UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended December 31, 2011
	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 333-120926

 

SOLAR ENERTECH CORP.

(Exact name of registrant as specified in its charter)

 

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

 

655 West Evelyn Avenue, Suite #2

Mountain View, CA 94041

(Address of principal executive offices) (Zip Code)

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes    x     No     o

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    o  No    x

 

Number of shares outstanding of registrant’s class of common stock as of February 6, 2012: 183,069,290

 

  

SOLAR ENERTECH CORP

 

FORM 10-Q

 

INDEX

 

			PAGE
	Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets – December 31, 2011 (Unaudited) and September 30, 2011		3
	Unaudited Consolidated Statements of Operations – Three Months Ended December 31, 2011 and 2010		4
	Unaudited Consolidated Statements of Cash Flows – Three Months Ended December 31, 2011 and 2010		5
	Notes to Unaudited Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures about Market Risks		36
Item 4.	Controls and Procedures		36
	Part II. Other Information
Item 1.	Legal Proceedings		37
Item 1A.	Risk Factors		37
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds		37
Item 3.	Defaults upon Senior Securities		37
Item 4.	Removed and Reserved		37
Item 5.	Other Information		37
Item 6.	Exhibits		37
Signatures			38

 

 

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

Solar EnerTech Corp.

Consolidated Balance Sheets

 

 

		December 31, 2011				September 30, 2011
ASSETS		(Unaudited)
Current assets:
Cash and cash equivalents		$	1,095,000			$	1,324,000
Accounts receivable, net of allowance for doubtful accounts off
$450,000 and $454,000 at December 31, 2011 and September 30, 2011, respectively			5,296,000				7,715,000
Advance payments and other			497,000				703,000
Inventories, net			901,000				2,189,000
VAT receivable			—				535,000
Other receivable			418,000				807,000
Total current assets			8,207,000				13,273,000
Property and equipment, net			8,162,000				8,523,000
Deposits			79,000				81,000
Total assets		$	16,448,000			$	21,877,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable		$	5,060,000			$	7,035,000
Customer advance payment			625,000				1,599,000
Accrued expenses			2,156,000				2,023,000
Short-term loans			—				273,000
Convertible notes, net of discount			1,507,000				1,474,000
Derivative liabilities			3,000				3,000
Total liabilities			9,351,000				12,407,000
STOCKHOLDERS' EQUITY:
Common stock - 400,000,000 shares authorized at $0.001 par value, 181,480,266
and 181,495,962 shares issued and outstanding at December 31, 2011 and
September 30, 2011, respectively			181,000				181,000
Additional paid in capital			100,507,000				100,422,000
Accumulated other comprehensive income			3,627,000				3,893,000
Accumulated deficit			(97,218,000	)			(95,026,000	)
Total stockholders' equity			7,097,000				9,470,000
Total liabilities and stockholders' equity		$	16,448,000			$	21,877,000

 

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

  

Solar EnerTech Corp.

Consolidated Statements of Operations

(Unaudited)

 

		Quarter Ended December 31,
		2011				2010
Sales		$	2,107,000			$	15,507,000
Cost of sales			(3,091,000	)			(14,391,000	)
Gross profit (loss)			(984,000	)			1,116,000
Operating expenses:
Selling, general and administrative			1,017,000				2,351,000
Research and development			26,000				69,000
Gain on debt extinguishment			—				(32,000	)
Reversal of payroll related tax accrual			—				(5,817,000	)
Total operating expenses			1,043,000				(3,429,000	)
Operating income (loss)			(2,027,000	)			4,545,000
Other income (expense):
Interest income			1,000				3,000
Interest expense			(59,000	)			(71,000	)
Gain on change in fair market value of compound embedded derivative			—				202,000
Gain on change in fair market value of warrant liability			—				466,000
Other expense			(107,000	)			(158,000	)
Net income (loss)		$	(2,192,000	)		$	4,987,000
Net income (loss) per share - basic			(0.01	)		$	0.03
Net income (loss) per share - diluted		$	(0.01	)		$	0.03
Weighted average shares outstanding - basic			173,838,226				160,416,534
Weighted average shares outstanding - diluted			173,838,226				171,351,607

 

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

 

 

 

Solar EnerTech Corp.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Quarter Ended December 31,
		2011				2010
Cash flows from operating activities:
Net income (loss)		$	(2,192,000	)		$	4,987,000
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation of property and equipment			508,000				642,000
Stock-based compensation			62,000				659,000
Accounts payable and accrued liabilities, related parties			—				(5,817,000	)
Amortization of other assets			—				5,000
Gain on debt extinguishment			—				(32,000	)
Payment of interest by issuance of shares			23,000				25,000
Amortization of note discount and deferred financing cost			33,000				32,000
Gain on change in fair market value of compound embedded derivative			—				(202,000	)
Gain on change in fair market value of warrant liability			—				(466,000	)
Changes in operating assets and liabilities:
Accounts receivable, net			2,475,000				(277,000	)
Advance payments and other			213,000				473,000
Inventories, net			1,302,000				(1,254,000	)
VAT receivable			537,000				(1,092,000	)
Other receivable			395,000				342,000
Accounts payable, accrued liabilities and customer advance payment			(2,894,000	)			(2,952,000	)
Net cash provided by (used in) operating activities			462,000				(4,927,000	)
Cash flows from investing activities:
Acquisition of property and equipment			(74,000	)			(169,000	)
Net cash used in investing activities			(74,000	)			(169,000	)
Cash flows from financing activities:
Borrowing under short-term loans			238,000				2,533,000
Short-term loans repayment			(511,000	)			(2,382,000	)
Net cash provided by (used in) financing activities			(273,000	)			151,000
Effect of exchange rate on cash and cash equivalents			(344,000	)			66,000
Net decrease in cash and cash equivalents			(229,000	)			(4,879,000	)
Cash and cash equivalents, beginning of period			1,324,000				6,578,000
Cash and cash equivalents, end of period		$	1,095,000			$	1,699,000
Cash paid:
Interest		$	3,000			$	13,000
Supplemental disclosure of non-cash activities:
Extinguishment of convertible notes by issuance of common stock		$	—			$	(100,000	)

 

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

  

  

SOLAR ENERTECH CORP.

Notes to Consolidated Financial Statements

December 31, 2011 (Unaudited)

 

NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS 

 

Solar EnerTech Corp. was originally incorporated under the laws of the State of Nevada on July 7, 2004 as Safer Residence Corporation and was reincorporated to the State of Delaware on August 13, 2008 (“Solar EnerTech” or the “Company”).  The Company engaged in a variety of businesses until March 2006, when the Company began its current operations as a photovoltaic (“PV”) solar energy cell (“PV Cell”) manufacturer. The Company’s management decided that, to facilitate a change in business that was focused on the PV Cell industry, it was appropriate to change the Company’s name. A plan of merger between Safer Residence Corporation and Solar EnerTech Corp., a wholly-owned inactive subsidiary of Safer Residence Corporation, was approved on March 27, 2006, under which the Company was to be renamed “Solar EnerTech Corp.” On April 7, 2006, the Company changed its name to Solar EnerTech Corp.  On August 13, 2008, the Company reincorporated to the State of Delaware.

 

The Company conducts a substantial part of its operations under a wholly-owned subsidiary in Shanghai, China named Solar EnerTech (Shanghai) Co., Ltd.

 

On April 27, 2009, the Company entered into a Joint Venture Agreement with Jiangsu Shunda Semiconductor Development Co., Ltd. to form a joint venture in the United States by forming a new company, to be known as Shunda-SolarE Technologies, Inc., in order to jointly pursue opportunities in the United States solar market. The Agreement was valid for 18 months and expired on October 27, 2010. After its formation, the joint venture company’s name was later changed to SET-Solar Corp. Since the agreement expired on October 27, 2010, SET-Solar Corp. became an independent company and transactions with SET-Solar Corp after that date are not considered as related party transactions.

 

On January 15, 2010, the Company incorporated a wholly-owned subsidiary in Yizheng, Jiangsu Province of China to supplement its existing production facilities to meet increased sales demands. On February 8, 2010, the Company acquired land use rights of a 68,025 square meter parcel of land located in Yizheng, Jiangsu Province of China, which was to be used to house the Company’s second manufacturing facility. With the decision of the Board of Directors, the Company wrote-off the registration of the Yizheng Jiangsu Province subsidiary on December 22, 2011.

 

NOTE 2 — GOING CONCERN

 

The Company has incurred significant net losses during each period from inception through December 31, 2011 and has an accumulated deficit of approximately $97.2 million at December 31, 2011. The conditions described raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s consolidated financial statements have been prepared on the assumption that it will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

 

While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenues.

 

The Company intends to raise financing for the purpose of funding operating expenses and working capital. In addition, the Company engaged in various cost cutting programs and renegotiated most of the contacts to reduce operating expenses. However, there can be no assurance that the raising of future equity will be successful and that the Company’s anticipated financing will be available in the future, at terms satisfactory to the Company. Failure to achieve the equity and financing at satisfactory terms and amounts could have a material adverse effect on the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

Principles of Consolidation and Basis of Accounting

 

The Company’s consolidated financial statements include the accounts of Solar EnerTech Corp. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in U.S. dollars and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

 

The interim unaudited financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.

 

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are defined as cash on hand, demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash within ninety days of deposit.

 

Currency and Foreign Exchange

 

The Company’s functional currency is the Renminbi as substantially all of the Company’s operations are in China. The Company’s reporting currency is the U.S. dollar.

 

Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with FASB ASC 830, “Foreign Currency Matters,” formerly referenced as SFAS No. 52, “Foreign Currency Translation”, and are included in determining net income or loss.

