrants to purchase 15,789,474 shares (exercise price of $0.90 per share)
of its common stock.
|
These
Notes bear interest at 6% per annum and are due in 2010. Under their original
terms, the principal amount of the Series A Convertible Notes may be
converted at the initial rate of $0.69 per share for a total of 7,246,377 shares
of common stock (which amount does not include shares of common stock that may
be issued for the payment of interest). Under their original terms, the
principal amount of the Series B Convertible Notes may be converted at the
initial rate of $0.57 per share for a total of 21,578,948 shares of common stock
(which amount does not include shares of common stock that may be issued for the
payment of interest).
The
Company evaluated the Notes for derivative accounting considerations under FASB
ASC 815 and determined that the notes contained two embedded derivative
features, the conversion option and a redemption privilege accruing to the
holder if certain conditions exist (the “compound embedded derivative” or
“CED”). The compound embedded derivative is measured at fair value both
initially and in subsequent periods. Changes in fair value of the compound
embedded derivative are recorded in the account “gain (loss) on fair market
value of compound embedded derivative” in the accompanying consolidated
statements of operations.
In
connection with the issuance of the Notes and Series A and Series B Warrants,
the Company engaged an exclusive advisor and placement agent (the “Advisor”) and
issued warrants to the Advisor to purchase an aggregate of 1,510,528 shares at
an exercise price of $0.57 per share and 507,247 shares at an exercise price of
$0.69 per share, of the Company’s common stock (the “Advisor Warrants”). In
addition to the issuance of the warrants, the Company paid $1,038,000 in
commissions, an advisory fee of $173,000, and other fees and expenses of
$84,025.
The
Series A and Series B Warrants (including the Advisor Warrants) were classified
as a liability, as required by FASB ASC 480, “Distinguishing Liabilities from
Equity”, formerly referenced as SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity”, due to the
terms of the warrant agreement which contains a cash redemption provision in the
event of a fundamental transaction. The warrants are measured at fair value both
initially and in subsequent periods. Changes in fair value of the warrants are
recorded in the account “gain (loss) on fair market value of warrant liability”
in the accompanying consolidated statements of operations.
In
conjunction with the March 2007 financing, the Company recorded a total deferred
financing cost of $2.5 million, of which $1.3 million represented cash payment
and $1.2 million represented the fair market value of the Advisor Warrants. The
deferred financing cost is amortized over the three year life of the notes using
a method that approximates the effective interest rate method. The Advisor
Warrants were recorded as a liability and adjusted to fair value in each
subsequent period.
On
January 7, 2010 (the “Conversion Date”), the Company entered into a Series A and
Series B Notes Conversion Agreement (the “Conversion Agreement”) with the
holders of Notes representing at least seventy-five percent of the aggregate
principal amounts outstanding under the Notes to restructure the terms of the
Notes. As of the Conversion Date, approximately $9.8 million of the Series A and
B Convertible Notes were effectively converted into 64,959,227 shares of the
Company’s common stock along with 1,035,791 shares of the Company’s common stock
as settlement of the accrued interest on the Series A and B Convertible Notes,
and the remaining $1.8 million of the Series B Notes were exchanged into another
convertible note as further discussed below. In connection with the Conversion
Agreement, on January 7, 2010, the Company entered into an Amendment (the
“Warrant Amendment”) to the Series A, Series B and Series C Warrants with the
holders of at least a majority of the common stock underlying each of its
outstanding Series A Warrants, Series B Warrants and Series C Warrants
(collectively the “PIPE Warrants”). The Warrant Amendment reduced the exercise
price for all of the PIPE Warrants from $1.21, $0.90 and $1.00, respectively, to
$0.15, removed certain maximum ownership provisions and removed anti-dilution
provisions for lower-priced security issuances.
The
Conversion Agreement resulted in modifications or exchanges of the Notes and
PIPE Warrants, which should be accounted for pursuant to FASB ASC 405-20,
“Liabilities” and FASB ASC 470-50, "Debt/Modifications and Extinguishment"
formerly referenced as EITF Consensus for Issue No. 96-19, "Debtor's Accounting
for a Modification (or Exchange) of Convertible Debt Instruments". The
combination of the adjustment to conversion price and the automatic conversion
of the Notes effectively resulted in the settlement of the Notes through the
issuance of shares of the Company’s common stock and amendment of the PIPE
Warrants’ terms. Since the Company is relieved of its obligation for the Notes,
the transaction is accounted for as an extinguishment of the Notes upon issuance
of ordinary shares and modification of the PIPE Warrants’ terms. The loss on
extinguishment associated with the Conversion Agreement amounted to
approximately $17.2 million.
On
January 19, 2010, a holder of approximately $1.8 million of the Company’s
formerly outstanding Series B Notes and Series B Warrants (hereinafter referred
to as the “Holder”) of the Company’s common stock disputed the effectiveness of
the Conversion Agreement and the Warrant Amendment. Accordingly, the
Holder did not tender its Series B Notes for conversion. After negotiations with
the Holder, on March 19, 2010, the Company entered into an Exchange Agreement
with the Holder (the “Exchange Agreement”), whereby the Company issued the
Series B-1 Note with a principal amount of $1.8 million (the “Series B-1 Note”)
to the Holder along with 283,498 shares of the Company’s common stock as
settlement of the accrued interest on the Holder’s Series B Notes and 666,666
shares of the Company’s common stock as settlement of the outstanding dispute
regarding the effectiveness of the Company’s Conversion Agreement and the
Warrant Amendment. The Company did not capitalize any financing costs
associated with the issuance of the Series B-1 Note. As of September 30,
2010, the Company has an outstanding convertible note with a principal balance
of $1.8 million consisting of the Series B-1 Note, which was recorded at a
carrying amount of $1.5 million. The Series B-1 Note bears interest at 6% per
annum and is due on March 19, 2012. During the fiscal year ended September 30,
2010, the Company issued 26,648 shares of its common stock to
settle the accrued interest on the Series B-1 Note.
The
Exchange Agreement resulted in modifications or exchanges of the Holder’s rights
under its former Series B Note, which should be accounted for pursuant to FASB
ASC 470-50, "Debt/Modifications and Extinguishment" formerly referenced as EITF
Consensus for Issue No. 96-19, "Debtor's Accounting for a Modification (or
Exchange) of Convertible Debt Instruments", and FASB ASC 470-50,
"Debt/Modifications and Extinguishment" formerly referenced as EITF Consensus
for Issue No.06-06, "Debtor's Accounting for a Modification (or Exchange) of
Convertible Debt Instruments". The loss on debt extinguishment associated with
the Exchange Agreement amounted to approximately $1.3 million.
The costs
associated with the Conversion Agreement were directly derived from the
execution of the Company’s plan in improving its liquidity and business
sustainability. The related loss on debt extinguishment was a cost that was
integral to the continuing operations of the business which is different in
nature to the continuing interest payments and change in fair value of the
compound embedded derivative and warrant liability. Accordingly, the loss on
debt extinguishment is included in operating expenses in the accompanying
consolidated statements of operations.
The
Company evaluated the Series B-1 Note for derivative accounting considerations
under FASB ASC 815 and determined that the Series B-1 Note contained two
embedded derivative features, the conversion option and a redemption privilege
accruing to the holder if certain conditions exist (the “compound embedded
derivative”). The compound embedded derivative is measured at fair value both
initially and in subsequent periods. Changes in fair value of the compound
embedded derivative are recorded in the account “gain (loss) on fair market
value of compound embedded derivative” in the accompanying consolidated
statements of operations.
The loss
on debt extinguishment is computed as follows:
|
|
Fiscal Years Ended
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
Fair
value of the common shares
|
|
$
|
18,915,000
|
|
|
$
|
316,000
|
|
Fair
value of Series B-1 Note
|
|
|
3,108,000
|
|
|
|
-
|
|
Unamortized
deferred financing costs associated with the converted
notes
|
|
|
594,000
|
|
|
|
140,000
|
|
Fair
value of the CED liability associated with the converted
notes
|
|
|
(94,000
|
)
|
|
|
(33,000
|
)
|
Accreted
amount of the notes discount
|
|
|
(7,585,000
|
)
|
|
|
104,000
|
|
Common
shares issued in conjunction with Series B-1 Note
|
|
|
100,000
|
|
|
|
-
|
|
Loss
on extinguishment of warrants
|
|
|
3,502,000
|
|
|
|
-
|
|
Loss
on debt extinguishment
|
|
$
|
18,540,000
|
|
|
$
|
527,000
|
|
During
the fiscal year ended September 30, 2010, $75,000 of the Series B-1 Note was
converted into 500,000 shares of the Company’s common stock. The Company
recorded a cumulative loss on debt extinguishment of approximately $18.5 million
as a result of the Conversion Agreement and the Exchange Agreement during the
fiscal year ended September 30, 2010.
For the
fiscal year ended September 30, 2009, $0.9 million of Series A and B Convertible
Notes were converted into the Company’s 1,455,069 common shares. The Company
recorded a loss on debt extinguishment of $0.5 million as a result of the
conversion based on the quoted market closing price of its common shares on the
conversion dates.
