Attached files
file | filename |
---|---|
EX-31 - EX-31.1 SECTION 302 CERTIFICATION - SURGLINE INTERNATIONAL, INC. | chinanuvo10qa013109ex311.htm |
EX-32 - EX-32.1 SECTION 906 CERTIFICATION - SURGLINE INTERNATIONAL, INC. | chinanuvo10qa013109ex321.htm |
EX-31 - EX-31.2 SECTION 302 CERTIFICATION - SURGLINE INTERNATIONAL, INC. | chinanuvo10qa013109ex312.htm |
EX-32 - EX-32.2 SECTION 906 CERTIFICATION - SURGLINE INTERNATIONAL, INC. | chinanuvo10qa013109ex322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
X . QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2009
or
. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-48746
CHINA NUVO SOLAR ENERGY, INC.
(Name of small business issuer as specified in its charter)
Nevada |
| 87-0567853 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification Number) |
319 Clematis Street Suite 703, West Palm Beach, Florida 33401
(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including area code: (561) 514-9042
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, and (2) has been subject to such filing requirements for the past 90 Days: Yes X . No .
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.
Large accelerated filer | . | Accelerated filer | . |
Non-accelerated filer | . (Do not check if a smaller reporting company) | Smaller reporting company | X . |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes . No X .
Number of shares of common stock outstanding at March 2, 2009 was 209,706,776.
Transitional Small Business Disclosure Format: Yes . No X .
EXPLANATORY NOTE
This Amendment No. 1 (Amendment) on Form 10-Q/A amends the Periodic Report of China Nuvo Solar Energy, Inc. (the Company) on Form 10-Q for the period ended January 31, 2009 as filed with the Securities and Exchange Commission on March 17, 2009 (the Original Filing). This Amendment is being filed to amend Part I, Item 4 (Controls and Procedures) as well as to restate the financial statements in their entirety to reflect the inclusion of the Companys Florida based subsidiary, Interactive Entertainment Group, Inc., formerly Interactive Games, Inc (Igam). Previously the Company excluded the balances and activity of Igam based on the spinoff of Igam as approved by the Companys Board of Directors. The Company determined that the spinoff of Igam was never effectuated as the shares of common stock were never issued and distributed as initially planned and approved by the Board of Directors. Additionally, management determined that transactions related to any predecessor company should not be included in the financial statements. Lastly, management determined that the accounting treatment of the July 27, 2007 transaction between the Company and Nuvo Solar Energy, Inc. (Nuvo) was deemed to be a reverse merger whereby the Company was the legal acquirer and Nuvo was the accounting acquirer. The effects of the restatements are shown in the tables in Footnote 8 to the financial statements.
Except as stated herein, this Form 10-Q/A does not reflect events occurring after the filing of the Original 10-Q on March 17, 2009 and no attempt has been made in this Periodic Report on Form 10-Q/A to modify or update other disclosures as presented in the Original Filing. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the SEC subsequent to the filing of the Original Filing.
Condensed consolidated financial statements: |
|
Condensed consolidated balance sheets | 3 |
Condensed consolidated statements of operations | 4 |
Condensed consolidated statements of cash flows | 6 |
Notes to condensed consolidated financial statements | 7 |
2
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY | ||||||||||
(DEVELOPMENT STAGE COMPANY) | ||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||
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| January 31, 2009 |
| July 31 2008 | ||
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| RESTATED |
| RESTATED | ||
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| (unaudited) |
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| |
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Current Assets |
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| ||||
| Cash |
| $ | 425 |
| $ | 942 | |||
| Notes and interest receivable |
|
| 55,485 |
|
| 53,649 | |||
| Prepaid expenses and other current assets |
|
| 20,000 |
|
| 53,400 | |||
|
|
|
|
|
|
|
|
|
|
|
|
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| Total current assets |
|
| 75,910 |
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| 107,991 | |
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|
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|
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|
Solar intellectual property, less accumulated depreciation of $66,666 |
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| ||||
| (January 31) and $54,166 (Juy 31) |
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| 373,234 |
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| 345,834 | |||
Fixed assets, less accumulated depreciation of $11,291 (2009) |
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| ||||
| and $10,909 (2008) |
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| 2,917 |
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| 3,896 | |||
Debt issuance costs |
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| 83,404 |
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| 108,199 | ||||
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| Total assets |
| $ | 535,465 |
| $ | 565,920 | |
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LIABILITIES AND SHAREHOLDERS' DEFICIT |
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Current liabilities: |
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| Bank overdraft |
| $ | 283 |
| $ | - | |||
| Accrued liabilities, related parties |
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| 600,697 |
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| 527,239 | |||
| Accounts payable and accrued expenses |
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| 361,832 |
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| 307,783 | |||
| Derivative liability convertible debentures |
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| 579,000 |
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| 572,238 | |||
| Notes payable |
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| 175,144 |
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| 175,644 | |||
| Notes payable, related party |
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| 268,635 |
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| 164,932 | |||
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| Total current liabilities |
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| 1,985,591 |
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| 1,747,836 | |
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Long-term liabilities: |
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| Convertible debentures payable, net |
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| 176,869 |
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| 101,134 | ||
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| Total liabilities |
|
| 2,162,460 |
|
| 1,848,970 | |
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Shareholders deficit: |
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| Preferred stock, $.001 par value; 5,000,000 shares authorized, |
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| 535,981 shares issued and outstanding |
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| 535,891 |
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| 535,891 | ||
| Common stock, $.001 par value, 495,000,00 shares authorized; |
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| 206,676,437 (January 31) and 204,676,437 (July 31) issued |
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| and outstanding |
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| 206,676 |
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| 204,676 | ||
| Minority interest |
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| (117,118) |
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| (61,286) | |||
| Deferred compensation |
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| (33,333) |
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| (133,333) | |||
| Additional paid-in capital |
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| 9,575,253 |
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| 9,554,753 | |||
| Retained earnings |
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| (11,794,364) |
|
| (11,383,751) | |||
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| Total shareholders' deficit |
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| (1,626,995) |
|
| (1,283,050) | |
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| Total liabilities and shareholders' deficit |
| $ | 535,465 |
| $ | 565,920 |
See accompanying notes to financial statements.
3
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY | |||||||||||||||||
(DEVELOPMENT STAGE COMPANY) | |||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | |||||||||||||||||
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| From Inception | |||||||||
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| For the three months ended January 31, |
| For the six months ended January 31, |
| April 16, 2006- | |||||||||
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| 2009 |
| 2008 |
| 2009 |
| 2008 |
| January 31, 2009 | |||||
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| Restated |
| Restated |
| Restated |
| Restated |
| Restated | |||||
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Revenues: |
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| Revenues | $ | 1,567 |
| $ | - |
| $ | 3,166 |
| $ | - |
| $ | 9,766 | ||
| Cost of revenues |
| - |
|
| - |
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| - |
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| - |
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| - | ||
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| Gross profit |
| 1,567 |
|
| - |
|
| 3,166 |
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| - |
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| 9,766 | |
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Operating costs and expenses: |
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| Selling, general and administrative |
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| Consulting fees |
| 33,445 |
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| 61,350 |
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| 51,745 |
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| 76,350 |
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| 317,495 | ||
| Management and consulting fees, related parties |
| 39,000 |
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| 225,272 |
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| 78,000 |
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| 294,022 |
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| 721,561 | ||
| Salaries and stock compensation cost |
| 56,094 |
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| 301,426 |
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| 112,188 |
|
| 438,895 |
|
| 690,448 | ||
| Legal and accounting |
| 21,033 |
|
| (3,196) |
|
| 30,533 |
|
| 69,109 |
|
| 164,072 | ||
| Other |
| 17,294 |
|
| 39,735 |
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| 46,726 |
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| 98,414 |
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| 274,953 | ||
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| Total operating costs and expenses |
| 166,866 |
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| 624,587 |
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| 319,192 |
|
| 976,790 |
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| 2,168,529 | |
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| Operating loss |
| (165,299) |
|
| (624,587) |
|
| (316,026) |
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| (976,790) |
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| (2,158,763) | |
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Other income (expenses) |
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| Interest expense, related parties |
| (6,119) |
|
| (9,121) |
|
| (10,855) |
|
| (17,867) |
|
| (46,241) | ||
| Interest expense, other |
| (53,905) |
|
| (129,592) |
|
| (111,638) |
|
| (177,396) |
|
| (456,392) | ||
| Interest income, related parties |
| 668 |
|
| 668 |
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| 1,336 |
|
| 1,336 |
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| 3,993 | ||
| Minority interest |
| 26,030 |
|
| 2,747 |
|
| 55,832 |
|
| 3,859 |
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| 117,118 | ||
| Fair value adjustment of derivative liabilities |
| - |
|
| 30,417 |
|
| (29,262) |
|
| 213,365 |
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| 229,214 | ||
| Loss on impairment |
| - |
|
| - |
|
| - |
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| - |
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| (9,483,293) | ||
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| Total other income (expenses) |
| (33,326) |
|
| (104,881) |
|
| (94,587) |
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| 23,297 |
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| (9,635,601) | |
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| Net loss | $ | (198,625) |
| $ | (729,468) |
| $ | (410,613) |
| $ | (953,493) |
| $ | (11,794,364) | |
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Basic and diluted net loss per common share |
| (0.01) |
|
| (0.01) |
|
| (0.01) |
|
| (0.01) |
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Basic and diluted weighted average common shares outstanding |
| 206,676,437 |
|
| 186,115,433 |
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| 206,031,628 |
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| 197,313,137 |
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|
See accompanying notes to financial statements.