 

For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues and expenses are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in the consolidated financial statements. Translation adjustments resulting from the process of translating the local currency consolidated financial statements into U.S. dollars are included in determining comprehensive loss.

 

Property and Equipment

 

The Company’s property and equipment are stated at cost net of accumulated depreciation. Depreciation is provided using the straight-line method over the related estimated useful lives, as follows:

 

		Useful Life (Years)
Office equipment		3 to 5
Machinery		10
Production equipment		5
Automobiles		5
Furniture		5
Leasehold improvement		the shorter of the lease term or  5 years

 

Expenditures for maintenance and repairs that do not improve or extend the lives of the related assets are expensed to operations. Major repairs that improve or extend the lives of the related assets are capitalized.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined by the weighted-average method. Market is defined principally as net realizable value. Raw material cost is based on purchase costs while work-in-progress and finished goods are comprised of direct materials, direct labor and an allocation of manufacturing overhead costs. Inventory in-transit is included in finished goods and consists of products shipped but not recognized as revenue because it does not meet the revenue recognition criteria. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value.

 

Warranty Cost

 

The Company provides product warranties and accrues for estimated future warranty costs in the period in which revenue is recognized. The Company’s standard solar modules are typically sold with a two-year warranty for defects in materials and workmanship and a ten-year and twenty five-year warranty against declines of more than 10.0% and 20.0%, respectively, of the initial minimum power generation capacity at the time of delivery. The Company therefore maintains warranty reserves to cover potential liabilities that could arise from its warranty obligations and accrues the estimated costs of warranties based primarily on management’s best estimate. In estimating warranty costs, the Company applied Accounting Standards Codification Topic 460 (“ASC 460”) – Guarantees, specifically paragraphs 460-10-25-5 to 460-10-25-7 of the FASB Accounting Standards Codification. This guidance requires that the Company make a reasonable estimate of the amount of a warranty obligation. It also provides that in the case of an entity that has no experience of its own, reference to the experience of other entities in the same business may be appropriate. Because the Company began to commercialize its products in fiscal year 2007, there is insufficient experience and historical data that can be used to reasonably estimate the expected failure rate of its solar modules. Thus, the Company considers warranty cost provisions of other China-based manufacturers that produce photovoltaic products that are comparable in engineering design, raw material input and functionality to the Company’s products, and sold to a similar target and class of customer with similar warranty coverage. In determining whether such peer information can be used, the Company also considers the years of experience that these manufacturers have in the industry. Because the Company’s industry is relatively young as compared to other traditional manufacturing industries, the selected peer companies that the Company considers have less than ten years in manufacturing and selling history. In addition, they have a manufacturing base in China, offer photovoltaic products with comparable engineering design, raw material input, functionality and similar warranty coverage, and sell in markets, including the geographic areas and class of customer, where the Company competes. Based on the analysis applied, the Company accrues warranty at 1% of sales. The Company has not experienced any material warranty claims to date in connection with declines of the power generation capacity of its solar modules and will prospectively revise its actual rate to the extent that actual warranty costs differ from the estimates. As of December 31, 2011 and September 30, 2011, the Company’s warranty liability was $1,616,000 and $1,532,000, respectively. The Company’s warranty costs for the three months ended December 31, 2011 and 2010 were $84,000 and $109,000, respectively. The Company did not make any warranty payments during the three months ended December 31, 2011 and 2010.

 

 

Other Assets

 

The Company acquired land use rights to a parcel of land from the government in the People’s Republic of China (“PRC”). All land in the PRC is owned by the PRC government and cannot be sold to any individual or entity. The government in the PRC, according to relevant PRC law, may sell the right to use the land for a specified period of time. Thus, the Company’s land purchase in the PRC is considered to be leased land and recorded as other assets at cost less accumulated amortization. Amortization is provided over the term of the land use right agreements on a straight-line basis, which is for 46.5 years from February 8, 2010 through August 31, 2056.

 

As part of the acquisition of the land use right, the Company is required to complete construction of the facility by February 8, 2012. The Board of Directors of the Company decided not to continue to fund the investment in the Yizheng Jiangsu Province subsidiary. The Company received the approval on December 22, 2011 to write-off the registration of the Yizheng Jiangsu Province subsidiary.

 

In September 2011, the Company wrote off the land use rights and received a partial refund. The remaining refund of approximately $317,000 is estimated to be received in February 2012.

 

Impairment of Long Lived Assets

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When such factors and circumstances exist, management compares the projected undiscounted future cash flows associated with the future use and disposal of the related asset or group of assets to their respective carrying values. Impairment, if any, is measured as the excess of the carrying value over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. No loss on property and equipment impairment was recorded during the three months ended December 31, 2011 and 2010.

 

Investments

 

Investments in an entity where the Company owns less than twenty percent of the voting stock of the entity and does not exercise significant influence over operating and financial policies of the entity are accounted for using the cost method. Investments in the entity where the Company owns twenty percent or more but not in excess of fifty percent of the voting stock of the entity or less than twenty percent and exercises significant influence over operating and financial policies of the entity are accounted for using the equity method. The Company has a policy in place to review its investments at least annually, to evaluate the carrying value of the investments in these companies. The cost method investment is subject to impairment assessment if there are identified events or changes in circumstance that may have a significant adverse affect on the fair value of the investment. If the Company believes that the carrying value of an investment is in excess of estimated fair value, it is the Company’s policy to record an impairment charge to adjust the carrying value to the estimated fair value, if the impairment is considered other-than-temporary.

 

On August 21, 2008, the Company entered into an equity purchase agreement in which it acquired two million shares of common stock of 21-Century Silicon, Inc., a polysilicon manufacturer based in Dallas, Texas (“21-Century Silicon”), for $1.0 million in cash. The two million shares of common stock represented approximately 7.8% of 21-Century Silicon’s outstanding equity. In connection with the equity purchase agreement, the Company also signed a memorandum of understanding with 21-Century Silicon for a four-year supply framework agreement for polysilicon shipments.  The first polysilicon shipment from 21-Century Silicon was initially expected in March 2009, but was subsequently delayed to March 2010. On March 5, 2009, the Emerging Technology Fund, created by the State of Texas, invested $3.5 million in 21-Century Silicon to expedite production and commercialization of research. The Company’s ownership of 21-Century Silicon became 5.5% as a result of the dilution. This first polysilicon shipment that was to be delivered in March 2010 was further delayed without a specified date given by 21-Century Silicon. As a result of the continued delays in shipment, in July 2010, members of the Company’s executive team, including the CEO, visited 21-Century Silicon and conducted reviews of the production facility and technical development.  The review indicated that 21-Century Silicon’s production facility and technical development were significantly below expected standards. Based on the findings from this visit, the timing of the first polysilicon shipment is unknown and it is unknown whether it will even occur. In addition, management of 21-Century Silicon expressed the need for more funding to sustain operations. Moreover, 21-Century Silicon could not provide the Company with updated financial information concerning 21-Century Silicon’s working capital condition and future cash flows.  The Company considered the above findings were indicators that a significant adverse effect on the fair value of the Company’s investment in 21-Century Silicon had occurred. Accordingly, an impairment loss of $1.0 million was recorded in the Consolidated Statements of Operations for the fiscal year ended September 30, 2010 to fully write-down the carrying amount of the investment. The Company may also be obligated to acquire an additional two million shares of 21-Century Silicon upon the first polysilicon shipment meeting the quality specifications determined solely by the Company. As of December 31, 2011, the Company has not yet acquired the additional two million common shares (at $0.50 per share) as the product shipment has not occurred.  On October 7, 2010, the X-Change Corporation announced that it has acquired 21-Century Silicon, Inc. The terms of the acquisition are anticipated to involve a change in control of the 21-Century Silicon and the appointment of new directors. The X-Change Corporation is anticipated to issue 20 million shares of its unregistered, restricted common stock to the shareholders of 21-Century Silicon in exchange for 100% of the issued and outstanding stock of 21-Century Silicon. As of the date of this report, the X-Change Corporation has not issued its shares to the Company.

 

 

Income Taxes

 

The Company accounts for income taxes under the liability method per the provisions of Accounting Standards Codification Topic 740 (“ASC 740”), “Income Taxes”.

 

Under the provisions of ASC 740, deferred tax assets and liabilities are determined based on the differences between their financial statement carrying values and their respective tax bases using enacted tax rates that will be in effect in the period in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Valuation Allowance

 

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

 

Unrecognized Tax Benefits

 

Effective on October 1, 2007, the Company adopted the provisions related to uncertain tax positions under ASC 740, “Income Taxes”, formerly referenced as FIN 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”.  Under ASC 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority based on the technical merits of the associated tax position.  An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company also elected the accounting policy that requires interest and penalties to be recognized as a component of tax expense. The Company classifies the unrecognized tax benefits that are expected to be effectively settled within one year as current liabilities, otherwise, the unrecognized tax benefits will be classified as non-current liabilities.

 

Fair Value of Warrants

 

The Company’s management used the binomial valuation model to value the warrants issued in conjunction with convertible notes entered into in March 2007. The model uses inputs such as implied term, suboptimal exercise factor, volatility, dividend yield and risk free interest rate. Selection of these inputs involves management’s judgment and may impact estimated value. Management selected the binomial model to value these warrants as opposed to the Black-Scholes-Merton model primarily because management believes the binomial model produces a more reliable value for these instruments because it uses an additional valuation input factor, the suboptimal exercise factor, which accounts for expected holder exercise behavior which management believes is a reasonable assumption with respect to the holders of these warrants.

 

 

Stock-Based Compensation

 

On January 1, 2006, Solar EnerTech began recording compensation expense associated with stock options and other forms of employee equity compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation”, formerly referenced as SFAS 123R, “Share-Based Payment”.