The
following table summarizes the valuation of the Notes and the related Compound
Embedded Derivative, the Series A and Series B Warrants (including the Advisor
Warrants), and the Series B-1 Note and the related Compound Embedded
Derivative:
|
|
Amount
|
|
Carrying
amount of notes at September 30, 2008
|
|
$
|
85,000
|
|
Amortization
of note discount and conversion effect
|
|
|
2,976,000
|
|
Carrying
amount of notes at September 30, 2009
|
|
$
|
3,061,000
|
|
Amortization
of note discount and conversion effect
|
|
|
(3,061,000
|
)
|
Carrying
amount of notes at September 30, 2010
|
|
$
|
-
|
|
|
|
|
|
|
Carrying
amount of Series B-1 Note at March 19, 2010
|
|
$
|
1,815,000
|
|
Fair
value of compound embedded derivative liabilities
|
|
|
(1,573,000
|
)
|
Loss
on debt extinguishment
|
|
|
1,293,000
|
|
Amortization
of note discount and conversion effect
|
|
|
(4,000
|
)
|
Carrying
amount of Series B-1 Note at September 30, 2010
|
|
$
|
1,531,000
|
|
|
|
|
|
|
Fair
value of warrant liability at September 30, 2008
|
|
$
|
3,412,000
|
|
Gain
on fair market value of warrant liability
|
|
|
(1,344,000
|
)
|
Fair
value of warrant liability at September 30, 2009
|
|
$
|
2,068,000
|
|
Loss
on PIPE warrant extinguishment
|
|
|
3,502,000
|
|
Cashless
exercise of warrants
|
|
|
(157,000
|
)
|
Gain
on fair market value of warrant liability
|
|
|
(4,511,000
|
)
|
Fair
value of warrant liability at September 30, 2010
|
|
$
|
902,000
|
|
|
|
|
|
|
Fair
value of Series A and B compound embedded derivative at September 30,
2008
|
|
$
|
980,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(770,000
|
)
|
Conversion
of Series A and B Notes
|
|
|
(32,000
|
)
|
Fair
value of compound embedded derivative at September 30,
2009
|
|
$
|
178,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(104,000
|
)
|
Loss
on debt extinguishment
|
|
|
(74,000
|
)
|
Fair
value of Series A and B compound embedded derivative at September 30,
2010
|
|
$
|
-
|
|
|
|
|
|
|
Fair
value of the Series B-1 compound embedded derivative liabilities at March
19, 2010
|
|
$
|
1,573,000
|
|
Gain
on fair market value of embedded derivative liability
|
|
|
(1,131,000
|
)
|
Effect
on debt conversion
|
|
|
(20,000
|
)
|
Fair
value of the Series B-1compound embedded derivative liabilities at
September 30, 2010
|
|
$
|
422,000
|
|
Series
B-1 Note
The
material terms of the Series B-1 Note are as follows:
Interest
Payments
The
Series B-1 Note bears interest at 6% per annum and the principal of $1,531,000
is due on March 19, 2012. Accrued interest is payable quarterly in arrears on
each of January 1, April 1, July 1 and October 1
,
beginning on the
first such date after issuance, in cash or registered shares of common stock at
the option of the Company. If the Company elects to pay any interest due in
registered shares of the Company’s common stock: (i) the issuance price
will be 90% of the 5-day weighted average price of the common stock ending on
the day prior to the interest payment due date, and (ii) a trigger event shall
not have occurred.
Voting
Rights
The
holder of the Series B-1 Note does not have voting rights under these
agreements.
Dividends
Until all
amounts owed under the Series B-1 Note have been converted, redeemed or
otherwise satisfied in accordance with their terms, the Company shall not,
directly or indirectly, redeem, repurchase or declare or pay any cash dividend
or distribution on its capital stock without the prior express written consent
of the required holders.
Conversion
Right
At any
time or times on or after the issuance date of the Series B-1 Note, the holder
is entitled to convert, at the holder’s sole discretion, any portion of the
outstanding and unpaid conversion amount (principal, accrued and unpaid interest
and accrued and unpaid late charges) may be converted into fully paid and
non-assessable shares of common stock, at the conversion rate discussed
next.
Conversion
Rate
The
number of shares of common stock issuable upon conversion of the Series B-1 Note
is determined by dividing (x) the conversion amount (principal, interest
and late charges accrued and unpaid), by (y) the then applicable conversion
price (initially $0.15 for Series B-1 Note, subject to adjustment as
provided in the agreement). No adjustment in the conversion price of the Series
B-1 Note will be made in respect of the issuance of additional shares of common
stock unless the consideration per share of an additional share of common stock
issued or deemed to be issued by the Company is less than the conversion price
of the Series B-1 Note in effect on the date of, and immediately prior to, such
issuance. Should the outstanding shares of common stock increase (by stock
split, stock dividend, or otherwise) or decrease (by reclassification or
otherwise), the conversion price of the Series B-1 Note in effect immediately
prior to the change shall be proportionately adjusted.
Redemptions
The
Series B-1 Note permits the holder the right of redemption in the event of
certain specified triggering events such as:
1)
|
|
The
suspension from trading or failure of the common stock to be listed on the
principal market or an eligible market for a period of five
(5) consecutive trading days or for more than an aggregate of ten
(10) trading days in any 365-day period;
|
|
|
|
2)
|
|
The
Company’s (A) failure to cure a conversion failure by delivery of the
required number of shares of common stock within ten (10) trading
days after the applicable conversion date or (B) notice, written or
oral, to any holder of the Series B-1 Note, including by way of public
announcement or through any of its agents, at any time, of its intention
not to comply with a request for conversion of any Series B-1 Note into
shares of common stock that is tendered in accordance with the provisions
of the Series B-1 Note;
|
|
|
|
3)
|
|
The
Company's failure to pay to the Holder any amount of principal (including,
without limitation, any redemption payments), interest, late charges or
other amounts when and as due under this Series B-1 Note except, in the
case of a failure to pay any interest and late charges when and as due, in
which case only if such failure continues for a period of at least five
(5) business days;
|
|
|
|
4)
|
|
(A)
The occurrence of any payment default or other default under any
indebtedness of the Company or any of its subsidiaries that results in a
redemption of or acceleration prior to maturity of $100,000 or more of
such indebtedness in the aggregate, or (B) the occurrence of any
material default under any indebtedness of the Company or any of its
subsidiaries having an aggregate outstanding balance in excess of $100,000
and such default continues uncured for more than ten (10) business days,
other than, in each case (A) or (B) above, or a default with
respect to any other Series B-1 Note;
|
|
|
|
5)
|
|
The
Company or any of its subsidiaries, pursuant to or within the meaning of
Title 11, U.S. Code, or any similar Federal, foreign or state law for the
relief of debtors (A) commences a voluntary case, (B) consents
to the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official
,
(D) makes
a general assignment for the benefit of its creditors or (E) admits
in writing that it is generally unable to pay its debts as they become
due;
|
|
|
|
6)
|
|
A
court of competent jurisdiction enters an order or decree under any
bankruptcy law that (A) is for relief against the Company or any of
its subsidiaries in an involuntary case, (B) appoints a custodian of
the Company or any of its subsidiaries or (C) orders the liquidation
of the Company or any of its
subsidiaries;
|
7)
|
|
A
final judgment or judgments for the payment of money aggregating in excess
of $250,000 are rendered against the Company or any of its subsidiaries
and which judgments are not, within sixty (60) days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay;
provided, however, that any judgment which is covered by insurance or an
indemnity from a credit worthy party shall not be included in calculating
the $250,000 amount set forth above so long as the Company provides the
holder with a written statement from such insurer or indemnity provider
(which written statement shall be reasonably satisfactory to the holder)
to the effect that such judgment is covered by insurance or an indemnity
and the Company will receive the proceeds of such insurance or indemnity
within thirty (30) days of the issuance of such judgment;
and
|
|
|
|
8)
|
|
The
Company breaches any representation, warranty, covenant or other term or
condition of any transaction document, except, in the case of a breach of
a covenant which is curable, only if such breach continues for a period of
at least ten (10) consecutive business days.
|
At any
time after becoming aware of a trigger event, the holder may require the Company
to redeem all or any portion of the Series B-1 Note at an amount equal to any
accrued and unpaid liquidated damages, plus the greater of (A) the
conversion amount to be redeemed multiplied by the redemption premium (125% for
trigger events described above in subparagraphs 1 to 5 and 8 above or 100% for
other events), or (B) the conversion amount to be redeemed multiplied by
the quotient of (i) the closing sale price at the time of the trigger event
(or at the time of payment of the redemption price, if greater) divided by
(ii) the conversion price
,
provided, however, (B) shall be applicable only in the
event that a trigger event of the type specified above in subparagraphs 1, 2 or
3 has occurred and remains uncured or the conversion shares otherwise could not
be received or sold by the holder without any resale restrictions.
Rights
upon Fundamental Transaction, Change of Control and Qualified
Financing
The
Series B-1 Note also contains certain provisions relating to the occurrences of
a fundamental transaction limiting the type of entity that can be a successor
entity and requiring the successor entity to assume the obligations of the
Series B-1 Note. In addition, the Series B-1 Note contains certain
provisions relating to a change of control or qualified financing which permit
the holder the right of redemption for all or a portion of the Series B-1
Note.
1)
|
Assumption.
The Company
may not enter into or be party to a fundamental transaction, as such terms
is defined in the Series B-1 Note,
unless:
|
|
•
|
The
successor entity assumes in writing all of the obligations of the Company
under the Series B-1 Note and related documents;
and
|
|
•
|
The
successor entity (including its parent entity) is a publicly traded
corporation whose common stock is quoted on or listed for trading on an
eligible market.
|
2)
|
Redemption Right on Change of
Control.
At any time during the period beginning on the date of the
holder’s receipt of a change of control notice and ending twenty
(20) trading days after the consummation of such change of control,
the holder may require the Company to redeem all or any portion of the
Series B-1 Note in cash for an amount equal to any accrued and unpaid
liquidated damages, plus the greater of (i) the product of (x) the
conversion amount being redeemed and (y) the quotient determined by
dividing (A) the greater of the closing sale price of the common
stock immediately prior to the consummation of the change of control, the
closing sale price immediately following the public announcement of such
proposed change of control and the closing sale price of the common stock
immediately prior to the public announcement of such proposed change of
control by (B) the conversion price and (ii) 125% of the
conversion amount being redeemed
.
|
3)
|
Redemption Right on Subsequent
Financing.
In the event that the Company or any of its subsidiaries
shall issue any of its or its subsidiaries' equity or equity equivalent
securities, or commit to issue or sell in one or more series of related
transactions or financings, including without limitation any debt,
preferred stock or other instrument or security that is, at any time
during its life and under any circumstances, convertible into or
exchangeable or exercisable for shares of common stock, options or
convertible securities (any such offer, sale, grant, disposition or
announcement of such current or future committed financing is referred to
as a "Subsequent Financing"), the Company is obligated to provide the
Holder written notice of the Subsequent Financing and the Holder, at its
option, may require the Company to redeem the Series B-1 Note up to the
Redemption Amount.
|
(A)
In
the event that the Gross Proceeds of the Subsequent Financing equals or exceeds
$15,000,000 (a “Qualified Financing”), the “Redemption Amount” shall equal 100%
of the Principal Amount then outstanding. For purposes hereof, “Gross
Proceeds” shall mean the aggregate proceeds received or receivable by the
Company in respect of one or more series of related future transactions or
financings for which the Company is committed in connection with such Qualified
Financing.
(B)
In
the event that the Gross Proceeds of the Subsequent Financing is less than
$15,000,000, the Redemption Amount shall equal a pro-rated portion of the
Principal Amount equaling a ratio, the numerator of which is the amount of
proceeds raised by the Company in the Subsequent Financing and the denominator
which is $15,000,000.