4
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY | ||||||||
(DEVELOPMENT STAGE COMPANY) | ||||||||
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT | ||||||||
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FOR THE SIX MONTHS ENDED JANUARY 31, 2009 | ||||||||
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RESTATED | ||||||||
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| Additional | Deferred |
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| Accumulated | Total |
| Common stock | paid-in | Compens- | Preferred | Minority | (deficit) | stockholders' | |
| Shares | Amount | capital | ation | stock | Interest | equity | deficit |
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Balance at April 13, 2006 Inception Date | - | $ - | $- | $- | $- | $- | $- | $- |
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Net loss April 13, 2006 thru July 31, 2006 | - | - | - | - | - | - | (22,264) | (22,264) |
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Common stock sold July 2006 through July 31, 2007 | 133,333,255 | 133,333 | 554,167 | - | - | - | - | 687,500 |
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Reverse acquisition of Nuvo Solar Energy, Inc. | 60,219,207 | 60,219 | 7,403,890 | - | 535,891 | - | - | 8,000,000 |
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Net loss | - | - | - | - | - | - | (10,051,258) | (10,051,258) |
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Balances, July 31, 2007 | 193,552,462 | 193,552 | 7,958,057 | - | 535,891 | - | (10,073,522) | (1,386,022) |
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Issuance of shares upon conversion of subordinated debentures | 6,473,975 | 6,474 | 320,448 | - | - | - | - | 326,922 |
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Sale of subsidiary common stock | - | - | 50,000 | - | - | - | - | 50,000 |
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Issuance of shares for services | 1,650,000 | 1,650 | 350,850 | (235,000) | - | - | - | 117,500 |
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Amortization of deferred compensation | - | - | 0 | 101,667 | - | - | - | 101,667 |
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Issuance of options and warrants | - | - | 328,375 | - | - | - | - | 328,375 |
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Issuance of shares pursuant to conversion of notes and interest payable, related parties | 1,000,000 | 1,000 | 99,000 | - | - | - | - | 100,000 |
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Issuance of shares of subsidiary common stock for notes and interest payable, related parties | - | - | 300,023 | - | - | (61,286) | - | 238,737 |
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Issuance of shares for purchased technology | 2,000,000 | 2,000 | 148,000 | - | - | - | - | 150,000 |
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Net loss | - | - | - | - | - | - | (1,310,229) | (1,310,229) |
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Balances July 31, 2008 | 204,676,437 | 204,676 | 9,554,753 | (133,333) | 535,891 | (61,286) | (11,383,751) | (1,283,050) |
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Amortization of deferred compensation | - | - | - | 100,000 | - | - | - | 100,000 |
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Issuance of common stock upon conversion of |
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subordinated debentures | 2,000,000 | 2,000 | 20,500 | - | - | - | - | 22,500 |
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Minority interest | - | - | - | - | - | (55,832) | - | (55,832) |
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Net loss | - | - | - | - | - | - | (410,613) | (410,613) |
Balances, January 31, 2009 | 206,676,437 | 206,676 | 9,575,253 | (33,333) | 535,891 | (117,118) | (11,794,364) | (1,626,995) |
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY | |||||||||||
(DEVELOPMENT STAGE COMPANY) | |||||||||||
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS | |||||||||||
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 AND 2008 (UNAUDITED) | |||||||||||
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| Restated | |
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| From Inception | |
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| April 16, 2006- | |
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| Restated 2009 |
| Restated 2008 |
| January 31, 2009 | |||
Cash flows from operating activities: |
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| Net loss | $ | (410,613) |
| $ | (953,493) |
| $ | (11,794,364) | ||
Adjustments to reconcile net income (loss) to net cash used in operating |
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| activities: |
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| Impairment of goodwill |
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| 9,483,293 | |
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| Increase (decrease) in derivative liability |
| 29,262 |
|
| (213,365) |
|
| (229,214) | |
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| Change in minority interest |
| (55,832) |
|
| (3,859) |
|
| (117,118) | |
|
| Amortization of discount on debentures payable |
| 75,735 |
|
| 131,895 |
|
| 321,719 | |
|
| Amortization of debt issuance costs |
| 12,607 |
|
| 14,280 |
|
| 63,465 | |
|
| Common stock and warrant based compensation |
| 112,188 |
|
| 438,895 |
|
| 684,198 | |
|
| Depreciation |
| 979 |
|
| 792 |
|
| 2,561 | |
|
| Amortization of intellectual property |
| 12,500 |
|
| 12,500 |
|
| 66,666 | |
Change in operating assets and liabilities: |
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|
|
|
|
|
|
| |||
| Decrease (increase) in prepaid expenses and other current assets |
| 33,400 |
|
| (38,795) |
|
| (20,000) | ||
| Increase in notes and interest receivable, related |
| (1,836) |
|
| (1,336) |
|
| (4,493) | ||
| Increase in accounts payable and accrued expenses |
| 54,051 |
|
| 80,350 |
|
| 176,073 | ||
| Increase in amounts due to related parties |
| 73,458 |
|
| 180,427 |
|
| 37,726 | ||
Net cash used in operating activities |
| (64,101) |
|
| (351,709) |
|
| (1,329,488) | |||
Cash flows from investing activities: |
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|
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|
| |||
| Purchase of property and equipment |
| (39,900) |
|
| - |
|
| (293,401) | ||
| Cash acquired in reverse transaction |
|
|
|
|
|
|
| 33,074 | ||
Net cash used in investing activities |
| (39,900) |
|
| - |
|
| (260,327) | |||
Cash flows from financing activities: |
|
|
|
|
|
|
|
| |||
| Proceeds from sale of common stock |
|
|
|
|
|
|
| 687,500 | ||
| Proceeds from issuance of third party notes payable |
| - |
|
| 163,500 |
|
| 371,000 | ||
| Proceeds from debentures payable |
| - |
|
| 370,000 |
|
| 505,000 | ||
| Proceeds from sale of subsidiary common stock |
|
|
|
| 50,000 |
|
| 50,000 | ||
| Placement fees paid |
| - |
|
| (58,100) |
|
| (75,650) | ||
| Proceeds from advances and loans from related parties |
| 103,203 |
|
| 18,835 |
|
| 491,538 | ||
| Payment of related party notes payable |
| - |
|
| (89,517) |
|
| (195,768) | ||
| Payment to related party for notes receivable |
| - |
|
| (23,300) |
|
| (23,300) | ||
| Payment of notes payable |
| - |
|
| (47,873) |
|
| (220,354) | ||
| Increase in bank overdraft |
| 283 |
|
| 45 |
|
| 274 | ||
Net cash provided by financing activities |
| 103,486 |
|
| 383,590 |
|
| 1,590,240 | |||
Net decrease in cash and cash equivalents |
| (515) |
|
| 31,881 |
|
| 425 | |||
Cash and cash equivalents, beginning of period |
| 940 |
|
| 33,024 |
|
| 0 | |||
Cash and cash equivalents, end of period | $ | 425 |
| $ | 64,905 |
| $ | 425 | |||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
| |||
| Cash paid during the year for interest | $ | 27 |
| $ | 11,392 |
| $ | 85,341 | ||
| Cash paid during the year for taxes | $ | - |
| $ | - |
| $ | - | ||
Non-cash investing and financial activities: |
|
|
|
|
|
|
|
| |||
| Fair value of options and shares issued for notes payable, |
|
|
|
|
|
|
|
| ||
|
| subordinated debentures and services | $ | 22,500 |
| $ | 318,800 |
| $ | 2,887,040 | |
| Fair value of subsidiary common stock issued for notes and |
|
|
|
|
|
|
|
| ||
|
| interest payable | $ |
|
| $ |
|
| $ | 300,023 | |
| Fair value of common stock issued to acquire patents | $ | - |
| $ | 150,000 |
| $ | 150,000 | ||
| Common stock issued in connection with merger | $ | - |
| $ | - |
| $ | 133,333 |
See accompanying notes to financial statements.
6
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of presentation and summary of significant accounting policies:
Basis of presentation
The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of China Nuvo Solar Energy, Inc. (the Company) contain all adjustments, which include normal recurring adjustments necessary to present fairly the financial position at January 31, 2009, the results of operations for the six months ended January 31, 2009 and 2008 and cash flows for the six months ended January 31, 2009 and 2008. The balance sheet as of July 31, 2008 is derived from the Companys audited financial statements.
Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Companys Annual Report on Form 10-K/A for the fiscal year ended July 31, 2008, as filed with the SEC.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates.