 

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

 

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

 

Expected Volatility — The Company’s expected volatilities are based on historical volatility of the Company’s stock, adjusted where determined by management for unusual and non-representative stock price activity not expected to recur. Due to the limited trading history, the Company also considered volatility data of guidance companies.

 

Expected Dividend — The Black-Scholes-Merton valuation model calls for a single expected dividend yield as an input. The Company currently pays no dividends and does not expect to pay dividends in the foreseeable future.

 

Risk-Free Interest Rate — The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

 

Estimated Forfeitures — When estimating forfeitures, the Company takes into consideration the historical option forfeitures over the expected term.

 

Revenue Recognition

 

The Company recognizes revenues from product sales in accordance with guidance provided in FASB ASC 605, “Revenue Recognition”, which states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably assured. Where a revenue transaction does not meet any of these criteria it is deferred and recognized once all such criteria have been met. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met.

 

On a transaction by transaction basis, the Company determines if the revenue should be recorded on a gross or net basis based on criteria discussed in the Revenue Recognition topic of the FASB Subtopic 605-405, “Reporting Revenue Gross as a Principal versus Net as an Agent”. The Company considers the following factors to determine the gross versus net presentation: if the Company (i) acts as principal in the transaction; (ii) takes title to the products; (iii) has risks and rewards of ownership, such as the risk of loss for collection, delivery or return; and (iv) acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are carried at net realizable value. The Company records allowance for doubtful accounts based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect customers’ ability to pay.

 

Shipping and Handling Costs

 

The Company incurred shipping and handling costs of $267,000 and $157,000 for the three months ended December 31, 2011 and 2010, respectively, which are included in selling expenses. Shipping and handling costs include costs incurred with third-party carriers to transport products to customers.

 

Research and Development Cost

 

Expenditures for research activities relating to product development are charged to expense as incurred. Research and development cost for the three months ended December 31, 2011 and 2010 were $26,000 and $69,000, respectively.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is defined as the change in equity of the Company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. Other comprehensive income (loss) of the Company consists of cumulative foreign currency translation adjustments.

 

 

Segment Information

 

The Company identifies its operating segments based on its business activities. The Company operates within a single operating segment - the manufacture of solar energy cells and modules in China. The Company’s manufacturing operations and fixed assets are all based in China. The solar energy cells and modules are distributed to customers, located in Europe, Australia, North America and China.

 

During the three months ended December 31, 2011 and 2010, the Company had three and one customers, respectively that accounted for more than 10% of net sales.

 

Recent Accounting Pronouncements

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) (“ASU 2011-04”). The amendments to this update provide a uniform framework for applying the principles of fair value measurement and include (i) amendments that clarify the Board’s intent about the application of existing fair value measurement and disclosure requirements and (ii) amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. These amendments do not require additional fair value measurements. The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The Company does not believe the adoption of ASU 2011-04 will have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2001-05 amends Topic 220, “Comprehensive Income”, to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects. This ASU is effective for the Company’s financial statements for annual and interim periods beginning on or after December 15, 2011, and must be applied retrospectively. The Company will adopt ASU 2011-05 in the second quarter of fiscal year 2012. The adoption of ASU 2011-05 is not expected to have a material impact on the Company’s consolidated financial statements.

 

NOTE 4 — FINANCIAL INSTRUMENTS

 

The Company’s assets that are potentially subject to significant concentration of credit risk are primarily cash and cash equivalents, advance payments to suppliers and accounts receivable.

 

The Company maintains cash deposits with financial institutions, which from time to time may exceed federally insured limits. The Company has not experienced any losses in connection with these deposits and believes it is not exposed to any significant credit risk from cash. At December 31, 2011 and September 30, 2011, the Company had approximately $82,000 and $82,000, respectively in excess of insured limits.

 

Other financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable.  Concentrations of credit risk with respect to accounts receivable are limited because a number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk.  The Company controls credit risk through credit approvals, credit limits and monitoring procedures.  The Company performs credit evaluations for all new customers but generally does not require collateral to support customer receivables. All of the Company’s customers have gone through a very strict credit approval process. The Company diligently monitors the customers’ financial position. Payment terms for our solar module sales generally range from 0 to 60 days. In some cases, these terms are extended up to 200 days for certain qualifying customers of whom the Company applied rigorous credit requirements. The Company has also purchased insurance from the China Export & Credit Insurance Company to insure the collectability of the outstanding accounts receivable balances of a key customer. During the three months ended December 31, 2011 and 2010, the Company had three and one customers, respectively that accounted for more than 10% of net sales.

 

Foreign exchange risk and translation

 

The Company may be subject to significant currency risk due to the fluctuations of exchange rates between the Chinese Renminbi, Euro and the United States dollar.

 

The local currency is the functional currency for the China subsidiary.  Assets and liabilities are translated at end of period exchange rates while revenues and expenses are translated at the average exchange rates in effect during the period.  Equity is translated at historical rates and the resulting cumulative translation adjustments, to the extent not included in net income, are included as a component of other comprehensive income (loss) until the translation adjustments are realized. Included in other comprehensive income were foreign currency translation adjustment loss of $266,000 and foreign currency translation adjustment gain of $203,000 for the three months ended December 31, 2011 and 2010, respectively.   Foreign currency transaction gains and losses are included in earnings. For the three months ended December 31, 2011 and 2010, the Company recorded foreign exchange losses of $0.1 million and $0.2 million, respectively.

 

NOTE 5 — ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

At December 31, 2011 and September 30, 2011, the accounts receivable, net of allowance for doubtful accounts consists of:

 

		December 31, 2011				September 30, 2011
Accounts receivable, gross		$	5,746,000			$	8,169,000
Allowance for doubtful accounts			(450,000	)			(454,000	)
Accounts receivable, net		$	5,296,000			$	7,715,000

 

The following table summarizes the activities of the allowance for doubtful accounts as of December 31, 2011 and September 30, 2011:

 

		Allowance for doubtful accounts
As of September 30, 2010		$	42,000
Addition			432,000
Write-down			(20,000	)
As of September 30, 2011			454,000
Write-down			(4,000	)
As of December 31, 2011		$	450,000

 

NOTE 6 — ADVANCE PAYMENTS AND OTHER

 

At December 31, 2011 and September 30, 2011, advance payments and other consist of:

 

		December 31, 2011				September 30, 2011
Prepayment for raw materials		$	311,000			$	310,000
Others			186,000				393,000
Total advance payments and other		$	497,000			$	703,000

 

NOTE 7 — INVENTORIES

 

At December 31, 2011 and September 30, 2011, inventories consist of:

 

		December 31, 2011				September 30, 2011
Raw materials		$	1,026,000			$	1,268,000
Finished goods			611,000				2,415,000
Inventories, gross		$	1,637,000			$	3,683,000
Inventory Provision			(736,000	)			(1,494,000	)
Inventories, net		$	901,000			$	2,189,000

 

NOTE 8 — PROPERTY AND EQUIPMENT

 

The Company depreciates its assets over their estimated useful lives. A summary of property and equipment at December 31, 2011 and September 30, 2011 is as follows:

 

 

		December 31, 2011				September 30, 2011
Production equipment		$	9,916,000			$	9,782,000
Leasehold improvements			3,984,000				3,950,000
Automobiles			320,000				318,000
Office equipment			415,000				411,000
Machinery			3,147,000				3,121,000
Furniture			71,000				71,000
Total property and equipment			17,853,000				17,653,000
Less:  accumulated depreciation			(9,691,000	)			(9,130,000	)
Total property and equipment, net		$	8,162,000			$	8,523,000

 

NOTE 9 — SHORT TERM LOANS

 

At December 31, 2011 and September 30, 2011, short-term loans consist of:

 

		December 31, 2011				September 30, 2011
Short-term loans		$	—			$	273,000

 

On March 25, 2010, the Company entered into a one year contract with China Export & Credit Insurance Corporation (“CECIC”) to insure the collectability of outstanding accounts receivable for two of the Company’s key customers. The Company pays a fee based on a fixed percentage of the accounts receivable outstanding and expenses this fee when it is incurred. In addition, on March 30, 2010, the Company entered into a one year revolving credit facility arrangement with Industrial Bank Co., Ltd. (“IBC”) that was secured by the accounts receivable balances of the two key customers insured by CECIC above. The cost of the insurance on accounts receivable is recorded as selling, general and administrative costs in the Consolidated Statements of Operations of the Company. On May 5, 2011, the Company terminated the credit facility arrangement with IBC and on the same day, the Company entered into a revolving credit facility arrangement with Bank of China (“BOC”), which is also secured by the accounts receivable balances of the key customers insured by CECIC above.

 

If the insured customer fails to repay the amounts outstanding due to the Company, the insurance proceeds will be remitted directly to BOC instead of the Company.  No amount was drawn down as of December 31, 2011. There have been no insurance claims submitted to CECIC. There are no commitment fees associated with the unused portion of the credit facility. The interest rate of the credit facility is 6.52% during the three months ended December 31, 2011. The weighted average interest rate on this credit facility during the three months ended December 31, 2011 was 6.52% per annum.  

 

NOTE 10 — INCOME TAX

 

The Company has no taxable income and no provision for federal and state income taxes is required for the three months ended December 31, 2011 and 2010, respectively, except certain state minimum tax.

 

The Company conducts its business in the United States and in various foreign locations and generally is subject to the respective local countries’ statutory tax rates.

 

Utilization of the U.S. federal and state net operating loss carry forwards may be subject to substantial annual limitation due to certain limitations resulting from ownership changes provided by U.S. federal and state tax laws. The annual limitation may result in the expiration of net operating losses carryforwards and credits before utilization. The Company has net operating losses in its foreign jurisdictions and those losses can be carried forward 5 years from the year the loss was incurred. As of December 31, 2011 and 2010, the Company’s deferred tax assets were subject to a full valuation allowance.