NOTE
12 — STOCKHOLDERS’ EQUITY
Warrants
During
March 2007, in conjunction with the issuance of $17,300,000 in convertible
debt, the board of directors approved the issuance of Warrants to purchase
shares of the Company’s common stock. Under their original terms, the 7,246,377
Series A warrants and the 21,578,948 Series B warrants are exercisable at $1.21
and $0.90, respectively and expire in March 2012. In addition, in March
2007, as additional compensation for services as placement agent for the
convertible debt offering, the Company issued the Advisor Warrants, which
entitle the placement agent to purchase 507,247 and 1,510,528 shares of the
Company’s common stock at exercise prices of $0.69 and $0.57 per share,
respectively. The Advisor Warrants expire in March 2012.
The
Series A and Series B Warrants (including the Advisor Warrants) are classified
as a liability in accordance with FASB ASC 480, “Distinguishing Liabilities from
Equity”, due to the terms of the warrant agreements which contain cash
redemption provisions in the event of a fundamental transaction, which provide
that the Company would repurchase any unexercised portion of the warrants at the
date of the occurrence of the fundamental transaction for the value as
determined by the Black-Scholes Merton valuation model. As a result, the
warrants are measured at fair value both initially and in subsequent periods.
Changes in fair value of the warrants are recorded in the account “gain (loss)
on fair market value of warrant liability” in the accompanying Consolidated
Statements of Operations.
Additionally,
in connection with the offering, all of the Company’s Series A and
Series B warrant holders waived their full ratchet anti-dilution and price
protection rights previously granted to them in connection with the Company’s
March 2007 convertible note and warrant financing.
On
January 12, 2008, the Company sold 24,318,181 shares of its common stock and
24,318,181 Series C warrants (the “Series C Warrants”) to purchase shares of
common stock for an aggregate purchase price of $21.4 million in a private
placement offering to accredited investors. Under its original terms, the
exercise price of the Series C Warrants is $1.00 per share. The warrants are
exercisable for a period of 5 years from the date of issuance of the Series C
Warrants.
For the
services in connection with this closing, the placement agent and the selected
dealer, Knight Capital Markets, LLC and Ardour Capital Investments, received an
aggregate of a 6.0% cash commission, a 1.0% advisory fee and warrants to
purchase 1,215,909 shares of common stock at $0.88 per share, exercisable for a
period of 5 years from the date of issuance of the warrants. The net proceeds
from issuing common stock and Series C warrants in January 2008 after all the
financing costs were $19.9 million and were recorded in additional paid in
capital and common stock. Neither the shares of common stock nor the shares of
common stock underlying the warrants sold in this offering were granted
registration rights.
In
connection with the Conversion Agreement, on January 7, 2010, the Company
entered into an Amendment (the “Warrant Amendment”) to the Series A, Series B
and Series C Warrants with the holders of at least a majority of the common
stock underlying each of its outstanding Series A Warrants, Series B Warrants
and Series C Warrants (collectively the “PIPE Warrants”). The Warrant Amendment
reduced the exercise price for all of the PIPE Warrants from $1.21, $0.90 and
$1.00, respectively, to $0.15, removed certain maximum ownership provisions and
removed anti-dilution provisions for lower-priced security issuances. Given the
above, the liability associated with the PIPE Warrants at the pre Conversion
Agreement exercise price was considered extinguished and was replaced with the
liability associated with the PIPE Warrants at the post Conversion Agreement
exercise price, which were recorded at fair value.
During
the fiscal year ended September 30, 2010, a warrants holder exchanged 1,147,394
warrants for 450,878 shares of the Company’s common stock after a cashless
exercise. There was no warrants exercise during the fiscal year ended
September 30, 2009.
A summary
of outstanding warrants as of September 30, 2010 is as follows:
|
|
Number of
Shares
|
|
|
Exercise
Price ($)
|
|
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 common stock purchase — Series C
|
|
|
24,318,181
|
|
|
|
1.00
|
|
Additional
paid in capital
|
Granted
in connection with placement service
|
|
|
507,247
|
|
|
|
0.69
|
|
Deferred
financing cost
|
Granted
in connection with placement service
|
|
|
1,510,528
|
|
|
|
0.57
|
|
Deferred
financing cost
|
Granted
in connection with placement service
|
|
|
1,215,909
|
|
|
|
0.88
|
|
Additional
paid in capital
|
Extinguishment
in accordance with the Conversion Agreement
|
|
|
(53,143,506
|
)
|
|
|
N/A
|
|
Loss
on debt extinguishment
|
Issuance
in accordance with the Conversion Agreement
|
|
|
53,143,506
|
|
|
|
0.15
|
|
Warrant
liabilities
|
Cashless
exercise of warrants
|
|
|
(1,147,394
|
)
|
|
|
0.15
|
|
Additional
paid in capital
|
Outstanding
at September 30, 2010
|
|
|
55,229,796
|
|
|
|
|
|
|
At
September 30, 2010, the range of warrant prices for shares under warrants and
the weighted-average remaining contractual life is as follows:
Warrants Outstanding and Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
Range of
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Warrant
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
Exercise Price
|
|
Warrants
|
|
|
Price
|
|
|
Life
|
|
$0.15
|
|
|
51,996,112
|
|
|
$
|
0.15
|
|
|
|
1.84
|
|
$0.57-$0.88
|
|
|
3,233,684
|
|
|
$
|
0.71
|
|
|
|
1.77
|
|
Restricted
Stock
On August
19, 2008, Mr. Leo Young, the Company’s Chief Executive Officer, entered into a
Stock Option Cancellation and Share Contribution Agreement with Jean Blanchard,
a former officer, to provide for (i) the cancellation of a stock option
agreement by and between Mr. Young and Ms. Blanchard dated on or about March 1,
2006 and (ii) the contribution to the Company by Ms. Blanchard of the remaining
25,250,000 shares of common stock underlying the cancelled option
agreement.
On the
same day, an Independent Committee of the Company’s Board adopted the 2008
Restricted Stock Plan (the “2008 Plan”) providing for the issuance of 25,250,000
shares of restricted common stock to be granted to the Company’s employees
pursuant to forms of restricted stock agreements.
The 2008
Plan provides for the issuance of a maximum of 25,250,000 shares of restricted
stock in connection with awards under the 2008 Plan. The 2008 Plan is
administered by the Company’s Compensation Committee, a subcommittee of the
Company’s Board of Directors, and has a term of 10 years. Restricted stock
vest over a three year period and unvested restricted stock are forfeited and
cancelled as of the date that employment terminates. Participation is limited to
employees, directors and consultants of the Company and its subsidiaries and
other affiliates. During any period in which shares acquired pursuant to the
2008 Plan remain subject to vesting conditions, the participant shall have all
of the rights of a stockholder of the Company holding shares of stock, including
the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares. If a participant
terminates his or her service for any reason (other than death or disability),
or the participant’s service is terminated by the Company for cause, then the
participant shall forfeit to the Company any shares acquired by the participant
which remain subject to vesting Conditions as of the date of the participant’s
termination of service. If a participant’s service is terminated by the Company
without cause, or due to the death or disability of the participant, then the
vesting of any restricted stock award shall be accelerated in full as of the
effective date of the participant’s termination of service.
Issuance
of fully vested restricted stock to the Company’s former Board of
Directors
On
January 12, 2010, the Company issued 400,000 shares of fully vested restricted
stock to the Company’s former board of directors on their resignation date. As
the former directors no longer provide services to the Company, these awards
were properly accounted for as awards to non-employees in accordance with FASB
ASC 718.
The
following table summarizes the activity of the Company’s unvested restricted
stock units as of September 30, 2010 and 2009 is presented
below:
|
|
Restricted Stock
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
average grant-
|
|
|
|
shares
|
|
|
date fair value
|
|
Unvested
as of September 30, 2008
|
|
|
25,250,000
|
|
|
$
|
0.62
|
|
Restricted
stock canceled
|
|
|
(2,100,000
|
)
|
|
$
|
0.62
|
|
Unvested
as of September 30, 2009
|
|
|
23,150,000
|
|
|
$
|
0.62
|
|
Restricted
stock canceled
|
|
|
(10,000,000
|
)
|
|
$
|
0.62
|
|
Restricted
stock granted
|
|
|
400,000
|
|
|
$
|
0.31
|
|
Restricted
stock vested
|
|
|
(400,000
|
)
|
|
$
|
0.31
|
|
Unvested
as of September 30, 2010
|
|
|
13,150,000
|
|
|
$
|
0.62
|
|
The total
unvested restricted stock as of September 30, 2010 and 2009 were 13,150,000
and 23,150,000 shares, respectively.
Stock-based
compensation expense for restricted stock for the fiscal years ended September
30, 2010 and 2009 were $2.8 million and $2.5 million, respectively. As of
September 30, 2010, the total unrecognized compensation expense net of
forfeitures relate to unvested awards was $2.4 million and is expected to be
amortized over a weighted average period of 0.9 years.
Issuance
of common shares to non-employees
On
February 1, 2010, the Company issued 400,000 shares of common stock to the
Company’s third party financial advisors. These awards were properly accounted
for as awards to non-employees in accordance with FASB ASC 718.
Options
Amended
and Restated 2007 Equity Incentive Plan
In
September 2007, the Company adopted the 2007 Equity Incentive Plan (the
“2007 Plan”) that allows the Company to grant non-statutory stock options to
employees, consultants and directors. A total of 10 million shares of the
Company’s common stock are authorized for issuance under the 2007 Plan. The
maximum number of shares that may be issued under the 2007 Plan will be
increased for any options granted that expire, are terminated or repurchased by
the Company for an amount not greater than the holder’s purchase price and may
also be adjusted subject to action by the stockholders for changes in capital
structure. Stock options may have exercise prices of not less than 100% of the
fair value of a share of stock at the effective date of the grant of the
option.
On
February 5, 2008, the Board of Directors of the Company adopted the Amended and
Restated 2007 Equity Incentive Plan (the “Amended 2007 Plan”), which increases
the number of shares authorized for issuance from 10 million to 15 million
shares of common stock and was to be effective upon approval of the Company’s
stockholders and upon the Company’s reincorporation into the State of
Delaware.
On May 5,
2008, at the Company’s Annual Meeting of Stockholders, the Company’s
stockholders approved the Amended 2007 Plan. On August 13, 2008, the
Company reincorporated into the State of Delaware. As of September 30, 2010 and
2009, 12,860,000 and 12,060,000 shares of common stock, respectively remain
available for future grants under the Amended 2007 Plan.