The results of operations for the six months ended January 31, 2009 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending July 31, 2009.
Going concern and managements plans
The Company had a working capital deficit of approximately $1,740,000 and $2,086,000 at July 31, 2008 and January 31, 2009, respectively. Additionally, the Company to date has generated minimal revenues. Accordingly, the Company has no ready source of working capital. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. While management believes the Company may be able to raise funds through the issuance of debt or equity instruments, there is no assurance the Company will be able to raise sufficient funds to operate in the future.
Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 (the Share Exchange), by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (Nuvo) incorporated on April 13, 2006, we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary (the Share Exchange). The Share Exchange was effective as of July 25, 2007, upon the completed filing of Articles of Exchange with the Nevada Secretary of State and a Statement of Share Exchange with the Colorado Secretary of State. Contemporaneously with the Share Exchange, we changed our name to China Nuvo Solar Energy, Inc.
Immediately prior to the effective time of the Share Exchange, Nuvo had outstanding 5,500,000 shares of its common stock (Nuvo Common Stock) and no shares of preferred stock. In accordance with the Share Exchange Agreement, each share of Nuvo Common Stock was acquired by us in exchange for approximately 24.24 shares of our common stock for a total of 133,333,255 shares issued. Accordingly, after giving effect to the Share Exchange, the Company had approximately 189,915,355 shares of Common Stock outstanding immediately following the transaction. The shares issued were valued at approximately $8 million or $.06 per share (the market price of the common stock on the date of issuance). The Company allocated the value of the shares to goodwill. Management had determined that as of July 31, 2007 the goodwill amount of $8,000,000 was impaired and recorded the write down of goodwill for the year ending July 31, 2007.
Upon completion of the Share Exchange, we ceased all operations relating to the business of Interactive Games, Inc. and adopted the business plan of Nuvo, which is now our wholly owned subsidiary. Our focus is the development of a viable manufacturing process for our solar cell technology.
7
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of presentation and summary of significant accounting policies (continued):
Going concern and managements plans (continued)
As part of our planned operations, our main focus will be the development of a viable manufacturing process for our technology.
We will require additional capital to fund the development of a pilot manufacturing process as well as for general corporate working capital to fund our day-to-day operations and costs associated with being a publicly-traded company. This amount does not include any amounts which may be necessary to pay off existing debt or accrued expenses. We presently believe the source of funds will primarily consist of debt financing, which may include debt instruments that may include loans from our officers or directors, or the sale of our equity securities in private placements or other equity offerings or instruments. . The debt financing may include loans from our officers and directors. Although our balance sheet includes current liabilities of approximately $1,986,000, a portion of this amount are in the form of a derivative liability of $579,000 and convertible notes of $300,000 (of which $125,000 is a related party). These amounts, plus other related party loans of $143,635 and accrued and unpaid interest may be converted to common stock, thereby reducing considerably our debt service obligations. Nevertheless, we will be required to raise funds in order to fund our operations and costs associated with being a public company.
Management will continue over the next twelve months re-examining its business plan. We do not intend to enter into any additional direct development of our technology. . Rather, we plan to become an incubator of the solar technology we currently own and technology that we may acquire in the future. We currently do not have any agreements to acquire any additional technology. In order to acquire additional technology we would either have to raise additional money through equity or debt financing or in the alternative issue shares of our common stock. We intend to study the feasibility of sub-licensing or entering into other types of agreements with third parties, whereby the third party will compensate us by paying a license fee and subsequent royalties. The compensation may be in the form of cash or in the licensees common stock. Through our established relationships we plan to focus on the identification, acquisition and potential license or resale of renewable and alternative energy technologies.
Description of business
DEVELOPMENT STAGE COMPANY
The Company has earned limited revenues from operations. Accordingly, the Company's activities have been accounted for as those of a "Development Stage Company" as set forth in Financial Accounting Standards Board Statement No. 7 ("SFAS 7"). Among the disclosures required by SFAS 7 are that the Company's financial statements be identified as those of a development stage company, and that the statements of operations, stockholders' equity and cash flows disclose activity since the date of the Company's inception.
Summary of significant accounting policies:
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results will differ from those estimates.
Intellectual property
The Company records intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) Number 142, Goodwill and Other Intangible Assets. Goodwill and other intangible assets deemed to have indefinite lives are not subject to annual amortization. Intangible assets which have finite lives are amortized on a straight line basis over their remaining useful life; they are also subject to annual impairment reviews.
8
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of presentation and summary of significant accounting policies (continued):
Summary of significant accounting policies (continued):
Long-lived assets and certain identifiable intangibles
Long-lived assets, such as property and equipment and definite-lived intangible assets are stated at cost or fair value for impaired assets. Depreciation and amortization is computed principally by the straight line method for financial reporting purposes.
Asset impairment charges are recorded for long-lived assets and intangible assets subject to amortization when events and circumstances indicate that such assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying value of the assets exceeds its fair value. Fair value is determined using appraisals, management estimates or discounted cash flow calculations.
Revenue recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements. This statement established that revenue can be recognized when persuasive evidence of an arrangement exists, the services have been delivered, all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is reasonably assured.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration on credit risks
The Company is subject to concentrations of credit risk primarily from cash. The Company minimizes its credit risks associated with cash, by periodically evaluating the credit quality of its primary financial institutions.
Stock-based compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS No, 123R). SFAS No. 123R establishes the financial accounting and reporting standards for stock-based compensation plans. As required by SFAS No. 123R, the Company will recognize the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements. The Company did not issue any stock options during the six months ended January 31, 2009 and 2008. There are 12,487,107 stock options and warrants outstanding as of January 31, 2009.
Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans (including shares issued under its stock option plans) in accordance with APB Opinion No. 25 and followed the pro forma net income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
Fair value of financial instruments
The carrying value of cash, accounts payable and accrued expenses approximate their fair value due to their short-term maturities. The carrying amount of the note payable and due to related parties approximate their fair value based on the Company's incremental borrowing rate.
9
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of presentation and summary of significant accounting policies (continued):
Summary of significant accounting policies (continued):
Income taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some, or all, of the deferred tax asset will not be realized.
Loss per common share
Loss per share of common stock is computed based on the weighted average number of common shares outstanding during the period. Stock options, warrants and common stock underlying convertible promissory notes at January 31, 2009 and 2008 were 150,408,676 and 26,605,683, respectively, are not considered in the calculation as the impact of the potential common shares would be to decrease loss per share and therefore no diluted loss per share figures are presented.
Accounting for obligations and instruments potentially settled in the Companys common stock
In connection with any obligations and instruments potentially to be settled in the Company's stock, the Company accounts for the instruments in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Companys Own Stock. This issue addresses the initial balance sheet classification and measurement of contracts that are indexed to, and potentially settled in, the Company's stock.
Under EITF 00-19, contracts are initially classified as equity or as either assets or liabilities, depending on the situation. All contracts are initially measured at fair value and subsequently accounted for based on the then current classification. Contracts initially classified as equity do not recognize subsequent changes in fair value as long as the
Accounting for obligations and instruments potentially settled in the Companys common stock (continued)
contracts continue to be classified as equity. For contracts classified as assets or liabilities, the Company reports changes in fair value in earnings and discloses these changes in the financial statements as long as the contracts remain classified as assets or liabilities. If contracts classified as assets or liabilities are ultimately settled in shares, any previously reported gains or losses on those contracts continue to be included in earnings. The classification of a contract is reassessed at each balance sheet date.
Derivative instruments
In connection with the issuances of equity instruments or debt, the Company may issue options or warrants to purchase common stock. In certain circumstances, these options or warrants may be classified as liabilities, rather than as equity. In addition, the equity instrument or debt may contain embedded derivative instruments, such as conversion options or listing requirements, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative liability instrument. The Company accounts for derivative instruments under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
10
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of presentation and summary of significant accounting policies (continued):
Summary of significant accounting policies (continued):
Recent accounting pronouncements
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not adopt SFAS No. 159 on any individual instrument as of January 31, 2009.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R is a revision to SFAS No. 141 and includes substantial changes to the acquisition method used to account for business combinations (formerly the purchase accounting method), including broadening the definition of a business, as well as revisions to accounting methods for contingent consideration and other contingencies related to the acquired business, accounting for transaction costs, and accounting for adjustments to provisional amounts recorded in connection with acquisitions. SFAS No.141R retains the fundamental requirement of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R is effective for periods beginning on or after December 15, 2008, and will apply to all business combinations occurring after the effective date. The Company is currently evaluating the requirements of SFAS No. 141R.
The FASB also issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements in December 2007. This statement amends ARB No. 51 to establish new standards that will govern the (1) accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the non-controlling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized in earnings. SFAS No. 160 is effective for periods beginning after December 15, 2008. The Company is currently evaluating the requirements of SFAS No. 160.
The FASB also issued SFAS No. 161 Disclosures About Derivatives Instruments and Hedging Activities in March 2008. This statement requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves the transparency of financial reporting. This statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Company is currently evaluating the requirements of SFAS No. 161.