 

Under the New Income Tax Law in the PRC, dividends paid by PRC enterprises out of profits earned post-2007 to non-PRC tax resident investors are subject to PRC withholding tax of 10%. A lower withholding tax rate may be applied based on applicable tax treaties with certain countries.

 

The New Income Tax Law also provides that enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC are considered PRC tax resident enterprises and subject to PRC income tax at the rate of 25% on worldwide income. The definition of “place of effective management" refers to an establishment that exercises, in substance, overall management and control over the production and business, personnel, accounting, properties, etc. of an enterprise. If the Company or any of its non-PRC subsidiaries is treated as a “resident enterprise” for PRC tax purposes, the Company or such subsidiary will be subject to PRC income tax. The Company will continue to monitor its tax status with regard to the PRC tax resident enterprise regulation but does not anticipate a material adverse impact to the financial statements as a whole.

 

 

There are no ongoing examinations by taxing authorities at this time. The Company’s tax years starting from 2006 to 2011 remain open in various tax jurisdictions. The Company has not recorded any unrecognized tax benefits; and does not anticipate any significant changes within the next 12 months.

 

NOTE 11 — CONVERTIBLE NOTES 

 

On March 7, 2007, Solar EnerTech entered into a securities purchase agreement to issue $17.3 million of secured convertible notes (the “Notes”) and detachable stock purchase warrants the “Series A and Series B Warrants”). Accordingly, during the quarter ended March 31, 2007, Solar EnerTech sold units consisting of:

 

	•		$5.0 million in principal amount of Series A Convertible Notes and warrants to purchase 7,246,377 shares (exercise price of $1.21 per share) of its common stock;
	•		$3.3 million in principal amount of Series B Convertible Notes and warrants to purchase 5,789,474 shares (exercise price of $0.90 per share) of its common stock ; and
	•		$9.0 million in principal amount of Series B Convertible Notes and warrants to purchase 15,789,474 shares (exercise price of $0.90 per share) of its common stock.

 

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

 

The Company evaluated the Notes for derivative accounting considerations under FASB ASC 815 and determined that the notes contained two embedded derivative features, the conversion option and a redemption privilege accruing to the holder if certain conditions exist (the “compound embedded derivative” or “CED”). The compound embedded derivative is measured at fair value both initially and in subsequent periods. Changes in fair value of the compound embedded derivative are recorded in the account “gain (loss) on fair market value of compound embedded derivative” in the accompanying consolidated statements of operations.

 

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

 

The Series A and Series B Warrants (including the Advisor Warrants) were classified as a liability, as required by FASB ASC 480, “Distinguishing Liabilities from Equity”, formerly referenced as SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, due to the terms of the warrant agreement which contains a cash redemption provision in the event of a fundamental transaction. The warrants are measured at fair value both initially and in subsequent periods. Changes in fair value of the warrants are recorded in the account “gain (loss) on fair market value of warrant liability” in the accompanying consolidated statements of operations.

 

In conjunction with the March 2007 financing, the Company recorded a total deferred financing cost of $2.5 million, of which $1.3 million represented cash payment and $1.2 million represented the fair market value of the Advisor Warrants. The deferred financing cost is amortized over the three year life of the notes using a method that approximates the effective interest rate method. The Advisor Warrants were recorded as a liability and adjusted to fair value in each subsequent period.

 

On January 7, 2010 (the “Conversion Date”), the Company entered into a Series A and Series B Notes Conversion Agreement (the “Conversion Agreement”) with the holders of Notes representing at least seventy-five percent of the aggregate principal amounts outstanding under the Notes to restructure the terms of the Notes. As of the Conversion Date, approximately $9.8 million of the Series A and B Convertible Notes were effectively converted into 64,959,227 shares of the Company’s common stock along with 1,035,791 shares of the Company’s common stock as settlement of the accrued interest on the Series A and B Convertible Notes, and the remaining $1.8 million of the Series B Notes were exchanged into another convertible note as further discussed below. In connection with the Conversion Agreement, on January 7, 2010, the Company entered into an Amendment (the “Warrant Amendment”) to the Series A, Series B and Series C Warrants with the holders of at least a majority of the common stock underlying each of its outstanding Series A Warrants, Series B Warrants and Series C Warrants (collectively the “PIPE Warrants”). The Warrant Amendment reduced the exercise price for all of the PIPE Warrants from $1.21, $0.90 and $1.00, respectively, to $0.15, removed certain maximum ownership provisions and removed anti-dilution provisions for lower-priced security issuances.

 

 

The Conversion Agreement resulted in modifications or exchanges of the Notes and PIPE Warrants, which should be accounted for pursuant to FASB ASC 405-20, “Liabilities” and FASB ASC 470-50, "Debt/Modifications and Extinguishment" formerly referenced as EITF Consensus for Issue No. 96-19, "Debtor's Accounting for a Modification (or Exchange) of Convertible Debt Instruments". The combination of the adjustment to conversion price and the automatic conversion of the Notes effectively resulted in the settlement of the Notes through the issuance of shares of the Company’s common stock and amendment of the PIPE Warrants’ terms. Since the Company is relieved of its obligation for the Notes, the transaction is accounted for as an extinguishment of the Notes upon issuance of ordinary shares and modification of the PIPE Warrants’ terms. The loss on extinguishment associated with the Conversion Agreement amounted to approximately $17.2 million.

 

On January 19, 2010, a holder of approximately $1.8 million of the Company’s formerly outstanding Series B Notes and Series B Warrants (hereinafter referred to as the “Holder”) of the Company’s common stock disputed the effectiveness of the Conversion Agreement and the Warrant Amendment.  Accordingly, the Holder did not tender its Series B Notes for conversion. After negotiations with the Holder, on March 19, 2010, the Company entered into an Exchange Agreement with the Holder (the “Exchange Agreement”), whereby the Company issued the Series B-1 Note with a principal amount of $1.8 million (the “Series B-1 Note”) to the Holder along with 283,498 shares of the Company’s common stock as settlement of the accrued interest on the Holder’s Series B Notes and 666,666 shares of the Company’s common stock as settlement of the outstanding dispute regarding the effectiveness of the Company’s Conversion Agreement and the Warrant Amendment.  The Company did not capitalize any financing costs associated with the issuance of the Series B-1 Note.  As of December 31, 2011, the Company has an outstanding convertible note with a principal balance of $1,540,261 consisting of the Series B-1 Note, which was recorded at a carrying amount of $1,507,000. The Series B-1 Note bears interest at 6% per annum and is due on March 19, 2012. During the three months ended December 31, 2011, the Company issued 784,304 shares of its common stock to settle the accrued interest on the Series B-1 Note.

 

The Exchange Agreement resulted in modifications or exchanges of the Holder’s rights under its former Series B Note, which should be accounted for pursuant to FASB ASC 470-50, "Debt/Modifications and Extinguishment" formerly referenced as EITF Consensus for Issue No. 96-19, "Debtor's Accounting for a Modification (or Exchange) of Convertible Debt Instruments", and FASB ASC 470-50, "Debt/Modifications and Extinguishment" formerly referenced as EITF Consensus for Issue No.06-06, "Debtor's Accounting for a Modification (or Exchange) of Convertible Debt Instruments". The loss on debt extinguishment associated with the Exchange Agreement amounted to approximately $1.3 million.

 

The costs associated with the Conversion Agreement were directly derived from the execution of the Company’s plan in improving its liquidity and business sustainability. The related loss on debt extinguishment was a cost that was integral to the continuing operations of the business which is different in nature to the continuing interest payments and change in fair value of the compound embedded derivative and warrant liability. Accordingly, the loss on debt extinguishment is included in operating expenses in the accompanying consolidated statements of operations.

 

The Company evaluated the Series B-1 Note for derivative accounting considerations under FASB ASC 815 and determined that the Series B-1 Note contained two embedded derivative features, the conversion option and a redemption privilege accruing to the holder if certain conditions exist (the “compound embedded derivative”). The compound embedded derivative is measured at fair value both initially and in subsequent periods. Changes in fair value of the compound embedded derivative are recorded in the account “gain (loss) on fair market value of compound embedded derivative” in the accompanying consolidated statements of operations.

 

On March 19, 2010, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Capital Ventures International (“CVI”) whereby the Company issued a Series B-1 Convertible Note (the “Note”) to CVI with an original principal amount of $1,815,261, which is due on March 19, 2012 and bears interest at 6% per annum. On May 11, 2011, the Company executed an amendment with CVI (“Amendment”) whereby CVI waives the following Trigger Events: (a) the migration of the Company’s listing from the OTCBB to the OTCQB, (b) the failure of the Company to timely pay the interest payment due on April 1, 2011 and (c) any other Trigger Event that may exist as of the date of this Amendment. According to the Amendment, Section 3(c) of the Exchange Agreement is amended to reduce the conversion price of the Note from $0.15 to $0.10 per common share, subject to further adjustment upon certain specified events as defined in the Exchange Agreement. As of December 31, 2011, the outstanding principal of the Note is $1,540,261, the carrying value was $1,507,000 and the related interest was $23,294. Notwithstanding the above, the Company’s liquidity and financial position raises substantial doubt about the Company’s ability to continue as a going concern. 

 

The loss (gain) on debt extinguishment is computed as follows:

 

 

		Quarter Ended December 31,
		2011				2010
Fair value of the common shares		$	—			$	70,000
Fair value of the CED liability associated with the converted notes			—				(13,000	)
Accreted amount of the notes discount			—				(89,000	)
Loss on debt extinguishment		$	—			$	(32,000	)

 

During the three months ended December 31, 2011, none of the Series B-1 Note was converted into the Company’s common stock.