These
options vest over various periods up to four years and expire no more than ten
years from the date of grant. A summary of activity under the Amended 2007 Plan
is as follows:
|
|
Option Available For
Grant
|
|
|
Number of Option
Outstanding
|
|
|
Weighted Average
Fair Value Per
Share
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
Balance
at September 30, 2008
|
|
|
7,339,375
|
|
|
|
7,660,625
|
|
|
$
|
0.39
|
|
|
$
|
0.62
|
|
Options
granted
|
|
|
(500,000
|
)
|
|
|
500,000
|
|
|
$
|
0.13
|
|
|
$
|
0.20
|
|
Options
cancelled
|
|
|
5,220,625
|
|
|
|
(5,220,625
|
)
|
|
$
|
0.39
|
|
|
$
|
0.62
|
|
Balance
at September 30, 2009
|
|
|
12,060,000
|
|
|
|
2,940,000
|
|
|
$
|
0.32
|
|
|
$
|
0.55
|
|
Options
granted
|
|
|
(250,000
|
)
|
|
|
250,000
|
|
|
$
|
0.20
|
|
|
$
|
0.32
|
|
Options
cancelled
|
|
|
1,050,000
|
|
|
|
(1,050,000
|
)
|
|
$
|
0.39
|
|
|
$
|
0.62
|
|
Balance
at September 30, 2010
|
|
|
12,860,000
|
|
|
|
2,140,000
|
|
|
$
|
0.27
|
|
|
$
|
0.49
|
|
The total
fair value of shares vested during fiscal years 2010 and 2009 were $42,000 and
$246,000, respectively.
At
September 30, 2010 and 2009, 2,140,000 and 2,940,000 options were outstanding,
respectively and had a weighted-average remaining contractual life of 7.66 years
and 6.98 years, respectively. Of these options, 1,542,917 and 2,333,127 shares
were vested and exercisable on September 30, 2010 and 2009, respectively.
The weighted-average exercise price and weighted-average remaining contractual
term of options currently exercisable were $0.58 and 7.15 years,
respectively.
The fair
values of employee stock options granted during the fiscal years ended September
30, 2010 and 2009 were estimated using the Black-Scholes option-pricing model
with the following weighted average assumptions:
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Volatility
|
|
|
93.0
|
%
|
|
|
97.0
|
%
|
Expected
dividend
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free
interest rate
|
|
|
1.70
|
%
|
|
|
1.68
|
%
|
Expected
term in years
|
|
|
3.32
|
|
|
|
3.9
|
|
Weighted-average
fair value
|
|
$
|
0.20
|
|
|
$
|
0.13
|
|
In
accordance with the provisions of FASB ASC 718, the Company has recorded
stock-based compensation expense of $2.9 million and $3.4 million for the fiscal
years ended September 30, 2010 and 2009, respectively, which include the
compensation effect for the options and restricted stock. The stock-based
compensation expense is based on the fair value of the options at the grant
date. The Company recognized compensation expense for share-based
awards based upon their value on the date of grant amortized over the applicable
service period, less an allowance estimated future forfeited
awards.
NOTE
13 — FAIR VALUE OF FINANCIAL INSTRUMENTS
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, codified in
FASB ASC 820, “Fair Value Measurements and Disclosures”, which defines fair
value to measure assets and liabilities, establishes a framework for measuring
fair value, and requires additional disclosures about the use of fair value.
FASB ASC 820 is applicable whenever another accounting pronouncement requires or
permits assets and liabilities to be measured at fair value. FASB ASC 820 does
not expand or require any new fair value measures. FASB ASC 820 is effective for
fiscal years beginning after November 15, 2007. In December 2007, the FASB
agreed to a one year deferral of FASB ASC 820’s fair value measurement
requirements for nonfinancial assets and liabilities that are not required or
permitted to be measured at fair value on a recurring basis. The Company adopted
FASB ASC 820 on October 1, 2008, which had no effect on the Company’s financial
position, operating results or cash flows.
FASB ASC
820 defines fair value and establishes a hierarchal framework which prioritizes
and ranks the market price observability used in fair value measurements. Market
price observability is affected by a number of factors, including the type of
asset or liability and the characteristics specific to the asset or liability
being measured. Assets and liabilities with readily available, active, quoted
market prices or for which fair value can be measured from actively quoted
prices generally are deemed to have a higher degree of market price
observability and a lesser degree of judgment used in measuring fair value.
Under FASB ASC 820, the inputs used to measure fair value must be classified
into one of three levels as follows:
Level 1 -
|
Quoted
prices in an active market for identical assets or
liabilities;
|
Level 2 -
|
Observable
inputs other than Level 1, quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets and
liabilities in markets that are not active, and model-derived prices whose
inputs are observable or whose significant value drivers are observable;
and
|
|
|
Level 3 -
|
Assets
and liabilities whose significant value drivers are
unobservable.
|
Observable
inputs are based on market data obtained from independent sources, while
unobservable inputs are based on the Company’s market assumptions. Unobservable
inputs require significant management judgment or estimation. In some cases, the
inputs used to measure an asset or liability may fall into different levels of
the fair value hierarchy. In those instances, the fair value measurement is
required to be classified using the lowest level of input that is significant to
the fair value measurement. Such determination requires significant management
judgment.
The
Company’s liabilities measured at fair value on a recurring basis consisted of
the following types of instruments as of September 30, 2010:
|
|
Fair Value at
September 30,
|
|
|
Quoted prices
in
active
markets
for
identical
assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilites
|
|
$
|
422,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
422,000
|
|
Warrant
liabilities
|
|
|
902,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
902,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
1,324,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,324,000
|
|
The
method used to estimate the value of the Series B-1 Note compound embedded
derivatives (“CED”) was a binomial model with the following
assumptions:
|
|
September 30, 2010
|
|
Implied
term(years)
|
|
|
1.46
|
|
Suboptimal
exercise factor
|
|
|
2.50
|
|
Volatility
|
|
|
66.30
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
Risk-free
interest rate
|
|
|
0.34
|
%
|
The fair
value of the Series A and Series B Warrants (including the Advisor Warrants)
were estimated using a binomial valuation model with the following
assumptions:
|
|
September 30,
2010
|
|
|
September 30,
2009
|
|
Implied
term (years)
|
|
|
1.43
|
|
|
|
2.43
|
|
Suboptimal
exercise factor
|
|
|
2.5
|
|
|
|
2.5
|
|
Volatility
|
|
|
78
|
%
|
|
|
106
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk
free interest rate
|
|
|
0.33
|
%
|
|
|
1.15
|
%
|
The
carrying values of cash and cash equivalents, accounts receivable, accrued
expenses, accounts payable, accrued liabilities and amounts due to related party
approximate fair value because of the short-term maturity of these instruments.
The Company does not invest its cash in auction rate
securities.
At
September 30, 2010, the principal outstanding and the carrying value of the
Company’s Series B-1 Note were $1.8 million and $1.5 million, respectively. The
Series B-1 Note contains two embedded derivative features, the conversion option
and a redemption privilege accruing to the holder if certain conditions exist
(the “compound embedded derivative”), which are measured at fair value both
initially and in subsequent periods. The fair value of the convertible notes can
be determined based on the fair value of the entire financial
instrument.
NOTE
14 — NET LOSS PER SHARE
The
following table presents the computation of basic and diluted net loss per share
applicable to common stockholders:
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Calculation
of net loss per share - basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(25,014,000
|
)
|
|
$
|
(14,181,000
|
)
|
Weighted-average
number of common shares outstanding - basic and diluted
|
|
|
135,557,265
|
|
|
|
87,817,762
|
|
Net
loss per share - basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
NOTE
15 — COMMITMENTS AND CONTINGENCIES
Research
and development commitment
Pursuant
to a joint research and development laboratory agreement with
Shanghai University, dated December 15, 2006 and expiring on
December 15, 2016, Solar EnerTech is committed to fund the establishment of
laboratories and completion of research and development activities. On November
12, 2010, the Company amended the agreement with Shanghai University and
extended the funding commitment from five years to eight years, and consequently
the agreement will end on December 15, 2014. Based on the amendment, the Company
has committed to fund no less than RMB 30 million ($4.5 million)
cumulatively across the eight years. The funding requirements are based on
specific milestones agreed upon by the Company and Shanghai University. For the
fiscal year ended September 30, 2010, the Company funded $0.7 million, of which
$0.1 million is recorded as “research and development expense” in the
consolidated statements of operations and $0.6 million is related to capital
expenditures. As of September 30, 2010, there are $3.1 million remained to
be funded in full by December 15, 2014.
The
Company will continue to invest in research and development as it grows its
business. The payment to Shanghai University will be used to fund program
expenses and equipment purchase. If the Company fails to make funding payments,
when requested, it is deemed to be a breach of the agreement. If the Company is
unable to correct the breach within the requested time frame,
Shanghai University could seek compensation up to an additional 15% of the
total committed amount for approximately $0.7 million. As of September 30, 2010,
the Company is not in breach as it has not received any additional compensation
requests from Shanghai University.
The
agreement is for shared investment in research and development on fundamental
and applied technology in the fields of semi-conductive photovoltaic theory,
materials, cells and modules. The agreement calls for Shanghai University
to provide equipment, personnel and facilities for joint laboratories. The
Company will provide funding, personnel and facilities for conducting research
and testing. Research and development achievements from this joint research and
development agreement will be available to both parties. The Company is entitled
to intellectual property rights including copyrights and patents obtained as a
result of this research.
Other
than capital expenditure related to purchase of fixed assets, expenditures under
this agreement will be accounted for as research and development expenditures
under FASB ASC 730, "Research and Development” and expensed as
incurred.
Capital
commitments
On August
21, 2008, the Company acquired two million shares of common stock of 21-Century
Silicon for $1.0 million in cash as previously discussed in “Note 3 — Summary of
Significant Accounting Policies – Investments” above. In
July 2010, members of the Company’s executive team, including the CEO, visited
21-Century Silicon and conducted reviews of the production facility and
technical development. The review indicated that 21-Century Silicon’s production
facility and technical development were significantly below expected standards.
In addition, management of 21-Century Silicon expressed the need for more
funding to sustain operations. Moreover, 21-Century Silicon could not provide
the Company with updated financial information concerning 21-Century Silicon’s
working capital condition and future cash flows. The timing of the first
polysilicon shipment is unknown and it is unknown whether it will even occur.
The Company considered the factors above as indicators that a significant
adverse effect on the fair value of the Company’s investment in 21-Century
Silicon had occurred. Accordingly, an impairment loss of $1.0 million
was recorded in the Consolidated Statements of Operations for the fiscal year
ended September 30, 2010 to fully write-down the carrying amount of the
investment. The Company may also be obligated to acquire an additional two
million shares of 21-Century Silicon upon the first polysilicon shipment meeting
the quality specifications determined solely by the Company. As of September 30,
2010, the Company has not yet acquired the additional two million shares as the
product shipment has not occurred. In connection with its impairment
of the investment in 21-Century Silicon, the Company considers the likelihood
that it will be required to acquire the additional two million shares to be
remote. On October 7, 2010, the X-Change Corporation announced that it has
acquired 21-Century Silicon, Inc. The terms of the acquisition is anticipated to
involve a change in control of the Company and the appointment of new directors.