The Company does not believe that any other recently issued, but not yet effective, accounting standards will have a material will have an effect on the Companys consolidated financial position, results of operations or cash flow.
2.
Accrued liabilities, related parties:
Accrued liabilities, related parties at January 31, 2009 and July 31, 2008 are as follows:
|
| January 31, 2009 |
| July 31, 2008 |
|
|
|
|
|
Officer bonus | $ | 275,561 | $ | 275,561 |
Management fees |
| 299,600 |
| 237,000 |
Accrued interest |
| 25,536 |
| 14,678 |
|
|
|
|
|
| $ | 600,697 | $ | 527,239 |
11
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.
Convertible debentures payable:
In April 2006, the Company executed a Securities Purchase Agreement (the Purchase Agreement) with various accredited investors (the Holder or Holders) for the issuance and sale of up to $700,000 of 6% unsecured convertible debentures in private transactions (the 2006 Debentures). As of July 31, 2006, the Company completed the sale of the aggregate $385,000 in the 2006 Debentures under the Purchase Agreement. We received $324,950 from these transactions net of $60,050 of debt issuance costs paid to our placement agents, Divine Capital Markets, LLC (Divine) (included in the accompanying balance sheet), which will be amortized as debt issuance costs over the three year term of the convertible notes. At January 31, 2009 the remaining face amount of the 2006 Debentures is $0.
On October 21, 2007 the Board of Director of the Company authorized the sale of up to $700,000 of 6% unsecured convertible debentures (the 2007 Debentures). We have received net proceeds of $429,350 after $75,650 of debt issuance costs (included in the accompanying January 31, 2009 balance sheet), paid to Divine, who acted as our placement agent. The debt issuance costs will be amortized as debt issuance costs over the three year term of the 2007 Debentures. The terms and conditions of the 2007 Debentures are the same as the 2006 Debentures. Accordingly, fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 2007 Debentures. The change in the fair value of the liability will be credited or (charged) to other income or (expense) in the consolidated statement of operations. The beneficial conversion feature included in the 2007 Debentures resulted in an initial debt discount of $465,000 and an initial loss on the valuation of derivative liabilities of $179,767. During the six months ended January 31, 2009 debenture holders redeemed $22,500, thereby reducing the face value of the debentures as well as the initial debt discount. Based on the revaluation of the remaining 2007 Debentures of $482,500 at January 31, 2009, the Company recorded an expense of $29,262 and increased the derivative liability on the balance sheet by $29,262.
The Debentures are due three years from the final Closing Date under the Purchase Agreement (the Maturity Date), unless prepayment of the Debentures is required in certain events, as described below. The Debentures are convertible at a conversion price (the Conversion Price) for each share of common stock equal to 75% of the lowest closing bid price per share (as reported by Bloomberg, LP) of the Corporations common stock for the twenty (20) trading days immediately preceding the date of conversion. In addition, the Debentures provide for adjustments for dividends payable other than in shares of common stock, for reclassification, exchange or substitution of the common stock for another security or securities of the Corporation or pursuant to a reorganization, merger, consolidation, or sale of assets, where there is a change in control of the Corporation.
The outstanding principal balance of each Debenture bears interest, in arrears, at six percent (6%) per annum, payable, (i) upon conversion, or (ii) on the Maturity Date, in shares of our common stock at the Conversion Price. Upon the occurrence of an Event of Default (as defined in the Purchase Agreement), then the Corporation is required to pay interest to the Holder of each outstanding Debenture, at the option of the Holders (i) at the rate of lesser of eighteen percent (18%) per annum and the maximum interest rate allowance under applicable law, and (ii) the Holders may at their option declare the Debentures, together with all accrued and unpaid interest (the Acceleration Amount), to be immediately due and payable.
The Corporation may at its option call for redemption all or part of the Debentures prior to the Maturity Date, as follows:
The Debentures called for redemption shall be redeemable for an amount (the Redemption Price) equal to (x) if called for redemption prior to the date which is nine months from the date of issuance (the Issuance Date), 115%, if called for redemption on or after the date that is nine months after the Issuance Date but prior to the first anniversary of the Issuance Date, 131%, in either case of the principal amount called for redemption, plus (y) interest accrued through the day immediately preceding the date of redemption.
(i)
If fewer than all outstanding Debentures are to be redeemed, then all Debentures shall be partially redeemed on a pro rata basis.
The Debentures cannot be converted until nine (9) months after the issuance date of each Debenture. During the six months ended January 31, 2009, the Holders converted $22,500 of the 2007 Debentures to 2,000,000 shares of common stock at an average conversion price of approximately $0.01125 per share.
On February 6, 2009 the Holders converted $15,000 of the 2007 Debentures to 3,030,303 shares of common stock at an average conversion price of approximately $0.00495
12
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3.
Convertible debentures payable (continued):
The Company determined that the conversion feature of the convertible Debentures represents an embedded derivative since the Debentures are convertible into a variable number of shares upon conversion. Accordingly, the convertible Debentures are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The Company believes that the aforementioned embedded derivatives and freestanding warrants meet the criteria of SFAS 133 and EITF 00-19, and should be accounted separately as derivatives with a corresponding value recorded as a liability. Accordingly, the fair value of these derivative instruments have been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the Debentures. Such discount will be accreted from the date of issuance to the maturity date of the Debentures. The change in the fair value of the liability for derivative contracts will be credited to other income (expense) in the consolidated statements of operations.
4.
Convertible and other promissory notes and long-term debt, including related parties:
Convertible and other promissory notes and long-term debt, including related parties at January 31, 2009 and July 31, 2008 consist of the following:
|
| January 31, 2009 |
| July 31, 2008 |
|
|
|
|
|
Notes payable | $ | 175,144 | $ | 175,644 |
Notes payable, related parties [A] |
| 268,635 |
| 164,932 |
Convertible debentures, net of discount of $305,631 (January) and $403,866 (July) |
| 176,869 |
| 101,134 |
|
| 620,648 |
| 441,710 |
|
|
|
|
|
Less current portion |
| 443,779 |
| 340,576 |
|
|
|
|
|
Long-term debt, net of current portion | $ | 176,869 | $ | 101,134 |
4.
Convertible and other promissory notes and long-term debt, including related parties (continued):
[A]
The following table summarizes the activity of notes payable, related parties for the six months ended January 31, 2009:
Balance, August 1, 2008 | $ | 164,932 |
|
|
|
|
|
|
Reclassification |
| 500 |
Issuance of new notes |
| 103,203 |
|
|
|
|
|
|
Balance, January 31, 2009 | $ | 268,635 |
5.
Stockholders deficit:
Common stock
On September 29, 2008, the Company issued 2,000,000 shares of its common stock upon the conversion of $22,500 of convertible debentures. The shares were converted at $0.01125 per share.
Stock options and warrants
In March 2002, the Company adopted the 2002 Stock Option Plan, covering up to 1,000,000 shares of the Company's common stock, and in July 2003, the Company adopted the 2003 Stock Option Plan covering up to 2,500,000 shares of the Company's common stock.
13
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.
Stockholders deficit (continued):
Stock options and warrants (continued)
A summary of the activity of the Companys outstanding options and warrants for the six months ended January 31, 2009 is as follows:
|
| Options and warrants |
| Weighted average exercise price |
|
|
|
|
|
Outstanding and exercisable August 1 |
| 14,187,107 | $ | 0.11 |
Expired |
| (1,700,000) |
| 0.20 |
|
|
|
|
|
Outstanding and exercisable, January 31, 2009 |
| 12,487,107 | $ | 0.096 |
Range of exercise prices |
| Warrants outstanding and exercisable |
| Weighted average remaining contractual life |
| Weighted average exercise price |
|
|
|
|
|
|
|
$ 0.05 |
| 300,000 |
| 0.04 |
| $ 0.05 |
0.07 0.10 |
| 10,237,107 |
| 1.81 |
| 0.085 |
0.12 |
| 1,000,000 |
| 0.22 |
| 0.12 |
0.20 |
| 950,000 |
| 0.01 |
| 0.20 |
The weighted average remaining contractual life of the terms of the warrants and options is 2.08 years.
6.
Income taxes:
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred taxes, as of January 31, 2009, are as follows:
Deferred tax assets: |
|
|
Net operating loss carryforward | $ | 336,000 |
Less valuation allowance |
| (336,000) |
Total net deferred tax assets | $ | - |
The Company may have had a change of ownership as defined by the Internal Revenue Code Section 382. As a result, a substantial annual limitation may be imposed upon the future utilization of its net operating loss carryforwards. At this point, the Company has not completed a change in ownership study and the exact impact of such limitations is unknown. The company has no accrued tax liability, as the income was derived from the sale of a subsidiary and the liabilities were alleviated through formal bankruptcy proceedings.