 

During the three months ended December 31, 2010, $100,000 of the Series B-1 Note was converted into 666,667 shares of the Company’s common stock. As a result, the Company recorded a cumulative gain on debt extinguishment of approximately $32,000 during the quarter ended December 31, 2010.

 

The following table summarizes the valuation of the Notes and the related Compound Embedded Derivative, the Series A and Series B Warrants (including the Advisor Warrants), and the Series B-1 Note and the related Compound Embedded Derivative:

 

Carrying amount of Series B-1 Note at September 30, 2010		$	1,531,000
Amortization of note discount and conversion effect			(57,000	)
Carrying amount of Series B-1 Note at September 30, 2011		$	1,474,000
Amortization of note discount and conversion effect			33,000
Carrying amount of Series B-1 Note at December 31, 2011		$	1,507,000
Fair value of the Series B-1compound embedded derivative liabilities at September 30, 2010		$	422,000
Gain on fair market value of embedded derivative liability			(393,000	)
Effect on debt conversion			(26,000	)
Fair value of the Series B-1compound embedded derivative liabilities at September 30, 2011		$	3,000
Gain on fair market value of embedded derivative liability			—
Effect on debt conversion			—
Fair value of the Series B-1compound embedded derivative liabilities at December 31, 2011		$	3,000

 

Series B-1 Note

 

The material terms of the Series B-1 Note are as follows:

 

Interest Payments

 

The Series B-1 Note bears interest at 6% per annum and the principal of $1.5 million is due on March 19, 2012. Accrued interest is payable quarterly in arrears on each of January 1, April 1, July 1 and October 1, beginning on the first such date after issuance, in cash or registered shares of common stock at the option of the Company. If the Company elects to pay any interest due in registered shares of the Company’s common stock: (i) the issuance price will be 90% of the 5-day weighted average price of the common stock ending on the day prior to the interest payment due date, and (ii) a trigger event shall not have occurred.

 

Voting Rights

 

The holder of the Series B-1 Note does not have voting rights under these agreements.

 

Dividends

 

Until all amounts owed under the Series B-1 Note have been converted, redeemed or otherwise satisfied in accordance with their terms, the Company shall not, directly or indirectly, redeem, repurchase or declare or pay any cash dividend or distribution on its capital stock without the prior express written consent of the required holders.

 

Conversion Right

 

At any time or times on or after the issuance date of the Series B-1 Note, the holder is entitled to convert, at the holder’s sole discretion, any portion of the outstanding and unpaid conversion amount (principal, accrued and unpaid interest and accrued and unpaid late charges) may be converted into fully paid and non-assessable shares of common stock, at the conversion rate discussed next.

 

 

Conversion Rate

 

The number of shares of common stock issuable upon conversion of the Series B-1 Note is determined by dividing (x) the conversion amount (principal, interest and late charges accrued and unpaid), by (y) the then applicable conversion price (initially $0.15 and currently $0.10 for Series B-1 Note after the execution of Amendment on May 11, 2011, subject to adjustment as provided in the agreement). No adjustment in the conversion price of the Series B-1 Note will be made in respect of the issuance of additional shares of common stock unless the consideration per share of an additional share of common stock issued or deemed to be issued by the Company is less than the conversion price of the Series B-1 Note in effect on the date of, and immediately prior to, such issuance. Should the outstanding shares of common stock increase (by stock split, stock dividend, or otherwise) or decrease (by reclassification or otherwise), the conversion price of the Series B-1 Note in effect immediately prior to the change shall be proportionately adjusted.

 

Redemptions

 

The Series B-1 Note permits the holder the right of redemption in the event of certain specified triggering events such as:

 

1)	The suspension from trading or failure of the common stock to be listed on the principal market or an eligible market for a period of five (5) consecutive trading days or for more than an aggregate of ten (10) trading days in any 365-day period;
2)	The Company’s (A) failure to cure a conversion failure by delivery of the required number of shares of common stock within ten (10) trading days after the applicable conversion date or (B) notice, written or oral, to any holder of the Series B-1 Note, including by way of public announcement or through any of its agents, at any time, of its intention not to comply with a request for conversion of any Series B-1 Note into shares of common stock that is tendered in accordance with the provisions of the Series B-1 Note;
3)	The Company's failure to pay to the Holder any amount of principal (including, without limitation, any redemption payments), interest, late charges or other amounts when and as due under this Series B-1 Note except, in the case of a failure to pay any interest and late charges when and as due, in which case only if such failure continues for a period of at least five (5) business days;
4)	(A) The occurrence of any payment default or other default under any indebtedness of the Company or any of its subsidiaries that results in a redemption of or acceleration prior to maturity of $100,000 or more of such indebtedness in the aggregate, or (B) the occurrence of any material default under any indebtedness of the Company or any of its subsidiaries having an aggregate outstanding balance in excess of $100,000 and such default continues uncured for more than ten (10) business days, other than, in each case (A) or (B) above, or a default with respect to any other Series B-1 Note;
5)	The Company or any of its subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official, (D) makes a general assignment for the benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as they become due;
6)	A court of competent jurisdiction enters an order or decree under any bankruptcy law that (A) is for relief against the Company or any of its subsidiaries in an involuntary case, (B) appoints a custodian of the Company or any of its subsidiaries or (C) orders the liquidation of the Company or any of its subsidiaries;
7)	A final judgment or judgments for the payment of money aggregating in excess of $250,000 are rendered against the Company or any of its subsidiaries and which judgments are not, within sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $250,000 amount set forth above so long as the Company provides the holder with a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the holder) to the effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance of such judgment; and
8)	The Company breaches any representation, warranty, covenant or other term or condition of any transaction document, except, in the case of a breach of a covenant which is curable, only if such breach continues for a period of at least ten (10) consecutive business days.

 

 

At any time after becoming aware of a trigger event, the holder may require the Company to redeem all or any portion of the Series B-1 Note at an amount equal to any accrued and unpaid liquidated damages, plus the greater of (A) the conversion amount to be redeemed multiplied by the redemption premium (125% for trigger events described above in subparagraphs 1 to 5 and 8 above or 100% for other events), or (B) the conversion amount to be redeemed multiplied by the quotient of (i) the closing sale price at the time of the trigger event (or at the time of payment of the redemption price, if greater) divided by (ii) the conversion price, provided, however, (B) shall be applicable only in the event that a trigger event of the type specified above in subparagraphs 1, 2 or 3 has occurred and remains uncured or the conversion shares otherwise could not be received or sold by the holder without any resale restrictions.

 

Rights upon Fundamental Transaction, Change of Control and Qualified Financing

 

The Series B-1 Note also contains certain provisions relating to the occurrences of a fundamental transaction limiting the type of entity that can be a successor entity and requiring the successor entity to assume the obligations of the Series B-1 Note.  In addition, the Series B-1 Note contains certain provisions relating to a change of control or qualified financing which permit the holder the right of redemption for all or a portion of the Series B-1 Note.

 

1)	Assumption. The Company may not enter into or be party to a fundamental transaction, as such terms is defined in the Series B-1 Note, unless:

 

	•	The successor entity assumes in writing all of the obligations of the Company under the Series B-1 Note and related documents; and
	•	The successor entity (including its parent entity) is a publicly traded corporation whose common stock is quoted on or listed for trading on an eligible market.

 

2)

Redemption Right on Change of Control. At any time during the period beginning on the date of the holder’s receipt of a change of control notice and ending twenty (20) trading days after the consummation of such change of control, the holder may require the Company to redeem all or any portion of the Series B-1 Note in cash for an amount equal to any accrued and unpaid liquidated damages, plus the greater of (i) the product of (x) the conversion amount being redeemed and (y) the quotient determined by dividing (A) the greater of the closing sale price of the common stock immediately prior to the consummation of the change of control, the closing sale price immediately following the public announcement of such proposed change of control and the closing sale price of the common stock immediately prior to the public announcement of such proposed change of control by (B) the conversion price and (ii) 125% of the conversion amount being redeemed.

 

3)

Redemption Right on Subsequent Financing. In the event that the Company or any of its subsidiaries shall issue any of its or its subsidiaries' equity or equity equivalent securities, or commit to issue or sell in one or more series of related transactions or financings, including without limitation any debt, preferred stock or other instrument or security that is, at any time during its life and under any circumstances, convertible into or exchangeable or exercisable for shares of common stock, options or convertible securities (any such offer, sale, grant, disposition or announcement of such current or future committed financing is referred to as a "Subsequent Financing"), the Company is obligated to provide the Holder written notice of the Subsequent Financing and the Holder, at its option, may require the Company to redeem the Series B-1 Note up to the Redemption Amount.

(A) In the event that the Gross Proceeds of the Subsequent Financing equals or exceeds $15,000,000 (a “Qualified Financing”), the “Redemption Amount” shall equal 100% of the Principal Amount then outstanding.  For purposes hereof, “Gross Proceeds” shall mean the aggregate proceeds received or receivable by the Company in respect of one or more series of related future transactions or financings for which the Company is committed in connection with such Qualified Financing.   (B) In the event that the Gross Proceeds of the Subsequent Financing is less than $15,000,000, the Redemption Amount shall equal a pro-rated portion of the Principal Amount equaling a ratio, the numerator of which is the amount of proceeds raised by the Company in the Subsequent Financing and the denominator which is $15,000,000.