The X-Change Corporation is anticipated to issue 20 million shares of its
unregistered, restricted common stock to the shareholders of the 21-Century
Silicon in exchange for 100% of the issued and outstanding stock of 21-Century
Silicon.
On
September 22, 2008, the registered capital of Solar EnerTech (Shanghai) Co., Ltd
was increased from $25 million to $47.5 million, which was approved by the Board
of Directors of the Company and authorized by Shanghai Municipal Government (the
“Shanghai Government”). The paid-in capital as of September 30, 2010 was $31.96
million, with an outstanding remaining balance of $15.54 million to be
originally funded by September 21, 2010. In August 2010, the Company received
the approval of the Shanghai Government to extend the funding requirement date
by nine months to June 2011. The Company plans to raise funds to meet this
capital requirement through participation in the capital markets, such as
undertaking equity offerings. If external financing is not available, the
Company will file an application with the Shanghai Government to reduce the
capital requirement, which is legally permissible under PRC law.
On
January 15, 2010, the Company incorporated a wholly-owned subsidiary in Yizheng,
Jiangsu Province of China to supplement its existing production facilities to
meet increased sales demands. The subsidiary was formed with a
registered capital requirement of $33 million, of which $23.4 million is to be
funded by October 16, 2011. In order to fund the registered capital
requirement, the Company will have to raise funds or otherwise obtain the
approval of local authorities to extend the payment of registered capital for
the subsidiary. The registered capital requirement outstanding as of September
30, 2010 is $23.4 million.
On
February 8, 2010, the Company acquired land use rights of a parcel of land at
the price of approximately $0.7 million. This piece of land is 68,025 square
meters and is located in Yizheng, Jiangsu Province of China, which will be used
to house the Company’s second manufacturing facility. As part of the acquisition
of the land use right, the Company is required to complete construction of the
facility by February 8, 2012.
Operating
lease
The
Company leases several of its facilities under operating leases. Payments
under operating leases are expensed on a straight-line basis over the periods of
their respective leases. The terms of the leases do not contain material rent
escalation clauses or contingent rents.
Future
minimum payments under non-cancelable operating leases as of September 30, 2010
are as follows:
Fiscal Year Ended September 30,
|
|
Amount
|
|
2011
|
|
$
|
548,000
|
|
2012
|
|
|
440,000
|
|
2013
|
|
|
288,000
|
|
2014
|
|
|
113,000
|
|
2015
|
|
|
-
|
|
After
2015
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
1,389,000
|
|
Rent
expense under operating leases was $0.6 million and $0.8 million in
fiscal years 2010 and 2009, respectively.
NOTE
16 — RELATED PARTY TRANSACTIONS
At
September 30, 2010 and September 30, 2009, the accounts payable and accrued
liabilities, related party balance was $5.8 million and $5.6 million,
respectively. The $5.8 million accrued liability represents $4.8 million of
compensation expense related to the Company’s obligation to withhold tax upon
exercise of stock options by Mr. Young in the fiscal year 2006 and the related
interest and penalties, and $1.0 million of indemnification provided by the
Company to Mr. Young for any liabilities he may incur as a result of
previous stock options granted to him by Ms. Blanchard, a former officer, in
conjunction with the purchase of Infotech on August 19, 2008.
Both the
Company’s obligation to withhold tax upon the exercise of stock options by Mr.
Young and the indemnification have a three year statute of limitation. Based on
the statute of limitation, the $5.8 million accrual can be released by the
Company during the first quarter of fiscal year 2011.
On April
27, 2009, the Company entered into a Joint Venture Agreement with Jiangsu Shunda
Semiconductor Development Co., Ltd. to form a joint venture in the United
States by forming a new company, to be known as Shunda-SolarE Technologies,
Inc., in order to jointly pursue opportunities in the United States solar
market. The Agreement was valid for 18 months and expired on October 27, 2010.
After its formation, the joint venture company’s name was later changed to
SET-Solar Corp. During the fiscal year ended September 30, 2010, the Company
recorded sales from SET-Solar Corp in the amount of $1.8 million. As of
September 30, 2010, the accounts receivable due from SET-Solar Corp. and the
cash collateral received from SET-Solar Corp. are $1.0 million and $0.4 million,
respectively. Since the agreement would expire on October 27, 2010, transactions
with SET-Solar Corp after that date would not be considered as related party
transactions.
NOTE
17 — FOREIGN OPERATIONS
The
Company identifies its operating segments based on its business activities. The
Company operates within a single operating segment, the manufacture of solar
energy cells and modules in China.
The
Company’s manufacturing operations and fixed assets are all based in China. The
Company’s sales occurred in Europe, Australia, North America and
China.
NOTE
18 — SUBSEQUENT EVENTS
On
October 7, 2010, the X-Change Corporation announced that it has acquired
21-Century Silicon, Inc as previously discussed in “Note 3 — Summary of
Significant Accounting Policies – Investments” above. The terms of the
acquisition is anticipated to involve a change in control of the Company and the
appointment of new directors. The X-Change Corporation is anticipated to issue
20 million shares of its unregistered, restricted common stock to the
shareholders of the 21-Century Silicon in exchange for 100% of the issued and
outstanding stock of 21-Century Silicon.
On
October 27, 2010, the Joint Venture Agreement between the Company and Jiangsu
Shunda Semiconductor Development Co., Ltd., to be known as Shunda-SolarE
Technologies, Inc., in order to jointly pursue opportunities in the
United States solar market has expired. The joint venture company’s name
was changed to SET-Solar Corp. Since the agreement would expire on October 27,
2010, SET-Solar Corp will not be considered as a related party of the Company
and thus the sales to SET-Solar Corp would not be disclosed in related party
transactions in the first fiscal quarter of 2011.
On
November 12, 2010, the Company amended the agreement with Shanghai University
and extended the funding commitment from five years to eight years, and
consequently the agreement will end on December 15, 2014. Based on the
amendment, the Company has committed to fund no less than
RMB 30 million ($4.5 million) cumulatively across the eight years. The
funding requirements are based on specific milestones agreed upon by the Company
and Shanghai University. For the fiscal year ended September 30, 2010, the
Company funded $0.7 million, of which $0.1 million is recorded as “research and
development expense” in the consolidated statements of operations and $0.6
million is related to capital expenditures. As of September 30, 2010, there are
$3.1 million remained to be funded in full by December 15,
2014. Subsequent to September 30, 2010 and through the date of this report,
there were no new funding requests from Shanghai University.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
No events
or disagreements occurred which are requiring disclosure under Item 304 of
Regulation S-K.
ITEM
9A. CONTROLS AND PROCEDURES
Management’s
Evaluation of Disclosure Controls and Procedures
As
required by Rule 13a-15 of the Securities Exchange Act of 1934, our Chief
Executive Officer and Chief Financial Officer evaluated our company's disclosure
controls and procedures (as defined in Rules 13a-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that as of the end of the period covered by this report, these
disclosure controls and procedures were not effective to ensure that the
information required to be disclosed by our company in reports we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Securities Exchange Commission, and to ensure that such information
required to be disclosed by our company in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is accumulated and
communicated to our company's management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. The conclusion that our disclosure controls and procedures
were not effective was due to the lack of finance and accounting personnel with
an appropriate level of knowledge, experience and training in the application of
U.S. GAAP. Our fiscal 2009 financial reporting close process was ineffective in
recording certain transactions according to the applicable accounting
pronouncement and preparing certain critical financial statement disclosures.
Our plan to remediate the material weakness primarily consisted of hiring
finance and accounting personnel with an appropriate level of knowledge,
experience and training in the application of U.S. GAAP and training, educating
and equipping our existing personnel on U.S. GAAP accounting matters. We
have improved the training, education and equipment of our accounting personnel
in U.S. GAAP, hired a new accounting supervisor and engaged a consulting firm to
provide us with professional advice on how to improve our disclosure controls
and procedures. We are, however, still looking to hire additional finance
and accounting personnel. Accordingly, management has determined that this
control deficiency continues to constitute a material weakness. Management
anticipates that such disclosure controls and procedures will not be effective
until the material weaknesses are remediated.
We are in
the process of implementing the following measures to remediate these material
weaknesses: (a) hire additional financial reporting and accounting personnel
with relevant account experience, skills, and knowledge in the preparation of
financial statements under the requirements of U.S. GAAP; and (b) continue to
work with internal and external consultants to improve the process for
collecting and reviewing information required for the preparation of financial
statements.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act). Internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for
external purposes in accordance with generally accepted accounting principles
(“GAAP”). Internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and or our Board of Directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the interim or annual consolidated financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
A
deficiency in internal control over financial reporting exists when the design
or operation of a control does not allow management or employees, in the normal
course of performing their assigned functions, to prevent or detect
misstatements on a timely basis. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
Under the
supervision of our Chief Executive Officer and Chief Financial Officer,
management conducted an assessment of the effectiveness of the Company’s
internal control over financial reporting as of September 30, 2010, using the
criteria established in
Internal Control — Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”).
We
maintain our primary accounting books and records under PRC GAAP, and we prepare
our consolidated financial statements under U.S. GAAP through the use of
memorandum entries. Our fiscal year 2010 financial reporting close process was
ineffective in: (i) recording certain transactions according to the
applicable accounting pronouncement and (ii) preparing certain critical
financial statement disclosures.
|
(i)
|
It
was determined that we inappropriately accounted for our debt
extinguishment transactions, and as such we recorded audit adjustments to
properly account for the loss on debt extinguishment, the loss on
extinguishment of warranty liabilities and the gain/loss on the change of
fair market value of the warrant
liability.
|
|
(ii)
|
Our
auditors also identified that certain required footnote disclosures
related to short term loan and land use right were either omitted or
inadequately disclosed.
|
The
material weakness described above could result in a material misstatement of the
Company’s consolidated financial statements that would not be prevented or
detected. As of September 30, 2010, the material weakness identified
in fiscal year 2009 had not been properly remediated. Based on this assessment,
management concluded that our internal control over financial reporting was not
effective as of September 30, 2010.
Remediation
of Material Weakness
We have
engaged in, and will continue to engage in, substantial efforts to address the
material weakness in our internal control over financial reporting. The audit
committee will continue to monitor the remediation plan to address the material
weakness noted in prior periods and which remains at the completion of this
evaluation of the Company’s internal controls over financial
reporting.