The federal statutory tax rate reconciled to the effective tax rate for the six months ended January 31, 2009 and 2008, respectively, is as follows:
|
| 2009 |
| 2008 |
|
|
|
|
|
Tax at U.S. Statutory Rate |
| 35.0% |
| 35.0% |
State tax rate, net of federal benefits |
| 5.0% |
| 5.0% |
Change in valuation allowance |
| (40.0) |
| (40.0) |
|
|
|
|
|
|
| 0.0% |
| 0.0% |
14
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7.
Agreements:
On June 9, 2006 Nuvo signed a license agreement with Photovoltaics.com, Inc. (PV), Hutchinson Island, Florida. Nuvo acquired exclusive worldwide rights to PV's solar cell technology relating to a multiple stacked solar cell using wave guide transfers (the Solar Technology). This license agreement includes all patents issued pursuant to certain patent applications or amendments that have been filed and the rights to use all applicable copyrights, trademarks and related intellectual property obtained on or in connection with the process and products. As consideration for this license, Nuvo paid a total aggregate license fee of $250,000. The term of the license is for 10 years, automatically renewable for successive ten year terms under the same terms and conditions as provided for in this agreement. Nuvo also agreed to pay PV a fee of $180,000 over the first three years of the agreement to act as a consultant.
On January 23, 2008, the Company purchased from PV the patents related to the solar technology in exchange for 2,000,000 restricted shares of common stock of the Company. The Company now owns all rights, title and interest in the patents, including all issued patents or other intellectual property arising from the patents worldwide. The Company valued the common stock at $0.075 per share (the market price of the common stock on November 16, 2007, the date the parties agreed to the number of shares to be issued) and accordingly, increased its intellectual property asset by $150,000 on the January 31, 2009 balance sheet included herein.
On November 27, 2007, we executed a Collaboration and Development Agreement (the Collaboration Agreement) with Pioneer Materials, Inc. (PMI) of Torrance, California. Under the terms of the Agreement, PMI will build, equip, operate and manage, for our benefit, a product development, testing and prototype manufacturing facility in PMIs Chengdu, Sichuan, China facility located in Chengdus West High Tech development zone. The agreement with PMI has the objective to develop, test and manufacture prototypes of solar energy products using our licensed technology based on an invention titled Photovoltaic cell with integral light transmitting waveguide in a ceramic sleeve. Additionally, PMI will provide technical, engineering development, testing and manufacturing employees and support staff. The term of the Agreement is for one year, with automatic six-month renewal periods unless terminated by the parties. Pursuant to the terms of the Agreement, the Company will pay PMI $2,500 per month and PMI is eligible to receive up to 4,000,000 shares of the Companys common stock upon the satisfactory completion of certain milestone accomplishments in the Agreement, of which 500,000 shares of common stock were issued upon the execution of the Agreement. The Company valued the shares at $0.07 per share (the market price of the common stock on the date the parties agreed to the number of shares to be issued) and recorded $35,000 as deferred stock compensation. PMI is a manufacturer and supplier of materials for the semiconductor, hard drive media, optical media and photonic industries. PMI is developing for the solar energy industry advanced materials for thin film photovoltaics (solar cell) processing.
In May of 2008, the Chengdu region of China experienced a catastrophic earthquake. As a result of this earthquake and the after effects including significant problems with the delivery of electricity, PMI suspended their development work for a significant period of time. We continue to work with PMI under the Collaboration Agreement, however, there has been no significant progress on product development and we continue to explore alternative avenues for development of our technology. We suspended paying the $2,500 monthly fee.
The future milestones and potential shares to be issued are as follows:
Hiring of staff and readying of equipment | 500,000 |
Demonstration of working single-junction |
|
solar cell with efficiency greater than 4% | 500,000 |
Demonstration of working single-junction |
|
or multiple junction cell with efficiency |
|
greater than 10% | 2,500,000 |
On December 10, 2008 we executed a Patent and Trademark Purchase Agreement (the Purchase Agreement) with PV. Nuvo acquired certain patent rights and trademarks in exchange for $39,900. Of this amount, $11,000 has been paid as of January 31, 2009 and we have agreed to pay $5,000 per month for five months beginning February 2009 with a final payment of $3,900 on July 5, 2009.
15
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
Restatements:
Subsequent to the issuance of the Companys July 31, 2008 consolidated financial statements, the Companys management determined that corrections were required to the previously reported financial statements to reflect the inclusion of the Companys Florida based subsidiary, Interactive Games, Inc (Igam). Previously the Company excluded the balances and activity of Igam. The Company determined that the spinoff of Igam was never effectuated as the shares of common stock were never issued and distributed as initially planned and approved by the Board of Directors. Additionally, management determined that transactions related to any predecessor company should not be included in the financial statements. Lastly, management determined that the accounting treatment of the July 27, 2007 transaction between the Company and Nuvo Solar Energy, Inc. (Nuvo) was deemed to be a reverse merger whereby the Company was the legal acquirer and Nuvo was the accounting acquirer. The effects of the restatements are shown in the following tables.
China Nuvo Solar Energy, Inc. and Subsidiary
Consolidated Balance Sheet
ASSETS |
| January 31, 2009 Original |
| Adjustments |
| January 31, 2009 Restated |
Current assets |
|
|
|
|
|
|
Cash | $ | 425 | $ |
| $ | 425 |
Notes and interest and interest receivable |
| 55,485 |
|
|
| 55,485 |
Prepaid expenses and other current assets |
| 20,000 |
|
|
| 20,000 |
Total current assets |
| 75,910 |
|
|
| 75,910 |
Fixed assets, net |
|
|
| 2,917 |
| 2,917 |
Solar intellectual property, net |
| 373,234 |
|
|
| 373,234 |
Debt issuance costs |
| 83,404 |
|
|
| 83,404 |
Total assets | $ | 532,548 | $ | 2,917 | $ | 535,465 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Accrued liabilities, related parties | $ | 413,587 | $ | 187,110 | $ | 600,697 |
Accounts payable and accrued expenses |
| 147,970 |
| 213,862 |
| 361,832 |
Derivative liability convertible debentures |
| 579,000 |
|
|
| 579,000 |
Notes payable |
| 175,144 |
|
|
| 175,144 |
Notes payable, related parties |
| 213,132 |
| 55,503 |
| 268,635 |
Bank overdraft |
|
|
| 283 |
| 283 |
Total current liabilities |
| 1,528,833 |
| 456,758 |
| 1,985,591 |
|
|
|
|
|
|
|
Long term liabilities |
|
|
|
|
|
|
Convertible debentures, payable, net |
| 176,869 |
|
|
| 176,869 |
|
|
|
|
|
|
|
Total Liabilities |
| 1,705,702 |
| 456,758 |
| 2,162,460 |
Shareholders Deficit |
|
|
|
|
|
|
Preferred stock, $.001 par value; 25,000,000 |
|
|
|
|
|
|
shares authorized, 535,891 issued and outstanding |
| 535,891 |
|
|
| 535,891 |
Common stock, $.001 par value, 475,000,000 |
|
|
|
|
|
|
shares authorized, 206,676,437 issued and outstanding |
| 206,676 |
|
|
| 206,676 |
Minority interest |
|
|
| (117,118) |
| (117,118) |
Deferred compensation |
|
|
| (33,333) |
| (33,333) |
Additional paid in capital |
| (949,653) |
| 10,524,906 |
| 9,575,253 |
Retained deficit |
| (966,068) |
| (10,828,296) |
| (11,794,364) |
Total shareholders deficit |
| (1,173,154) |
| (453,841) |
| (1,626,995) |
Total liabilities and shareholders deficit | $ | 532,548 | $ | 2,917 | $ | 535,465 |
16
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
Restatements (continued):
As a result of the restated consolidated balance sheet, to include the accounts of Interactive Games, Inc., (our Florida majority owned subsidiary), and to carry forward prior year adjustments, including the impairment of $9,483,293 of goodwill; total assets and liabilities increased by $2,917 and $456,758 respectively and shareholders deficit increased by $453,841.
China Nuvo Solar Energy, Inc. and Subsidiary
Consolidated Statement of Operations
Six Months Ended January 31, 2009
|
| Original |
| Adjustments |
| Restated |
Revenues | $ | 0 | $ | 3,166 | $ | 3,166 |
Cost of sales |
| 0 |
| 0 |
| 0 |
Gross profit |
| 0 |
| 3,166 |
| 3,166 |
Operating costs and expenses: |
|
|
|
|
|
|
Consulting fees |
| 46,605 |
| 5,140 |
| 51,745 |
Management fees, related parties |
| 78,000 |
|
|
| 78,000 |
Salaries, including stock compensation |
| 12,188 |
| 100,000 |
| 112,188 |
Legal and accounting |
| 30,533 |
|
|
| 30,533 |
Other |
| 31,153 |
| 15,573 |
| 46,726 |
Total operating costs and expenses |
| 198,479 |
| 120,113 |
| 319,192 |
|
|
|
|
|
|
|
Operating Loss |
| (198,479) |
| (117,547) |
| (316,026) |
Interest expense, related |
| (8,669) |
| (2,186) |
| (10,855) |
Interest expense, other |
| (99,030) |
| (12,608) |
| (111,638) |
Interest income, related |
| 1,336 |
|
|
| 1,336 |
Minority interest |
| 0 |
| 55,832 |
| 55,832 |
Derivative liability |
| (29,262) |
|
|
| (29,262) |
Total other (expenses) income |
| (135,625) |
| 41,038 |
| (94,587) |
|
|
|
|
|
|
|
Net loss | $ | (334,104) | $ | (76,509) | $ | (410,613) |
|
|
|
|
|
|
|
Basic and diluted net loss per common share | $ | (.**) | $ | - | $ | (.01) |
|
|
|
|
|
|
|
Basis and diluted weighted average common shares |
|
|
|
|
|
|
Outstanding |
| 206,031,628 |
| - |
| 206,031,628 |
As a result of the restated consolidated statement of operations for the six months ending January 31, 2009, the Companys net loss increased from $334,104 to $410,613. The increase in the loss is a result of including the accounts of Interactive Games, Inc. (our Florida majority owned subsidiary).