 

NOTE 12 — STOCKHOLDERS’ EQUITY

 

Warrants

 

 

During March 2007, in conjunction with the issuance of $17,300,000 in convertible debt, the board of directors approved the issuance of Warrants to purchase shares of the Company’s common stock. Under their original terms, the 7,246,377 Series A warrants and the 21,578,948 Series B warrants are exercisable at $1.21 and $0.90, respectively and expire in March 2012. In addition, in March 2007, as additional compensation for services as placement agent for the convertible debt offering, the Company issued the Advisor Warrants, which entitle the placement agent to purchase 507,247 and 1,510,528 shares of the Company’s common stock at exercise prices of $0.69 and $0.57 per share, respectively. The Advisor Warrants expire in March 2012.

 

The Series A and Series B Warrants (including the Advisor Warrants) are classified as a liability in accordance with FASB ASC 480, “Distinguishing Liabilities from Equity”, due to the terms of the warrant agreements which contain cash redemption provisions in the event of a fundamental transaction, which provide that the Company would repurchase any unexercised portion of the warrants at the date of the occurrence of the fundamental transaction for the value as determined by the Black-Scholes Merton valuation model. As a result, the warrants are measured at fair value both initially and in subsequent periods. Changes in fair value of the warrants are recorded in the account “gain (loss) on fair market value of warrant liability” in the accompanying Consolidated Statements of Operations.

 

Additionally, in connection with the offering, all of the Company’s Series A and Series B warrant holders waived their full ratchet anti-dilution and price protection rights previously granted to them in connection with the Company’s March 2007 convertible note and warrant financing.

 

On January 12, 2008, the Company sold 24,318,181 shares of its common stock and 24,318,181 Series C warrants (the “Series C Warrants”) to purchase shares of common stock for an aggregate purchase price of $21.4 million in a private placement offering to accredited investors. Under its original terms, the exercise price of the Series C Warrants is $1.00 per share. The warrants are exercisable for a period of 5 years from the date of issuance of the Series C Warrants.

 

For the services in connection with this closing, the placement agent and the selected dealer, Knight Capital Markets, LLC and Ardour Capital Investments, received an aggregate of a 6.0% cash commission, a 1.0% advisory fee and warrants to purchase 1,215,909 shares of common stock at $0.88 per share, exercisable for a period of 5 years from the date of issuance of the warrants. The net proceeds from issuing common stock and Series C warrants in January 2008 after all the financing costs were $19.9 million and were recorded in additional paid in capital and common stock. Neither the shares of common stock nor the shares of common stock underlying the warrants sold in this offering were granted registration rights.

 

In connection with the Conversion Agreement, on January 7, 2010, the Company entered into an Amendment (the “Warrant Amendment”) to the Series A, Series B and Series C Warrants with the holders of at least a majority of the common stock underlying each of its outstanding Series A Warrants, Series B Warrants and Series C Warrants (collectively the “PIPE Warrants”). The Warrant Amendment reduced the exercise price for all of the PIPE Warrants from $1.21, $0.90 and $1.00, respectively, to $0.15, removed certain maximum ownership provisions and removed anti-dilution provisions for lower-priced security issuances. Given the above, the liability associated with the PIPE Warrants at the pre Conversion Agreement exercise price was considered extinguished and was replaced with the liability associated with the PIPE Warrants at the post Conversion Agreement exercise price, which were recorded at fair value.

 

There were no warrants exercised during the three months ended December 31, 2011 and 2010.

 

 

A summary of outstanding warrants as of December 31, 2011 is as follows:

 

		Number of Shares				Exercise Price ($)				Recognized as
Granted in connection with convertible notes — Series A			7,246,377				1.21				Discount to notes payable
Granted in connection with convertible notes — Series B			21,578,948				0.90				Discount to notes payable
Granted in connection with common stock purchase — Series C			24,318,181				1.00				Additional paid in capital
Granted in connection with placement service			507,247				0.69				Deferred financing cost
Granted in connection with placement service			1,510,528				0.57				Deferred financing cost
Granted in connection with placement service			1,215,909				0.88				Additional paid in capital
Extinguishment in accordance with the Conversion Agreement			(53,143,506	)			N/A				Loss on debt extinguishment
Issuance in accordance with the Conversion Agreement			53,143,506				0.15				Warrant liabilities
Cashless exercise of warrants			(1,147,394	)			0.15				Additional paid in capital
Outstanding at December 31, 2011			55,229,796

 

At December 31, 2011, the range of warrant prices for shares under warrants and the weighted-average remaining contractual life is as follows:

 

Warrants Outstanding and Exercisable
											Weighted-
							Weighted-				Average
Range of							Average				Remaining
Warrant			Number of				Exercise				Contractual
Exercise Price			Warrants				Price				Life
$0.15			51,996,112			$	0.15				0.59
$0.57-$0.88			3,233,684			$	0.71				0.52

 

Restricted Stock

 

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

 

On the same day, an Independent Committee of the Company’s Board adopted the 2008 Restricted Stock Plan (the “2008 Plan”) providing for the issuance of 25,250,000 shares of restricted common stock to be granted to the Company’s employees pursuant to forms of restricted stock agreements.

 

The 2008 Plan provides for the issuance of a maximum of 25,250,000 shares of restricted stock in connection with awards under the 2008 Plan. The 2008 Plan is administered by the Company’s Compensation Committee, a subcommittee of the Company’s Board of Directors, and has a term of 10 years. Restricted stock vest over a three year period and unvested restricted stock are forfeited and cancelled as of the date that employment terminates. Participation is limited to employees, directors and consultants of the Company and its subsidiaries and other affiliates. During any period in which shares acquired pursuant to the 2008 Plan remain subject to vesting conditions, the participant shall have all of the rights of a stockholder of the Company holding shares of stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares.  If a participant terminates his or her service for any reason (other than death or disability), or the participant’s service is terminated by the Company for cause, then the participant shall forfeit to the Company any shares acquired by the participant which remain subject to vesting Conditions as of the date of the participant’s termination of service. If a participant’s service is terminated by the Company without cause, or due to the death or disability of the participant, then the vesting of any restricted stock award shall be accelerated in full as of the effective date of the participant’s termination of service.

 

On July 2, 2011, the Company issued 8,600,000 shares of restricted common stock to the Company’s employees pursuant to the Company’s 2008 Restricted Stock Plan, with such awards to be evidenced by and subject to the terms and conditions of the form of restricted stock agreement previously adopted by the Company, except that the vesting of such restricted stock awards shall be over three years, with one-third of such shares vested upon the one year anniversary of the date of grant, and the balance to vest in equal monthly installments thereafter.  The issuance of the shares of restricted stock was not registered under the Securities Act in reliance on the exemption from registration provided under Regulation S, as promulgated under the Securities Act. Shares of restricted stock were issued only to non-U.S. persons in offshore transactions who met the conditions under Regulation S.

 

 

Out of the 8,600,000 shares of restricted common stock issued, the Company issued 1,000,000 shares of restricted common stock to Yihong Yao, the Company’s Chief Financial Officer, pursuant to the Company’s 2008 Restricted Stock Plan, with such awards to be evidenced by and subject to the terms and conditions of the form of restricted stock agreement previously adopted by the Company, except that the vesting of such restricted stock awards shall be over three years, with one-third of such shares vested upon the one year anniversary of the date of grant, and the balance to vest in equal monthly installments thereafter.

 

Issuance of fully vested restricted stock to the Company’s former Board of Directors

 

On January 12, 2010, the Company issued 400,000 shares of fully vested restricted stock to the Company’s former board of directors on their resignation date. As the former directors no longer provide services to the Company, these awards were properly accounted for as awards to non-employees in accordance with FASB ASC 718.

 

The following table summarizes the activity of the Company’s unvested restricted stock units as of December 31, 2011 and September 30, 2011 is presented below:

  

		Restricted Stock
		Number of				Weighted-
		shares				average grant-
						date fair value
Unvested as of September 30, 2010			13,150,000			$	0.62
Restricted stock canceled			(255,000	)		$	0.62
Restricted stock granted			8,600,000			$	0.08
Restricted stock vested			(13,070,000	)		$	0.62
Unvested as of September 30, 2011			8,425,000			$	0.49
Restricted stock canceled			(800,000	)		$	0.08
Unvested as of December 31, 2011			7,625,000			$	0.48

 

In October, 2011, 800,000 shares of our restricted stock were cancelled due to employees’ resignation.

 

The total unvested restricted stock as of December 31, 2011 and September 30, 2011 were 7,625,000 and 8,425,000 shares, respectively.

 

Stock-based compensation expense for restricted stock for the three months ended December 31, 2011 and 2010 were $43,000 and $0.6 million, respectively. As of December 31, 2011, the total unrecognized compensation expense net of forfeitures related to unvested awards was $0.5 million and is expected to be amortized over a weighted average period of 2.5 years.

 

Issuance of common shares to non-employees

 

On February 1, 2010, the Company issued 400,000 shares of common stock to the Company’s third party financial advisors. These awards were properly accounted for as awards to non-employees in accordance with FASB ASC 718.

 

Options

 

Amended and Restated 2007 Equity Incentive Plan

 

In September 2007, the Company adopted the 2007 Equity Incentive Plan (the “2007 Plan”) that allows the Company to grant non-statutory stock options to employees, consultants and directors. A total of 10 million shares of the Company’s common stock are authorized for issuance under the 2007 Plan. The maximum number of shares that may be issued under the 2007 Plan will be increased for any options granted that expire, are terminated or repurchased by the Company for an amount not greater than the holder’s purchase price and may also be adjusted subject to action by the stockholders for changes in capital structure. Stock options may have exercise prices of not less than 100% of the fair value of a share of stock at the effective date of the grant of the option.

 

On February 5, 2008, the Board of Directors of the Company adopted the Amended and Restated 2007 Equity Incentive Plan (the “Amended 2007 Plan”), which increases the number of shares authorized for issuance from 10 million to 15 million shares of common stock and was to be effective upon approval of the Company’s stockholders and upon the Company’s reincorporation into the State of Delaware.  