To
remediate the material weakness described above, the Company has implemented or
plans to implement the remedial measures described below.
|
¨
|
Employ
resources with sufficient U.S. GAAP competence to improve our finance and
accounting department and the quality of our US GAAP accounting books and
records;
|
|
¨
|
Provide
additional training and cross-training to our existing personnel,
including areas of new and emerging accounting standards;
and
|
|
¨
|
Enhance
our accounting and finance policy and procedure manuals to provide
guidance to our finance and accounting staff and develop tools or
checklists to improve the completeness and accuracies of financial
disclosures.
|
Changes
in Internal Control Over Financial Reporting
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 year ended September
30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this Annual Report.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
following table sets forth certain information regarding our directors and
executive officers. There are no family relationships among our executive
officers and directors.
Name
|
|
Age
|
|
Position
|
Leo
Shi Young
|
|
56
|
|
Director,
President and Chief Executive Officer
|
Steve
Ye
|
|
34
|
|
Chief
Financial Officer, Treasurer and Secretary
|
David
Anthony
|
|
48
|
|
Director,
Vice-President, Chief Operating Officer
|
David
A. Field (*)
|
|
48
|
|
Former
Director
|
(*) –Mr.
David A. Field resigned as a member of our board of directors effective December
5, 2010
LEO SHI
YOUNG, Director, President and Chief Executive Officer since April
2006
Prior to
becoming our President and Chief Executive Officer, Mr. Young was the
co-founder, President and Chief Executive Officer of InfoTech Essentials Inc.,
an energy-saving technology company in China from 2001 to 2006. Mr. Young was a
senior member of the California trade delegation to China in 2005, headed by
Governor Arnold Schwarzenegger, and currently serves as an organizing committee
member of China’s National Renewable Energy Forum. Mr. Young holds an MBA from
Fordham University, New York (2005); an MA from the School of the Art Institute
of Chicago (1985); and a BA from Tsinghua University of Beijing
(1982).
STEVE YE,
Chief Financial Officer, Treasurer and Secretary since
April 2009
Mr. Ye
joined us in April 2009. Mr. Ye has many years of experience in corporate
finance, especially in financial planning and analysis. Before joining the
Company, Mr. Ye worked at ABN AMRO Bank, GE and Wells Fargo bank for the last
ten years and advanced his career progressively in different financial
leadership roles. Mr. Ye holds an MBA from University of Rochester, Simon
Business School in 2004 and Bachelor from Shanghai International Studies
University with major in International Accounting in 1998. In addition, Mr. Ye
is a registered certified public accountant in State of Delaware and a Chartered
Financial Analyst.
DAVID
ANTHONY, Director since January 2010
Mr.
Anthony is an experienced entrepreneur, venture capitalist, and
educator. He is the Managing Director of 21 Ventures, a position he
has held since 2003, and sits on the boards of ThermoEnergy Corporation, Agent
Video Intelligence, Axion Power International, Inc., 3GSolar, BioPetroClean,
Open Energy and VOIP Logic. Prior to 21 Ventures, Mr. Anthony
launched Notorious Entertainment, a developer of multimedia
brands.
DAVID A.
FIELD, Former Director from January 2010 to December 2010.
Mr. David
A. Field resigned as a member of our board of directors effective December 5,
2010. Mr. Field is president and chief executive officer of Applied
Solar, LLC, the successor to the business and assets of Applied Solar, Inc.,
which, together with one of its wholly-owned subsidiaries, Solar Communities I,
LLC, filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code on July 28, 2009. Mr. Field is a director of
ThermoEnergy Corporation, a Delaware corporation. Mr. Field had been
president, chief executive officer and a director of Applied Solar, Inc.,
positions he had held since October 2007, November 2008 and June 2008,
respectively. Prior to joining Applied Solar, Inc., Mr. Field was a
senior executive at Clark Security Products from January 2005 to August
2006. Previously, he founded and managed several companies in the
energy sector. In June 2001, Mr. Field founded and was chief
executive officer of Clarus Energy Partners, a leading distributed generation
developer, owner and operator that was acquired by Hunt Power in early 2004.
Prior to Clarus Energy, Mr. Field co-founded Omaha-based Kiewit Fuels, a
renewable energy company specializing in the development of biofuels
production. In addition to a career in sustainable energy
development, he also has an extensive background in water technology and
infrastructure development, with companies such as Bechtel, Peter Kiewit, and
Poseidon Resources, as well as in corporate finance with
Citicorp.
Board
Composition and Committees
Our board
of directors is comprised of Leo Shi Young and David Anthony. Of such
directors, David Anthony is an “independent director” as such term is defined in
NASDAQ Manual Rule 5605 (a)(2) of the listing standards of the NASDAQ Stock
Market. We were not a party to any transaction, relationship or other
arrangement with any of our “independent directors” that was considered by our
board of directors under NASDAQ Manual Rule 5605 (a)(2) in the determination of
such director’s independence.
Our board
of directors directs the management of our business and affairs, as provided by
Delaware law, and conducts its business through meetings of the board of
directors. The composition of the board committees will comply, when
required, with the applicable rules of the exchange on which our common stock is
listed and applicable law. Our board of directors has adopted a
written charter for each of the standing committees, each of which is available
on our website.
While we
have charters providing for an Audit Committee, Compensation Committee and
Nominating and Governance Committee, we do not currently have members of the
Board of Directors serving on any of the committees.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities and Exchange Act of 1934 requires any person who is our
director or executive officer or who beneficially holds more than 10% of any
class of our securities which have been registered with the SEC, to file reports
of initial ownership and changes in ownership with the SEC. These persons are
also required under the regulations of the SEC to furnish us with copies of all
Section 16(a) reports they file.
Based
solely on a review of copies of such reports furnished to us and written
representations that no other reports were required during the fiscal year ended
September 30, 2010, we believe that all persons subject to the reporting
requirements of Section 16(a) filed the required reports on a timely basis with
the SEC, except as follows:
Insider
|
|
Filing
|
|
Date of Transaction
|
|
Filing Date
|
The
Quercus Trust
|
|
Form
4
|
|
June
11, 2008
|
|
December
4, 2009
|
The
Quercus Trust
|
|
Form
4
|
|
January
7, 2010
|
|
January
12, 2010
|
Code
of Business Conduct and Ethics
We have
adopted a Code of Business Conduct and Ethics that applies to all of our
employees, officers and directors. The Code of Business Conduct and
Ethics is available on our website at www.solarE-power.com and was filed with
SEC on February 11, 2008 as Exhibit 14.1 to our Form 8-K.
ITEM
11. EXECUTIVE COMPENSATION
The
following table and discussion sets forth information with respect to all
compensation awarded to, earned by or paid to our Chief Executive Officer and to
any executive officer whose annual salary and bonus exceeded $100,000 during our
last completed fiscal year.
SUMMARY
COMPENSATION TABLE
|
|
|
|
|
|
|
Option Awards($)
|
|
|
Other Compensation
|
|
|
|
|
Name and principal position
|
|
Year
|
|
Salary ($)
|
|
|
(1)
|
|
|
($)
|
|
|
Total ($)
|
|
Leo
Shi Young
|
|
2010
|
|
|
237,500
|
|
|
|
|
|
|
28,657
|
(2)
|
|
|
266,157
|
|
President
and Chief Executive Officer
|
|
2009
|
|
|
200,000
|
|
|
|
2,428,000
|
(3)
|
|
|
22,000
|
(2)
|
|
|
2,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve
Ye
|
|
2010
|
|
|
89,552
|
|
|
|
|
|
|
|
|
|
|
|
89,552
|
|
Chief
Financial Officer
|
|
2009
|
|
|
38,000
|
|
|
|
8,000
|
(4)
|
|
|
|
|
|
|
46,000
|
|
(1)
|
Option
award values reflect the amortization expense recognized by the Company in
accordance with FASB ASC 718, “Compensation – Stock Compensation” (“FASB
ASC 718"), during fiscal year 2007 for unvested and outstanding stock
option grants. The total value to be expensed over the amortization or
vesting period for each award was determined using the Black-Scholes
option pricing model with assumptions as disclosed in this Form 10-K in
Item 7 Financial Statements, Note 3. Summary of Significant
Accounting Policies under the heading “Stock Based
Compensation.”
|
(2)
|
The
Company provided apartment while Mr. Young was working in the Shanghai
office.
|
(3)
|
On
August 19, 2008, Mr. Young was granted 11.75 million restricted
shares. These shares are vested in 3 years. The
amount shown reflect the grant date fair value computed in accordance with
FASB ASC 718.
|
(4)
|
Represents
500,000 options granted to Mr. Ye effective April 2,2009 under the
terms of the Company’s 2007 Stock Incentive Plan with an exercise price of
$0.20.
|
AGREEMENT
WITH PRINCIPAL EXECUTIVE OFFICER
Amended
and Restated Executive Employment, Incentive, and Severance Agreement with Mr.
Leo Shi Young
Under the
terms of the Amended and Restated Executive Employment, Incentive, and Severance
Agreement entered into between the Company and Mr. Young dated January 7, 2010
(the “Amended Young Employment Agreement”) which amended and restated that
certain Equity Incentive, Change of Control Retention and Severance Agreement
dated August 19, 2008; Mr. Young is entitled to receive (i) an annual base
salary of $250,000; (ii) additional options for a number of shares of the
Company’s common stock to be determined by the Board if the Company reaches
certain operating and financial metrics agreed upon between the Board and Mr.
Young; (iii) a severance arrangement of a lump sum payment in an amount equal to
eighteen (18) months of Mr. Young’s then effective base salary and acceleration
of vesting of stock options and restricted stock under certain conditions; and
(iv) other benefits as set forth in the Amended Young Employment
Agreement.
Amended
and Restated Executive Employment Agreement with Mr. Steve Ye
On
January 7, 2010, the Company and Steve Ye, the Company’s Chief Financial
Officer, entered into an Amended and Restated Employment Agreement (the “Amended
Ye Employment Agreement”) which amended and restated that certain Management
Agreement dated April 2, 2009 with Mr. Ye. Under the terms of the
Amended Ye Employment Agreement, Mr. Ye is entitled to receive (i) an annual
salary of Chinese RMB 600,000 (approximately US$88,000 as of the date hereof),
increasing to Chinese RMB 672,000 (approximately US$98,500 as of the date
hereof) to the extent the Company achieves profitability for each of the
quarters ending March 30, 2010 and June 30, 2010; (ii) severance arrangement of
a lump sum payment in an amount equal to six (6) months of Mr. Ye’s then
effective base salary and acceleration of vesting of stock options and
restricted stock under certain conditions; and (iii) other benefits as set forth
in the Amended Ye Employment Agreement.