17
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
Restatements (continued):
China Nuvo Solar Energy, Inc. and Subsidiary
Consolidated Statement of Operations
Six Months Ended January 31, 2008
|
| Original |
| Adjustments |
| Restated |
Revenues | $ | 0 | $ | 0 | $ | 0 |
Cost of sales |
| 0 |
| 0 |
| 0 |
Gross profit |
| 0 |
| 0 |
| 0 |
Operating costs and expenses: |
|
|
|
|
|
|
Bonus, related party |
|
|
| 130,772 |
| 130,772 |
Consulting fees |
| 75,750 |
| 600 |
| 76,350 |
Management fees, related parties |
| 239,022 |
| (75,772) |
| 163,250 |
Salaries, including stock compensation |
| 438,895 |
|
|
| 438,895 |
Legal and accounting |
| 55,809 |
| 13,300 |
| 69,109 |
Other |
| 102,438 |
| (4,024) |
| 98,414 |
Total operating costs and expenses |
| 911,914 |
| 64,876 |
| 976,790 |
|
|
|
|
|
|
|
Operating loss |
| (911,914) |
| (64,876) |
| (976,790) |
|
|
|
|
|
|
|
Other (expenses) income |
|
|
|
|
|
|
Interest expense, related |
| (7,119) |
| (10,748) |
| (17,867) |
Interest expense, other |
| (150,615) |
| (26,781) |
| (177,396) |
Interest income, related |
| 1,336 |
|
|
| 1,336 |
Minority interest |
| 0 |
| 3,859 |
| 3,859 |
Derivative liability expense |
| 213,365 |
| - |
| 213,365 |
Total other (expenses) income |
| 56,967 |
| (33,670) |
| 23,297 |
Net loss | $ | (854,947) | $ | (98,546) | $ | (953,493) |
Basic and diluted net loss per common share | $ | (**) | $ | - | $ | (0.01) |
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding |
| 195,178,268 |
| - |
| 195,178,268 |
As a result of the restated consolidated statement of operations for the six months ended January 31, 2008, the Companys originally reported net loss of $854,947 was increased by $102,405, resulting in a net loss of $957,352 for the six months ended January 31, 2008. The increase in the loss is a result of including the accounts of Interactive Games, Inc., (our Florida majority owned subsidiary).
18
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
Restatements (continued):
China Nuvo Solar Energy, Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Six Months Ended January 31, 2009
|
| Original |
| Adjustments |
| Restated |
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss | $ | (334,104) | $ | (76,509) | $ | (410,613) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
Decrease in derivative liability |
| 29,262 |
| - |
| 29,262 |
Change in minority interest |
| 0 |
| (55,832) |
| (55,832) |
Amortization of discount on debentures payable |
| 75,735 |
| - |
| 75,735 |
Amortization of debt issuance costs |
| 12,607 |
|
|
| 12,607 |
Common stock and warrant based compensation |
| 12,188 |
| 100,000 |
| 112,188 |
Depreciation |
| - |
| 979 |
| 979 |
Amortization of intellectual property |
| 12,500 |
| - |
| 12,500 |
Change in operating assets and liabilities: |
|
|
|
|
|
|
Decrease (increase) in prepaid expenses and other assets |
| 30,000 |
| 3,400 |
| 33,400 |
Increase in notes and interest receivable |
|
|
| (1,836) |
| (1,836) |
Increase in accounts payable and accrued expenses |
| 54,011 |
| 40 |
| 54,051 |
Increase in amounts due to related parties |
| 73,336 |
| 122 |
| 73,458 |
Net cash used in operating activities |
| (34,465) |
| (29,636) |
| (64,101) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
Purchase of property and equipment |
| (39,900) |
| - |
| (39,900) |
|
|
|
|
|
|
|
Net cash used in investing activities |
| (39,900) |
| - |
| (39,900) |
Cash flows from financing activities: |
|
|
|
|
|
|
Proceeds from issuance of third party notes payable |
| 74,350 |
| 28,853 |
| 103,203 |
Payment to related party for note receivable |
| (500) |
| 500 |
| - |
Increase in bank overdraft |
| - |
| 283 |
| 283 |
Net cash provided by financing activities | $ | 73,850 | $ | 29,636 | $ | 103,486 |
Net increase decrease in cash and cash equivalents |
| (515) |
|
|
| (515) |
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
| 940 |
| - |
| 940 |
|
|
|
|
|
|
|
Cash and cash equivalents, end of period | $ | 425 | $ | - | $ | 425 |
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
Cash paid during the year for interest | $ | 24 | $ | 3 | $ | 27 |
Cash paid during the year for taxes | $ | - | $ | - | $ | - |
|
|
|
|
|
|
|
Non-cash investing and financial activities: |
|
|
|
|
|
|
Fair value of options and shares issued for notes payable, subordinated debentures and services | $ | 22,500 | $ | - | $ | 22,500 |
Fair value of subsidiary common stock issued for notes and interest payable | $ | - | $ | - | $ | - |
Common stock issued in connection with merger | $ | - | $ | - | $ | - |
As a result of the restatement of the consolidated statement of cash flows for the six months ended January 31, 2009, the net cash used in operations originally reported of $34,465 increased by $29,636 to $64,101, net cash used in investing activities remained unchanged, and net cash provided by financing activities increased from the original reported amount of $73,850 by $29,636 to $103,486. The net cash and cash equivalents originally reported of $425 remained unchanged for the year six months January 31, 2009.
19
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
Restatements (continued):
China Nuvo Solar Energy, Inc. and Subsidiary
Consolidated Statement of Cash Flows
|
| January 31, 2008 Original |
| Adjustments |
| January 31, 2008 Restated |
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss | $ | (854,947) | $ | (98,546) | $ | (953,493) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
Increase (decrease) in derivative liability |
| (213,365) |
|
|
| (213,365) |
Change in minority interest |
| - |
| (3,859) |
| (3,859) |
Amortization of discount on debentures payable |
| 131,895 |
| - |
| 131,895 |
Amortization of debt issuance costs |
| 14,280 |
| - |
| 14,280 |
Common stock and warrant based compensation |
| 438,896 |
|
|
| 438,895 |
Depreciation |
| - |
| 792 |
| 792 |
Amortization of intellectual property |
| 12,500 |
| - |
| 12,500 |
Change in operating assets and liabilities: |
|
|
|
|
|
|
Decrease (increase) in prepaid expenses and other assets |
| (36,731) |
| (2,064) |
| (38,795) |
Increase in notes and interest receivable |
| - |
| (1,336) |
| (1,336) |
Increase in accounts payable and accrued expenses |
| 62,709 |
| 17,641 |
| 80,350 |
Increase in amounts due to related parties |
| 146,937 |
| 33,490 |
| 180,427 |
Net cash used in operating activities |
| (297,826) |
| (53,883) |
| (351,709) |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchase of property and equipment |
| - |
| - |
| - |
Net cash used in investing activities |
| - |
| - |
| - |
Cash flows from financing activities: Proceeds from debentures payable |
| 370,000 |
| - |
| 370,000 |
Proceeds from issuance of third party notes payable |
| 163,500 |
| - |
| 163,500 |
Proceeds from sale of subsidiary common stock |
| - |
| 50,000 |
| 50,000 |
Proceeds from advances and loans from related parties |
| 13,000 |
| 5,835 |
| 18,835 |
Payment of related party notes payable |
| (87,517) |
| (2,000) |
| (89,517) |
Payment of notes payable |
| (47,873) |
| - |
| (47,873) |
Payment to related party for notes receivable |
| (23,300) |
| - |
| (23,300) |
Placement fees paid |
| (58,100) |
| - |
| (58,100) |
Increase in bank overdraft |
| - |
| 45 |
| 45 |
Net cash provided by financing activities | $ | 329,710 | $ | 53,880 | $ | 383,590 |
Net increase in cash and cash equivalents |
| 31,884 |
| (3) |
| 31,881 |
Cash and cash equivalents, beginning of period |
| 33,021 |
| 3 |
| 33,024 |
Cash and cash equivalents, end of period | $ | 64,905 | $ | - | $ | 64,905 |
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
Cash paid during the year for interest | $ | 11,392 | $ | - | $ | 11,392 |
Cash paid during the year for taxes | $ | - | $ | - | $ | - |
Non-cash investing and financial activities: |
|
|
|
|
|
|
Fair value of options and shares issued for notes payable, subordinated debentures and services | $ | 318,800 | $ | - | $ | 318,800 |
Fair value of subsidiary common stock issued for notes and interest payable |
| - |
| - |
| - |
Fair value of common stock issued to acquire patents | $ | 150,000 | $ |
| $ | 150,000 |
Common stock issued in connection with merger | $ | - | $ | - | $ | - |
20
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
Restatements (continued):
As a result of the restatement of the consolidated statement of cash flows for the six months ended January 31, 2008, the net cash used in operations originally reported of $297,826 increased by $53,883 to $351,709, there was no cash used in investing activities, and net cash provided by financing activities increased from the original reported amount of $329,710 by $53,880 to $383,590. The increase in net cash and cash equivalents originally reported of $31,884, decreased by $3 to $31,880 and ending cash at January 31, 2008 remain unchanged at $64,905.