 

 

On May 5, 2008, at the Company’s Annual Meeting of Stockholders, the Company’s stockholders approved the Amended 2007 Plan.  On August 13, 2008, the Company reincorporated into the State of Delaware. As of December 31, 2011 and September 30, 2011, 9,810,000 and 9,810,000 shares of common stock, respectively remain available for future grants under the Amended 2007 Plan.

 

These options vest over various periods up to four years and expire no more than ten years from the date of grant. A summary of activity under the Amended 2007 Plan is as follows:

 

		Options Available For Grant				Number of Options Outstanding				Weighted Average Fair Value Per Share				Weighted Average Exercise Price Per Share
Balance at September 30, 2010			12,860,000				2,140,000			$	0.32			$	0.55
Options granted			(4,000,000	)			4,000,000			$	0.05			$	0.06
Options cancelled			950,000				(950,000	)		$	0.20			$	0.32
Balance at September 30, 2011			9,810,000				5,190,000			$	0.11			$	0.18
Options granted			—				—			$	—			$	—
Options cancelled			—				—			$	—			$	—
Balance at December 31, 2011			9,810,000				5,190,000			$	0.11			$	0.18

 

The total fair value of shares vested during the three months ended December 31, 2011 and 2010 were approximately $0 and $6,000, respectively.

 

At December 31, 2011 and September 30, 2011, 5,190,000 and 5,190,000 options were outstanding, respectively and had a weighted-average remaining contractual life of 8.74 years and 8.99 years, respectively. Of these options, 1,190,000 and 1,190,000 shares were vested and exercisable on December 31, 2011 and September 30, 2011, respectively.  The weighted-average exercise price and weighted-average remaining contractual term of options currently exercisable were $0.62 and 5.75 years, respectively.

 

There were no employee stock options granted during the three months ended December 31, 2011.

 

In accordance with the provisions of FASB ASC 718, the Company has recorded stock-based compensation expense of $19,000 and $0.7 million for the three months ended December 31, 2011 and 2010, respectively, which include the compensation effect for the options and restricted stock. The stock-based compensation expense is based on the fair value of the options at the grant date.  The Company recognized compensation expense for share-based awards based upon their value on the date of grant amortized over the applicable service period, less an allowance estimated future forfeited awards.

 

Issuance of common shares to settle the accrued interest on the Series B-1 Note

 

On October 1, 2011, the Company issued 784,304 shares of its common stock as accrued interest to the holder of our Series B-1 convertible note. These shares were exempt from any registration requirement under the Securities Act pursuant to Section 3(a)(9) of the Securities Act and Rule 144 promulgated under the Securities Act.

 

NOTE 13 — FAIR VALUE OF FINANCIAL INSTRUMENTS

 

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, codified in FASB ASC 820, “Fair Value Measurements and Disclosures”, which defines fair value to measure assets and liabilities, establishes a framework for measuring fair value, and requires additional disclosures about the use of fair value. FASB ASC 820 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value. FASB ASC 820 does not expand or require any new fair value measures. FASB ASC 820 is effective for fiscal years beginning after November 15, 2007. In December 2007, the FASB agreed to a one year deferral of FASB ASC 820’s fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The Company adopted FASB ASC 820 on October 1, 2008, which had no effect on the Company’s financial position, operating results or cash flows.

 

FASB ASC 820 defines fair value and establishes a hierarchal framework which prioritizes and ranks the market price observability used in fair value measurements. Market price observability is affected by a number of factors, including the type of asset or liability and the characteristics specific to the asset or liability being measured. Assets and liabilities with readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Under FASB ASC 820, the inputs used to measure fair value must be classified into one of three levels as follows:

 

 

Level 1 -	Quoted prices in an active market for identical assets or liabilities;
Level 2 -	Observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
Level 3 -	Assets and liabilities whose significant value drivers are unobservable.

 

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.

 

The Company’s liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of December 31, 2011: 

 

		Fair Value at December 31, 2011				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs  (Level 2)				Significant unobservable inputs  (Level 3)
Derivative liabilites		$	3,000				—				—			$	3,000
Total liabilities		$	3,000				—				—			$	3,000

 

The method used to estimate the value of the Series B-1 Note compound embedded derivatives (“CED”) was a binomial model with the following assumptions:

 

		December 31, 2011				September 30, 2011
Implied term (years)			0.22				0.47
Suboptimal exercise factor			2.50				2.50
Volatility			80.20	%			80.20	%
Dividend yield			0.00	%			0.00	%
Risk-free interest rate			0.06	%			0.06	%

 

The fair value of the Series A and Series B Warrants (including the Advisor Warrants) were estimated using a binomial valuation model with the following assumptions:

 

		December 31, 2011				September 30, 2011
Implied term (years)			0.18				0.43
Suboptimal exercise factor			2.5				2.5
Volatility			78	%			78	%
Dividend yield			0	%			0	%
Risk free interest rate			0.05	%			0.05	%

 

The carrying values of cash and cash equivalents, accounts receivable, accrued expenses, accounts payable, accrued liabilities and amounts due to related party approximate fair value because of the short-term maturity of these instruments. The Company does not invest its cash in auction rate securities.  

 

At December 31, 2011, the principal outstanding and the carrying value of the Company’s Series B-1 Note were $1,540,261 and $1,507,000, respectively. The Series B-1 Note contains two embedded derivative features, the conversion option and a redemption privilege accruing to the holder if certain conditions exist (the “compound embedded derivative”), which are measured at fair value both initially and in subsequent periods. The fair value of the convertible notes can be determined based on the fair value of the entire financial instrument.

 

 

NOTE 14 — COMPREHENSIVE INCOME (LOSS)

 

The Company computes comprehensive income (loss) in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 220, “Comprehensive Income”. FASB ASC 220 establishes standards for the reporting and display of comprehensive income (loss) and its components in financial statements.

 

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

 

		Quarter Ended December 31,
		2011				2010
Net income (loss)		$	(2,192,000	)		$	4,987,000
Other comprehensive income:
Change in foreign currency translation			(266,000	)			203,000
Comprehensive income (loss)		$	(2,458,000	)		$	5,190,000

 

The accumulated other comprehensive income at December 31, 2011 and September 30, 2011 comprised of accumulated translation adjustments of $3.6 million and $3.9 million, respectively.

 

NOTE 15 — NET INCOME (LOSS) PER SHARE

 

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

 

		Quarter Ended December 31,
		2011				2010
Calculation of net income (loss) per share - basic:
Net income (loss)		$	(2,192,000	)		$	4,987,000
Weighted-average number of common shares outstanding			173,838,226				160,416,534
Net income (loss) per share - basic		$	(0.01	)		$	0.03
Calculation of net income (loss) per share - diluted:
Net income (loss)		$	(2,192,000	)		$	4,987,000
Less:  Gain on change in fair market value of compound embedded derivative			—				(202,000	)
Interest expense on convertible notes			—				57,000
Net income (loss) assuming dilution		$	(2,192,000	)		$	4,842,000
Weighted-average number of common shares outstanding			173,838,226				160,416,534
Effect of potentially dilutive securities:
Convertible notes			—				10,935,073
Weighted-average number of common shares outstanding assuming dillution			173,838,226				171,351,607
Net income (loss) per share - diluted		$	(0.01	)		$	0.03

 

During the three months ended December 31, 2011, 5,190,000 stock options, 55,229,796 warrants and 7,625,000 restricted stocks were excluded from the calculation of earnings per share because their effect would be anti-dilutive.

 

NOTE 16 — COMMITMENTS AND CONTINGENCIES 

 

Research and development commitment

 

Pursuant to a joint research and development laboratory agreement with Shanghai University, dated December 15, 2006 and expiring on December 15, 2016, Solar EnerTech is committed to fund the establishment of laboratories and completion of research and development activities. On November 12, 2010, the Company amended the agreement with Shanghai University and extended the funding commitment from five years to eight years, and consequently the agreement will end on December 15, 2014. Based on the amendment, the Company has committed to fund no less than RMB 30 million ($4.5 million) cumulatively across the eight years. The funding requirements are based on specific milestones agreed upon by the Company and Shanghai University. As of December 31, 2011, there are approximately $3.2 million remaining to be funded in full by December 15, 2014.

 

 

The Company will continue to invest in research and development as it grows its business. The payment to Shanghai University will be used to fund program expenses and equipment purchase. Shanghai University needs to obtain the pre-approval from the Company before incurring expenditures on the program. If the Company fails to make pre-approved funding payments, when requested, it is deemed to be a breach of the agreement. If the Company is unable to correct the breach within the requested time frame, Shanghai University could seek compensation up to an additional 15% of the total committed amount for approximately $0.7 million. As of December 31, 2011, the Company is not in breach as it has not received any additional compensation requests for pre-approved funding payment from Shanghai University.

 

The agreement is for shared investment in research and development on fundamental and applied technology in the fields of semi-conductive photovoltaic theory, materials, cells and modules. The agreement calls for Shanghai University to provide equipment, personnel and facilities for joint laboratories. The Company will provide funding, personnel and facilities for conducting research and testing. Research and development achievements from this joint research and development agreement will be available to both parties. The Company is entitled to intellectual property rights including copyrights and patents obtained as a result of this research.

 

Other than capital expenditure related to purchase of fixed assets, expenditures under this agreement will be accounted for as research and development expenditures under FASB ASC 730, "Research and Development” and expensed as incurred.