Outstanding
Equity Awards at Fiscal Year-End
OUTSTANDING
EQUITY AWARDS AT SEPTEMBER 30, 2010
|
|
Number of Securities
Underlying Unexercised
Options (#)
|
|
|
Number of Securities
Underlying Unexercised
Options (#)
|
|
|
Option
Exercise
|
|
Option
Expiration
|
|
Number of Shares or
Units of Stock(#)
That Have Not Vested
|
|
|
Market Value of
Shares
or units of
Stock That
have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
Date
|
|
(#)
|
|
|
Vested ($) (1)
|
|
Leo
Shi Young
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
9,400,000
|
(2)
|
|
$
|
1,128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve
Ye
|
|
|
125,000
|
(3)
|
|
|
375,000
|
(3)
|
|
|
0.2
|
|
4/2/2019
|
|
|
|
|
|
|
|
|
(1)
|
Based
on a closing price of Solar EnerTech's common stock of $0.12 on September
30, 2010.
|
(2)
|
On
August 19, 2008, Mr. Young was granted 11.75 million shares of restricted
stocks. 20% of these shares vested on August 19, 2010 and the
remaining 80% will vest on August 19,
2011.
|
(3)
|
Represents
options granted to Mr. Ye on May 20, 2009 under the terms of the
Company’s 2007 Stock Incentive Plan with an exercise price of $0.20. The
options vest 25% annually over 4 years beginning on April 2,
2009.
|
DIRECTOR
COMPENSATION
Name
|
|
Option Awards ($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
Leo
Shi Young (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
David
Anthony (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
David
A. Field (2) (3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(1)
|
Please
see the Summary Compensation Table above with respect to compensation
earned by Mr. Young as an executive officer of the
Company.
|
(2)
|
No
cash compensation and share options received by Mr. Anthony and Mr.
Field.
|
(3)
|
Mr.
Field resigned as a member of our board of directors effective December 5,
2010.
|
Compensation
of Directors
Narrative
to Director Compensation Table
On
February 22, 2008, the Compensation Committee of the Board of Directors
recommended and the Board adopted the following compensation arrangements for
our non-employee directors:
|
|
Attendance
Fees
|
|
Stock
Option Award
|
|
|
|
|
|
All
Board Members
|
|
$1,500
per Board meeting attended in person; $300 per Board meeting attended
telephonically
|
|
25,000
shares vesting ratably over one year
|
|
|
|
|
|
Audit
Committee
|
|
$1,500
per committee meeting attended in person; $300 per committee meeting
attended telephonically (1)
|
|
—
|
Audit
Committee Chair
|
|
—
|
|
Additional
award of 175,000 shares vesting ratably over one year
|
|
|
|
|
|
Compensation
Committee
|
|
$1,500
per committee meeting attended in person; $300 per committee meeting
attended telephonically (1)
|
|
—
|
|
|
|
|
|
Compensation
Committee Chair
|
|
—
|
|
Additional
award of 75,000 shares vesting ratably over one year
|
|
|
|
|
|
Nominating
and Governance Committee
|
|
$1,500
per committee meeting attended in person; $300 per committee meeting
attended telephonically (1)
|
|
—
|
|
|
|
|
|
Nominating
and Governance Committee Chair
|
|
—
|
|
Additional
award of 75,000 shares vesting ratably over one
year
|
(1)
|
Attendance
of committee meetings that are held on the same day with a general Board
meeting do not result in receiving additional attendance fees for
attendance of the committee
meeting.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
EQUITY COMPENSATION
PLAN INFORMATION
Equity
Compensation Plan Information
Plan Category
|
|
Number of securities to
be
issued upon exercise
of
outstanding options,
warrants and rights (a)
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
|
|
|
Number of securities
remaining available for
future
issuance under
equity
compensation plans
(excluding securities
reflected
in column a) (c)
|
|
Equity
compensation plans approved by security holders
|
|
|
2,140,000
|
(1)
|
|
$
|
0.49
|
|
|
|
12,860,000
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
(1)
Represents options to purchase common stock issued pursuant to the terms of the
2007 Equity Incentive Plan, as amended and restated.
a — Our
common stock is currently quoted by the Over-The-Counter Bulletin Board under
the symbol “SOEN”.
b — We
have approximately 46 record holders on November 30, 2010.
c — No
cash dividend has been declared.
Options
Amended
and Restated 2007 Equity Incentive Plan
On
September 24, 2007, our Board of Directors approved the adoption of the
2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the
issuance of a maximum of 10 million shares of common stock in connection
with awards under the 2007 Plan. Such awards may include stock options,
restricted stock purchase rights, restricted stock bonuses and restricted stock
unit awards. The 2007 Plan may be administered by the Company’s Board of
Directors or a committee duly appointed by the Board of Directors and has a term
of 10 years. Participation in the Plan is limited to employees, directors
and consultants of the Company and its subsidiaries and other affiliates.
Options granted under the 2007 Plan must have an exercise price per share not
less than the fair market value of the Company’s common stock on the date of
grant. Options granted under the 2007 Plan may not have a term exceeding
10 years. Awards will vest upon conditions established by the Board of
Directors or it’s duly appointed Committee. Subject to the requirements and
limitations of section 409A of the Internal Revenue Code of 1986, as amended, in
the event of a Change in Control (as defined in the 2007 Plan), the Board of
Directors may provide for the acceleration of the exercisability or vesting
and/settlement of any award, the Board of Directors may provide for a cash-out
of awards or the Acquirer (as defined in the 2007 Plan) may either assume or
continue the Company’s rights and obligations under any awards.
On
February 5, 2008, the Board of Directors adopted the Amended and Restated 2007
Equity Incentive Plan (the “Amended 2007 Plan”), which increases the number of
shares authorized for issuance from 10 million to 15 million shares of common
stock and was to be effective upon approval of the Company’s stockholders and
upon the Company’s reincorporation into the State of Delaware. On May
5, 2008, at the Company’s Annual Meeting of Stockholders, the Company’s
stockholders approved the Amended 2007 Plan. On August 13, 2008, the
Company reincorporated into the State of Delaware.
On May 9,
2008, the Compensation Committee of the Board of Directors of the Company
authorized the repricing of all outstanding options issued to current employees,
directors, officers and consultants prior to February 5, 2008 under the 2007
Plan to $0.62, determined in accordance with the 2007 Plan as the closing price
for shares of Common Stock on the Over-the-Counter Bulletin Board on the date of
the repricing.
As of
September 30, 2010, the Board of Directors granted options to purchase
2,140,000 shares of our common stock to our employees, director and
consultants.
2008
Restricted Stock Plan
On August
19, 2008, Mr. Leo Young, our Chief Executive Officer, entered into a Stock
Option Cancellation and Share Contribution Agreement with Jean Blanchard, a
former officer, to provide for (i) the cancellation of a stock option agreement
by and between Mr. Young and Ms. Blanchard dated on or about March 1, 2006 and
(ii) the contribution to the Company by Ms. Blanchard of the remaining
25,250,000 shares of common stock underlying the cancelled Option
Agreement.
On the
same day, an Independent Committee of the Company’s Board adopted the 2008
Restricted Stock Plan (the “2008 Plan”) providing for the issuance of 25,250,000
shares of restricted common stock to be granted to the Company’s employees
pursuant to forms of restricted stock agreements.
The 2008
Plan provides for the issuance of a maximum of 25,250,000 shares of restricted
stock in connection with awards under the 2008 Plan. The 2008 Plan is
administered by the Company’s Compensation Committee, a subcommittee of our
Board of Directors, and has a term of 10 years. Restricted stock vest over
a three year period and unvested restricted stock are forfeited and cancelled as
of the date that employment terminates. Participation is limited to employees,
directors and consultants of the Company and its subsidiaries and other
affiliates. During any period in which shares acquired pursuant to
the 2008 Plan remain subject to vesting conditions, the participant shall have
all of the rights of a stockholder of the Company holding shares of stock,
including the right to vote such shares and to receive all dividends and other
distributions paid with respect to such shares. If a participant
terminates his or her service for any reason (other than death or disability),
or the participant’s service is terminated by the Company for cause, then the
participant shall forfeit to the Company any shares acquired by the participant
which remain subject to vesting Conditions as of the date of the participant’s
termination of service. If a participant’s service is terminated by the Company
without cause, or due to the death or disability of the participant, then the
vesting of any restricted stock award shall be accelerated in full as of the
effective date of the participant’s termination of service.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables sets forth security information as of November 30, 2010, as to
each person or group who is known to us to be the beneficial owner of more than
5% of our outstanding voting securities, each of our executive officers and
directors and of all of our executive officers and directors as a group. On
November 30, 2010, we had 171,257,443 shares of common stock
outstanding.
Beneficial
ownership is determined under the rules of the Securities and Exchange
Commission and generally includes voting or investment power over securities.
Except in cases where community property laws apply or as indicated in the
footnotes to this table, we believe that each shareholder identified in the
table possesses sole voting and investment power over all shares of common stock
shown as beneficially owned by the shareholder.
Shares of
common stock subject to options or warrants that are currently exercisable or
exercisable within 60 days after November 30, 2010 are considered
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person.
Security
Ownership of Certain Beneficial Owners
Name and Address
|
|
Number of Shares
Beneficially Owned
|
|
|
Percentage Owned
|
|
The
Quercus Trust (1)
|
|
|
125,734,189
|
|
|
|
59
|
%
|
(1)
Information based on Amendment No. 7 to Schedule 13D dated January 7, 2010. The
address for The Quercus Trust is 1835 Newport Blvd., A109-PMB 467, Costa Mesa,
CA 92627. Each of David Gelbaum and Monica Chavez Gelbaum, acting alone, has the
power to exercise voting and investment control over the shares of Common Stock
owned by The Quercus Trust. The Quercus Trust holds 83,127,191 shares
of common stock and warrants to purchase 42,606,998 shares of common
stock.
Security
Ownership of Management
|
|
Number of Shares
|
|
|
|
|
Name and Address (1)
|
|
Beneficially Owned
|
|
|
Percentage Owned
|
|
|
|
|
|
|
|
|
Leo
Shi Young
|
|
|
15,284,286
|
(2)
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
Steve
Ye
|
|
|
125,000
|
(3)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All
directors and officers as a group
|
|
|
15,409,286
|
|
|
|
9.0
|
%
|
*
|
Beneficially
owns less than 1% of our outstanding common shares and
options.
|
(1)
|
The
address for our officers and directors is 655 West Evelyn Avenue, Suite
#2, Mountain view, CA 94041.
|
(2)
|
Mr.