China Nuvo Solar Energy, Inc. and Subsidiary
Consolidated Statement of Operations
Three Months Ended January 31, 2009
|
| Original |
| Adjustments |
| Restated |
Revenues | $ | 0 | $ | 1,567 | $ | 1,567 |
Cost of sales |
| 0 |
| 0 |
| 0 |
Gross profit |
| 0 |
| 1,567 |
| 1,567 |
Operating costs and expenses: |
|
|
|
|
|
|
Consulting fees |
| 31,605 |
| 1,840 |
| 33,445 |
Management fees, related parties |
| 39,000 |
|
|
| 39,000 |
Salaries, including stock compensation |
| 6,094 |
| 50,000 |
| 56,094 |
Legal and accounting |
| 21,033 |
|
|
| 21,033 |
Other |
| 13,458 |
| 3,836 |
| 17,294 |
Total operating costs and expenses |
| 111,190 |
| 55,676 |
| 166,866 |
|
|
|
|
|
|
|
Operating Loss |
| (111,190) |
| (54,109) |
| (165,299) |
Interest expense, related |
| (8,000) |
| 1,881 |
| (6,119) |
Interest expense, other |
| (44,450) |
| (9,455) |
| (53,905) |
Interest income, related |
| 668 |
|
|
| 668 |
Minority interest |
| - |
| 26,030 |
| 26,030 |
Derivative liability |
| - |
| - |
| - |
Total other (expenses) income |
| (51,782) |
| 18,456 |
| (33,326) |
|
|
|
|
|
|
|
Net loss | $ | (162,972) | $ | (35,653) | $ | (198,625) |
Basic and diluted net loss per common share | $ | (.**) | $ | - | $ | (.01) |
|
|
|
|
|
|
|
Basis and diluted weighted average common shares outstanding |
| 206,676,437 |
| - |
| 206,676,437 |
As a result of the restated consolidated statement of operations for the three months ending January 31, 2009, the Companys net loss increased from $162,972 to $198,625. The decrease in the loss is a result of including the accounts of Interactive Games, Inc. (our Florida majority owned subsidiary).
21
CHINA NUVO SOLAR ENERGY, INC. AND SUBSIDIARY
FOR THE SIX MONTHS ENDED JANUARY 31, 2009 and 2008
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8.
Restatements (continued):
China Nuvo Solar Energy, Inc. and Subsidiary
Consolidated Statement of Operations
Three Months Ended January 31, 2008
|
| Original |
| Adjustments |
| Restated |
Revenues | $ | 0 | $ | 0 | $ | 0 |
Cost of sales |
| 0 |
| 0 |
| 0 |
Gross profit |
| 0 |
| 0 |
| 0 |
Operating costs and expenses: |
|
|
|
|
|
|
Consulting fees |
| 60,750 |
| 600 |
| 61,350 |
Management fees, related parties |
| 197,772 |
| 27,500 |
| 225,272 |
Salaries, including stock compensation |
| 301,426 |
| - |
| 301,426 |
Legal and accounting |
| (4,996) |
| 1,800 |
| (3,196) |
Other |
| 51,105 |
| (11,370) |
| 39,735 |
Total operating costs and expenses |
| 606,057 |
| 18,530 |
| 624,587 |
|
|
|
|
|
|
|
Operating Loss |
| (606,057) |
| (18,530) |
| (624,587) |
Interest expense, related |
| (7,081) |
| (2,040) |
| (9,121) |
Interest expense, other |
| (104,136) |
| (25,456) |
| (129,592) |
Interest income, related |
| 668 |
| - |
| 668 |
Minority interest |
| - |
| 2,747 |
| 2,747 |
Derivative liability |
| 30,417 |
| - |
| 30,417 |
Total other (expenses) income |
| (80,132) |
| (24,749) |
| (104,881) |
|
|
|
|
|
|
|
Net loss | $ | (686,189) | $ | (43,279) | $ | (729,468) |
|
|
|
|
|
|
|
Basic and diluted net loss per common share | $ | (.**) | $ | - | $ | (.01) |
|
|
|
|
|
|
|
Basis and diluted weighted average common shares |
|
|
|
|
|
|
Outstanding |
| 186,115,433 |
| - |
| 186,115,433 |
As a result of the restated consolidated statement of operations for the three months ending January 31, 2008, the Companys net loss increased from $686,189 to $729,468. The decrease in the loss is a result of including the accounts of Interactive Games, Inc. (our Florida majority owned subsidiary).
22
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS, FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE", "MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON THE VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
GENERAL
China Nuvo Solar Energy, Inc. (the Company) formerly known as Interactive Games, Inc. (Interactive), was previously known as Torpedo Sports USA, Inc. (Torpedo Sports).
Pursuant to an Agreement and Plan of Reorganization dated as of April 23, 2007, as amended on July 25, 2007 (the Share Exchange), by and between the Company and Nuvo Solar Energy, Inc., a Colorado corporation (Nuvo) incorporated on April 13, 2006, we and Nuvo entered into a share exchange whereby all of the issued and outstanding capital stock of Nuvo, on a fully-diluted basis, was exchanged for like securities of the Company, and whereby Nuvo became our wholly owned subsidiary. The Share Exchange was effective as of July 25, 2007, upon the completed filing of Articles of Exchange with the Nevada Secretary of State and a Statement of Share Exchange with the Colorado Secretary of State. Contemporaneously with the Share Exchange, we changed our name to China Nuvo Solar Energy, Inc.
Nuvo was formed for the purpose of seeking a business opportunity in the alternate energy or next-generation energy" sector. This industry sector encompasses non-hydro carbon based energy production and renewable energy technologies that are net-zero" or emissions free.
On June 9, 2006 Nuvo signed a license agreement with Photovoltaics.com, Inc. (PV), Hutchinson Island, Florida. Nuvo acquired exclusive worldwide rights to PV's solar cell technology relating to a multiple stacked solar cell using wave guide transfers. This license agreement includes all patents issued pursuant to certain patent applications or amendments that have been filed and the rights to use all applicable copyrights, trademarks and related intellectual property obtained on or in connection with the process and products. As consideration for this license, Nuvo paid a total aggregate license fee of $250,000. The term of the license is for 10 years, automatically renewable for successive ten year terms under the same terms and conditions as provided for in this agreement. Nuvo also agreed to pay PV a fee of $180,000 over the first three years of the agreement to act as a consultant.
On January 23, 2008, the Company purchased from PV the patents related to the solar technology in exchange for 2,000,000 restricted shares of common stock of the Company. The Company now owns all rights, title and interest in the patents, including all issued patents or other intellectual property arising from the patents worldwide. The Company valued the common stock at $0.075 per share (the market price of the common stock on November 16, 2007, the date the parties agreed to the number of shares to be issued) and accordingly, increased its intellectual property asset by $150,000 on the January 31, 2009 balance sheet included herein.
On December 10, 2008 we executed a Patent and Trademark Purchase Agreement (the Purchase Agreement) with PV. Nuvo acquired certain patent rights and trademarks in exchange for $39,900. Of this amount, $11,000 has been paid as of January 31, 2009 and we have agreed to pay $5,000 per month for five months beginning February 2009 with a final payment of $3,900 on July 5, 2009.
23
OVERVIEW
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto for the years ended July 31, 2008 and 2007. The financial statements presented for the six months ended January 31, 2009 and 2008 include the Company and Nuvo, its wholly-owned subsidiary.
In light of the foregoing, the historical data presented below is not indicative of future results. You should read this information in conjunction with the audited consolidated financial statements of the Company, including the notes to those statements and the following Managements Discussion and Analysis of Financial Conditions and Results of Operations.
The Companys financial statements for the six months ended January 31, 2009 and 2008 have been prepared on a going concern basis, which contemplates the realization of its remaining assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred significant losses since its inception and has a working capital deficit of approximately $1,910,000, and an accumulated shareholders deficit of approximately $1,627,000 as of January 31, 2009. Nuvo has not yet earned any sources of revenue.
These factors raise substantial doubt about the Companys ability to continue as a going concern. There can be no assurance that the Company will have adequate resources to fund future operations or that funds will be available to the Company when needed, or if available, will be available on favorable terms or in amounts required by the Company. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
On November 27, 2007, we executed a Collaboration and Development Agreement (the Agreement) with Pioneer Materials, Inc. (PMI) of Torrance, California. Under the terms of the Agreement, PMI will build, equip, operate and manage, for our benefit, a product development, testing and prototype manufacturing facility in PMIs Chengdu, Sichuan, China facility located in Chengdus West High Tech development zone. The agreement with PMI has the objective to develop, test and manufacture prototypes of solar energy products using our licensed technology based on an invention titled Photovoltaic cell with integral light transmitting waveguide in a ceramic sleeve. Additionally, PMI will provide technical, engineering development, testing and manufacturing employees and support staff. The term of the Agreement is for one year, with automatic six-month renewal periods unless terminated by the parties. Pursuant to the terms of the Agreement, the Company agreed to pay PMI $2,500 per month and PMI is eligible to receive up to 4,000,000 shares of our common stock, of which 500,000 shares of common stock were issued upon the execution of the Agreement, upon the satisfactory completion of certain milestone accomplishments in the Agreement. No further shares have been issued. PMI is a manufacturer and supplier of materials for the semiconductor, hard drive media, optical media and photonic industries. PMI is developing for the solar energy industry advanced materials for thin film photovoltaics (solar cell) processing.
In May of 2008, the Chengdu region of China experienced a catastrophic earthquake. As a result of this earthquake and the after effects including significant problems with the delivery of electricity, PMI suspended their development work for a significant period of time. We continue to work with PMI under the Collaboration Agreement, however, there has been no significant progress on product development and we continue to explore alternative avenues for development of our technology. We suspended paying the $2,500 monthly fee.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended January 31, 2009, net cash used in operating activities was $64,101 compared to $351,709 for the six months ended January 31, 2008. Net loss was $410,613 for the six months ended January 31, 2009 compared to $951,235 for the six months ended January 31, 2008. The net loss in the current period includes net non-cash expenses of $187,439 of which $29,262 are associated with the fair market valuation of the convertible debentures and $138,274 of depreciation and amortization expense including $100,000 of deferred stock compensation. These amounts were offset by the change in minority interest of $55,832.
There was net cash used of $39,900 in investing activities for the six months ended January 31, 2009 for the purchase of intellectual property and patents.
Net cash provided by financing activities for the six months ended January 31, 2009 was $103,486 compared to $383,590 for the six months ended January 31, 2008. For the six months ended January 31, 2009, the Company received net proceeds of $103,203 on the issuance of notes payable to related parties. The significant activity for the six months ended January 31, 2008 included the Company receiving proceeds of $552,335 on the issuance of notes payable and convertible debentures. The Company repaid notes payable of $137,390, placement fees of $58,100 related to the sale of convertible debentures and advanced $23,300 in exchange for notes receivables from related parties.
24
For the six months ended January 31, 2009, cash and cash equivalents decreased by $515 compared to an increase in cash and cash equivalents of $31,881 for the six months ended January 31, 2008. Ending cash and cash equivalents at January 31, 2009 was $425 compared to $64,905 at January 31, 2008.
We have limited cash and cash equivalents on hand and need to raise funds to continue to be able to support our operating expenses and to meet our other obligations as they become due. Sources available to us that we may utilize include the sale of unsecured convertible debentures, as well as the exercise of outstanding options and warrants, all of which may cause dilution to our stockholders.
OPERATING EXPENSES
Operating expenses for the six months ended January 31, 2009 were $319,192 compared to expenses of $976,752 for the six months ended January 31, 2008. The 2009 expenses include stock compensation costs of $112,188 comprised of deferred stock compensation expensed. Legal and accounting expenses were $30,533, management and consulting fees of $78,000 are comprised of fees accrued to our chief executive officer ($10,000 per month) and paid to our corporate secretary ($3,000 per month), and $5,000 per month under our Licensing Agreement with PV. Other expenses of $46,726 include depreciation and amortization of $13,478 and general and administrative costs of $33,248.
OTHER INCOME (EXPENSE)
Other expenses, net for the six months ended January 31, 2009 was $94,587 compared to other income of $25,517 for the six months ended January 31, 2008. The increase and decrease in derivative liabilities included in other (expenses) and income for the six months ended January 31, 2009 and 2008 was ($29,262) and $213,365, respectively. Interest expense for the six months ended January 31, 2009 and 2008 is summarized as:
| Three months ended |
| Six months ended | |||||
| January 31, |
| January 31, | |||||
| 2009 |
| 2008 |
| 2009 |
| 2008 | |
|
|
|
|
|
|
|
| |
Amortization of debenture note discounts | $ | 36,370 | $ | 118,154 | $ | 75,735 | $ | 158,676 |
Debenture interest | 6,805 |
| 6,496 |
| 14,442 |
| 9,949 | |
Notes interest, related | 6,119 |
| 9,121 |
| 10,855 |
| 17,905 | |
Notes and other interest | 10,730 |
| 4,942 |
| 21,461 |
| 8,771 | |
|
|
|
|
|
|
|
| |
$ | 60,024 | $ | 138,713 | $ | 112,493 | $ | 195,301 |
CONTRACTUAL OBLIGATIONS
No material changes outside the ordinary course of business during the quarter ended January 31, 2009.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results will differ from those estimates.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment (SFAS No, 123R). SFAS No. 123R establishes the financial accounting and reporting standards for stock-based compensation plans. As required by SFAS No. 123R, the Company will recognize the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements. There are 14,287,107 stock options outstanding as of January 31, 2009.
Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans (including shares issued under its stock option plans) in accordance with APB Opinion No. 25 and followed the pro forma net income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). The Company did not issue any stock options during the six months ended January 31, 2009 and 2008.
25
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company did not adopt SFAS No. 159 on any individual instrument as of January 31, 2009.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R is a revision to SFAS No. 141 and includes substantial changes to the acquisition method used to account for business combinations (formerly the purchase accounting method), including broadening the definition of a business, as well as revisions to accounting methods for contingent consideration and other contingencies related to the acquired business, accounting for transaction costs, and accounting for adjustments to provisional amounts recorded in connection with acquisitions. SFAS No.141R retains the fundamental requirement of SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141R is effective for periods beginning on or after December 15, 2008, and will apply to all business combinations occurring after the effective date. The Company is currently evaluating the requirements of SFAS No. 141R.
The FASB also issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements an amendment of Accounting Research Bulletin No. 51, Consolidated Financial Statements in December 2007. This statement amends ARB No. 51 to establish new standards that will govern the (1) accounting for and reporting of non-controlling interests in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. Non-controlling interest will be reported as part of equity in the consolidated financial statements. Losses will be allocated to the non-controlling interest, and, if control is maintained, changes in ownership interests will be treated as equity transactions. Upon a loss of control, any gain or loss on the interest sold will be recognized in earnings. SFAS No. 160 is effective for periods beginning after December 15, 2008. The Company is currently evaluating the requirements of SFAS No. 160.
The FASB also issued SFAS No. 161 Disclosures About Derivatives Instruments and Hedging Activities in March 2008. This statement requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves the transparency of financial reporting. This statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Company is currently evaluating the requirements of SFAS No. 161.
The Company does not believe that any other recently issued, but not yet effective, accounting standards will have a material will have an effect on the Companys consolidated financial position, results of operations or cash flow.
ITEM THREE
DISCLOSURE CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the Company's Chief Executive Officer (the "CEO") and the Chief Financial Officer (the CFO) of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and the CFO has concluded that as of January 31, 2009 disclosure controls and procedures, were not effective at ensuring that the material information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported as required in application SEC rules and forms. There have been no changes in the Companys internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.
In connection with the 2008 audit and the 2009 quarterly reviews, our independent registered public accounting firm has advised us and our Board of Directors that there are material weaknesses in our internal controls and procedures. The identified material weaknesses primarily relate to the limited number of Company employees engaged in the authorization, recording, processing and reporting of transactions, as well as the overall financial reporting process. These material weaknesses have caused significant delays in our financial reporting process. In addition, during the 2006 audit, we were not able to timely produce adequate documentation supporting all transactions underlying the financial statements. We are currently considering taking certain steps to correct the material weaknesses by enhancing our reporting process in future. Enhancing our internal controls to correct the material weaknesses will result in increased costs to us.
26
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
Refer to Note 5 of the Condensed Consolidated Financial Statements
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.
Defaults upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
Item 5.
Other Information
None.
Item 6.
Exhibits
Exhibit Number | Description |
|
|
31.1 | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) |
|
|
31.2 | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) |
|
|
32.1 | CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) |
|
|
32.2 | CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith) |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| China Nuvo Solar Energy, Inc. |
| (Registrant) |
|
|
Date: March 31, 2011 | By: /s/ Henry Fong |
| Henry Fong |
| Principal Executive Officer |
28