Young was granted 11,750,000 of restricted shares on August 19,
2008. 20% of these shares vested on August 19, 2010 and the
remaining 80% will vest on August 19, 2011. These
restricted shares bear voting rights and therefore are included in this
calculation.
|
(3)
|
Mr.
Ye was granted an option for 500,000 shares on May 20,
2009. The options vests 25% annually over 4 years beginning on
April 2, 2009. As of September 30, 2010, 125,000 shares have
vested.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
At
September 30, 2010 and September 30, 2009, the accounts payable and accrued
liabilities, related party balance was $5.8 million and $5.6 million,
respectively. The $5.8 million accrued liability represents $4.8 million of
compensation expense related to the Company’s obligation to withhold tax upon
exercise of stock options by Mr. Young in the fiscal year 2006 and the related
interest and penalties, and $1.0 million of indemnification provided by the
Company to Mr. Young for any liabilities he may incur as a result of
previous stock options granted to him by Ms. Blanchard, a former officer, in
conjunction with the purchase of Infotech on August 19, 2008.
Both the
Company’s obligation to withhold tax upon the exercise of stock options by Mr.
Young and the indemnification have a three year statute of limitation. Based on
the statute of limitation, the $5.8 million accrual can be released by the
Company during the first quarter of fiscal year 2011.
DIRECTOR
INDEPENDENCE
The Board
of Directors is presently comprised of Leo Shi Young and David Anthony. Of such
directors, David Anthony is an “independent director” as such term is
defined in NASDAQ Manual Rule 5605 (a)(2) of the listing standards of the
NASDAQ Stock Market. The Company was not a party to any transaction,
relationship or other arrangement with any of its “independent directors” that
was considered by our Board of Directors under NASDAQ Manual Rule 5605
(a)(2) in the determination of such director’s independence.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees
The
aggregate fees billed by our auditors for professional services rendered for the
audit of our annual consolidated financial statements and the review of our
quarterly financial statements for the fiscal years ended September 30,
2010 and 2009 were as follows:
|
|
Fiscal Year
2010
|
|
|
Fiscal Year
2009
|
|
Ernst
& Young Hua Ming — Audit fee
|
|
$
|
390,000
|
|
|
$
|
371,000
|
|
Ernst
& Young Hua Ming — Audit related fees
|
|
|
80,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
470,000
|
|
|
$
|
371,000
|
|
Tax
Fees
We paid
no fees to auditors for tax compliance, tax advice or tax compliance services
during the fiscal year ended September 30, 2010 and 2009,
respectively.
All
Other Fees
We did
not incur any other fees billed by auditors for services rendered to our
Company, other than the services covered in “Audit Fees” and S-1 filing fee for
the fiscal years ended September 30, 2010 and 2009.
Pre-Approval
Policies Regarding Audit and Permissible Non-Audit Services
Our Board
of Directors’ policy is to pre-approve all audit and permissible non-audit
services provided by our independent auditors. These services may include audit
services, audit-related services, tax services and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed as to
the particular service or category of services. The independent auditor and
management are required to periodically report to the Audit Committee regarding
the extent of services provided by the independent auditor in accordance with
this pre-approval.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The
following documents are being filed as part of this report on
Form 10-K:
(a) Index
to Consolidated Financial Statements:
|
|
Page
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
|
34
|
Consolidated
Balance Sheets as of September 30, 2010 and 2009
|
|
35
|
Consolidated
Statements of Income for the years ended September 30, 2010 and
2009
|
|
36
|
Consolidated
Statements of Stockholders’ Equity for the years ended September 30, 2010
and 2009
|
|
37
|
Consolidated
Statements of Cash Flows for the years ended September 30, 2010 and
2009
|
|
38
|
Notes
to Consolidated Financial Statements
|
|
39
|
(b)
Exhibits
2.1
|
Agreement
and Plan of Merger with Solar EnerTech Corp., a Nevada corporation and our
predecessor in interest, dated August 13, 2008, incorporated by reference
from Exhibit 2.1 to our Form 8-K filed on August 14,
2008.
|
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.
|
4.1
|
Specimen
Common Stock Certificate, incorporated by reference from Exhibit 4.1
to our Form 8-K filed on August 14,
2008.
|
4.2
|
Form
of Notice of Repricing, incorporated by reference from Exhibit 4.1 to
our Form 8-K filed on May 13,
2008.
|
10.1
|
Amended
and Restated Employment Agreement between the Company and Steve Ye dated
January 7, 2010, incorporated by reference from Exhibit 10.4 to our Form
8-K filed on January 11, 2010.
|
10.2
|
Stock
Purchase Agreement, dated August 19, 2008, incorporated by reference from
Exhibit 10.1 to our Form 8-K filed on August 19,
2008.
|
10.3
|
Amended
and Restated Executive Employment, Incentive, and Severance Agreement
between the Company and Leo Shi Young, incorporated by reference from
Exhibit 10.3 to our Form 8-K filed on January 11,
2010.
|
10.4
|
2008
Restricted Stock Plan established effective as of August 19, 2008,
incorporated by reference from Exhibit 10.3 to our Form 8-K filed on
August 19, 2008.
|
10.5
|
Forms
of Restricted Stock Agreement, incorporated by reference from Exhibit 10.4
to our Form 8-K filed on August 19,
2008.
|
10.6
|
Form
of Indemnity Agreement, incorporated by reference from Exhibit 10.1
to our Form 8-K filed on August 14,
2008.
|
10.7
|
Amended
and Restated 2007 Equity Incentive Plan, incorporated by reference from
Exhibit 10.2 to our Form 8-K filed on August 14,
2008.
|
10.8
|
Notice
of Grant and Stock Option Agreement (For Participant Resident in the
United States of America), incorporated by reference from
Exhibit 10.3 to our Form 8-K filed on September 27,
2007.
|
10.9
|
Notice
of Grant and Stock Option Agreement (For Participant Resident in The
Peoples Republic of China), incorporated by reference from
Exhibit 10.4 to our Form 8-K filed on September 27,
2007.
|
10.10
|
Form
of Securities Purchase Agreement between the Company and certain Buyers
(as defined therein) dated as of January 11, 2008, incorporated by
reference from Exhibit 10.29 to our Form 8-K filed on January 16,
2008.
|
10.11
|
Form
of Series C Warrant dated as of January 11, 2008, incorporated by
reference from Exhibit 10.30 to our Form 8-K filed on January 16,
2008.
|
10.12
|
Form
of Securities Purchase Agreement between the Company and certain Buyers
(as defined therein) dated as of March 7, 2007, incorporated by
reference from Exhibit 10.1 to our Form 8-K filed on March 8,
2007.
|
10.13
|
Form
of Series A Warrant dated as of March 7, 2007, incorporated by
reference from Exhibit 10.4 to our Form 8-K filed on March 8,
2007.
|
10.14
|
Form
of Series B Warrant dated as of March 7, 2007, incorporated by
reference from Exhibit 10.5 to our Form 8-K filed on March 8,
2007.
|
10.15
|
Form
of Registration Rights Agreement dated as of March 7, 2007,
incorporated by reference from Exhibit 10.6 to our Form 8-K
filed on March 8, 2007.
|
10.16
|
Joint
R&D Laboratory Agreement between Solar EnerTech (Shanghai) Co., Ltd.
and Shanghai University dated December 15, 2006, incorporated by
reference from Exhibit 10.19 to our Form SB-2 filed on April 23,
2007.
|
10.17
|
Management
Agreement between the Company and Qizhuang Cai dated effective
April 6, 2007, incorporated by reference from Exhibit 10.27 to
our Form SB-2 filed on April 23,
2007.
|
10.18
|
Lease
Agreement between Solar EnerTech, Ltd. and Shanghai Jin Qiao Technology
Park, Ltd. commenced on February 20, 2006, incorporated by reference from
Exhibit 4.1 to our Form 8-K filed on May 12,
2006.
|
10.19
|
Joint
Venture Agreement between the Company and Jiangsu Shunda Semiconductor
Development Co., Ltd. effective April 27, 2009, incorporated by reference
from Exhibit 10.1 to our Form 8-K filed on May 1,
2009.
|
10.20
|
Exchange
Agreement effective March 19, 2010, incorporated by reference from Exhibit
10.1 to our Form 8-K filed on March 22,
2010.
|
10.21
|
Series
B-1 Convertible Note issued effective March 19, 2010, incorporated by
reference from Exhibit 10.2 to our Form 8-K filed on March 22,
2010.
|
10.22
|
Engagement
letter agreement dated November 11, 2010 by and between the Company and
Rodman & Renshaw, LLC,, incorporated by reference from Exhibit 10.23
to our Form S-1/A filed on November 12,
2010.
|
10.23
|
Series
A and Series B Notes Conversion Agreement dated January 7, 2010 by and
between the Company and the Required Holders (as defined therein),
incorporated by reference from Exhibit 10.1 to our Form 8-K filed on
January 11, 2010.
|
10.24
|
Amendment
to the Series A, Series B and Series C Warrants dated January 7, 2010 by
and between the Company and the Consenting Holders (as defined therein),
incorporated by reference from Exhibit 10.2 to our Form 8-K filed on
January 11, 2010.
|
10.25
|
Voting
Agreement dated January 7, 2010 by and between the Company and the
Stockholders (as defined therein), incorporated by reference from Exhibit
10.5 to our Form 8-K filed on January 11,
2010.
|
14.1
|
Code
of Business Conduct and Ethics, incorporated by reference from Exhibit
14.1 to our Form 8-K filed on February 11,
2008.
|
21.1
|
Subsidiaries
of the Registrant*
|
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.*
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
SOLAR
ENERTECH CORP.
|
|
Date:
December 17, 2010
|
|
|
|
|
By:
|
/s/
Leo Shi Young
|
|
|
|
Leo
Shi Young
President
and Chief Executive Officer
|
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Leo Shi Young and Steve Ye, and each of them
individually, as his attorney-in-fact, each with full power of substitution, for
him in any and all capacities to sign any and all amendments to this Report on
Form 10-K, and to file the same with, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or his or her
substitute, may do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
|
|
|
|
|
By:
|
|
/s/
Leo Shi Young
|
|
|
Date:
December 17, 2010
|
|
|
Leo
Shi Young
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
Steve Ye
|
|
|
Date:
December 17, 2010
|
|
|
Steve
Ye
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
David Anthony
|
|
|
Date:
December 17, 2010
|
|
|
David
Anthony
Director
|
|
|
|
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