 

Capital commitments

 

On August 21, 2008, the Company acquired two million shares of common stock of 21-Century Silicon for $1.0 million in cash as previously discussed in “Note 3 — Summary of Significant Accounting Policies – Investments”  above.  In July 2010, members of the Company’s executive team, including the CEO, visited 21-Century Silicon and conducted reviews of the production facility and technical development. The review indicated that 21-Century Silicon’s production facility and technical development were significantly below expected standards. In addition, management of 21-Century Silicon expressed the need for more funding to sustain operations. Moreover, 21-Century Silicon could not provide the Company with updated financial information concerning 21-Century Silicon’s working capital condition and future cash flows. The timing of the first polysilicon shipment is unknown and it is unknown whether it will even occur. The Company considered the factors above as indicators that a significant adverse effect on the fair value of the Company’s investment in 21-Century Silicon had occurred.  Accordingly, an impairment loss of $1.0 million was recorded in the Consolidated Statements of Operations for the fiscal year ended September 30, 2010 to fully write-down the carrying amount of the investment. The Company may also be obligated to acquire an additional two million common shares (at $0.50 per share) of 21-Century Silicon upon the first polysilicon shipment meeting the quality specifications determined solely by the Company. As of December 31, 2011, the Company has not yet acquired the additional two million shares as the product shipment has not occurred. On October 7, 2010, the X-Change Corporation announced that it has acquired 21-Century Silicon, Inc. The terms of the acquisition is anticipated to involve a change in control of the 21-Century Silicon and the appointment of new directors. The X-Change Corporation is anticipated to issue 20 million shares of its unregistered, restricted common stock to the shareholders of 21-Century Silicon in exchange for 100% of the issued and outstanding stock of 21-Century Silicon. As of the date of this report, the X-Change Corporation has not issued its shares to the Company.

 

On September 22, 2008, the registered capital of Solar EnerTech (Shanghai) Co., Ltd was increased from $25 million to $47.5 million, which was approved by our Board of Directors and authorized by Shanghai Municipal Government (the “Shanghai Government”). The paid-in capital as of December 31, 2011 was $32 million. The Board of Directors of the Company has decided not to fund the remaining balance of $15.5 million. On September 11, 2011, Solar EnerTech (Shanghai) Co., Ltd received approval from the Shanghai Government to reduce the capital requirement to $32 million.

 

On January 15, 2010, we incorporated a wholly-owned subsidiary in Yizheng, Jiangsu Province of China to supplement our existing production facilities to meet increased sales demands.  The subsidiary was formed with a registered capital requirement of $33 million, of which $23.4 million was to be funded by October 16, 2011.  The Board of Directors of the Company decided not to continue to fund the investment in the Yizheng Jiangsu Province subsidiary. We received the approval on December 22, 2011 to write-off the registration of the Yizheng Jiangsu Province subsidiary.

 

Convertible note

 

On March 19, 2010, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with Capital Ventures International (“CVI”) whereby the Company issued a Series B-1 Convertible Note (the “Note”) to CVI with an original principal amount of $1,815,261, which is due on March 19, 2012 and bears interest at 6% per annum. On May 11, 2011, the Company executed an amendment with CVI (“Amendment”) whereby CVI waives the following Trigger Events: (a) the migration of the Company’s listing from the OTCBB to the OTCQB, (b) the failure of the Company to timely pay the interest payment due on April 1, 2011 and (c) any other Trigger Event that may exist as of the date of this Amendment. According to the Amendment, Section 3(c) of the Exchange Agreement is amended to reduce the conversion price of the Note from $0.15 to $0.10 per common share, subject to further adjustment upon certain specified events as defined in the Exchange Agreement. Notwithstanding the above, the Company’s liquidity and financial position raises substantial doubt about the Company’s ability to continue as a going concern. As of December 31, 2011, the outstanding principal of the Note was $1,540,261, the carrying value was $1,507,000 and the related interest was $23,294. 

 

 

NOTE 16 — FOREIGN OPERATIONS

 

The Company identifies its operating segments based on its business activities. The Company operates within a single operating segment, the manufacture of solar energy cells and modules in China.

 

The Company’s manufacturing operations and fixed assets are all based in China. The Company’s sales occurred in Europe, Australia, North America and China.

 

NOTE 17 — SUBSEQUENT EVENTS

 

The Company has reviewed all subsequent events and transactions that occurred from the balance sheet date through the date these financial statements were issued.

 

 

 

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

 

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

 

The following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that relate to our current expectations and views of future events. In some cases, readers can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under the headings “Risks Related to Our Business and Our Industry,” “Risks Related to Doing Business in China” and “Risks Related To an Investment in Our Securities” in our Form 10-K filed with the Securities and Exchange Commission on December 27, 2011 as well as other relevant risks detailed in our filings with the SEC which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The information set forth in this report on Form 10-Q should be read in light of such risks and in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.

 

Overview

 

Solar EnerTech Corp. is a solar product manufacturer with its headquarters based in Mountain View, California, and with low-cost operations located in Shanghai, China.  Our principal products are monocrystalline silicon and polycrystalline silicon solar cells and solar modules. Solar cells convert sunlight to electricity through the photovoltaic effect, with multiple solar cells electrically interconnected and packaged into solar modules to form the building blocks for solar power generating systems. We primarily sell solar modules to solar panel installers who incorporate our modules into their power generating systems that are sold to end-customers located in Europe, Australia, North America and China.

 

We have established our manufacturing base in Shanghai, China to capitalize on the cost advantages offered in manufacturing of solar power products.  In our 67,107-square-foot manufacturing facility we operate two 25 MW solar cell production lines and a 50 MW solar module production facility.  We believe that the choice of Shanghai, China for our manufacturing base provides us with convenient and timely access to key resources and conditions to support our growth and low-cost manufacturing operations.

 

Our solar cells and modules are sold under the brand name “SolarE”.  Our total sales for the three months ended December 31, 2011 was $2.1 million and our end users are mainly in Europe and Australia.  In anticipation of entering the US market, we have established a headquarter office which also serves as marketing, purchasing and distribution office in Mountain View, California. Our goal is to become a worldwide supplier of PV cells and modules.

 

We purchase our key raw materials, silicon wafer, from the spot market.  We do not have a long term contract with any silicon supplier.  

 

We have been able to increase sales since our inception in 2006. Although our efforts to reach profitability have been adversely affected by the global recession, the credit market contraction and a volatile polysilicon market, during fiscal year 2010 and the first quarter of fiscal year 2011 we had significantly improved our gross margin as a result of declines in raw materials costs and the efficiencies gained from greater capacity utilization at our facilities. However, during the fiscal year 2011, the gross margin was negative 2%, mainly because of the decrease in average selling price of solar modules and decline in sales volume.

 

In December 2006, we entered into a joint venture with Shanghai University to operate a research facility to study various aspects of advanced PV technology. Our joint venture with Shanghai University is for shared investment in research and development on fundamental and applied technologies in the fields of semi-conductive photovoltaic theory, materials, cells and modules. The agreement calls for Shanghai University to provide equipment, personnel and facilities for joint laboratories. It is our responsibility to provide funding, personnel and facilities for conducting research and testing. Research and development achievements from this joint research and development agreement will be available for use by both parties. We are entitled to the intellectual property rights, including copyrights and patents, obtained as a result of this research. The research and development we will undertake pursuant to this agreement includes the following:

 

•

develop mass-production process for CIGS thin film technology which we jointly developed with AQT Solar;

 

•

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

 

 

 

•

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

 

•

research and develop key materials for new low-cost flexible-film PV cells and non-vacuum technology; and

 

•

research and develop key technologies and fundamental theories for third-generation PV cells.

 

On January 7, 2010 (the “Conversion Date”), we entered into a Series A and Series B Notes Conversion Agreement (the “Conversion Agreement”) with the holders of Notes representing at least seventy-five percent of the aggregate principal amounts outstanding under the Notes to restructure the terms of the Notes. On January 7, 2010, as part of the Conversion Agreement, approximately $9.8 million of convertible notes outstanding were successfully converted into shares of our common stock. On January 19, 2010, a holder of approximately $1.8 million of our formerly outstanding Series B Notes and Series B Warrants disputed the effectiveness of the Conversion Agreement and the Warrant Amendment.  Accordingly, such holder did not tender its Series B Notes for conversion. After negotiations with such holder, on March 19, 2010, we entered into an Exchange Agreement with the holder Capital Ventures International (“CVI”) (“Exchange Agreement”), whereby we issued the Series B-1 Note with a principal amount of $1.8 million (the “Series B-1 Note”) due on March 19, 2012 and an interest at 6% per annum, which extended the original maturity date by 24 months, in exchange for the Series B Notes.

 

On May 11, 2011, we executed an amendment with CVI (“Amendment”) whereby CVI waives the following Trigger Events: (a) the migration of our listing from the OTCBB to the OTCQB, (b) the failure of us to timely pay the interest payment due on April 1, 2011 and (c) any other Trigger Event that may exist as of the date of this Amendment. According to the Amendment, Section 3(c) of the Exchange Agreement was amended to reduce the conversion price of the Note from $0.15 to $0.10 per common shares, subject to further adjustment upon certain specified events as defined in the Exchange Agreement. Notwithstanding the above, our liquidity and financial position raises substantial doubt about our ability to continue as a going concern. If we are unable to renegotiate the terms of the Series B-1 Note prior to the March 19, 2012 due date, we may not be able to continue as a going concern. As of December 31, 2011, the outstanding principal of the Note was $1,540,261, the carrying amount was $1,507,000 and the related interest was $23,294. 

 

On May 5, 2011, we entered into a credit facility arrangement with BOC, in which we can draw up to the cumulative amount of accounts receivable outstanding from our key customer. If we are unable to successfully generate enough revenues to cover our costs or secure additional financing, our liquidity and results of operations may be materially and adversely affected. As of December 31, 2011, we had no short term loans outstanding.

 

As of December 31, 2011, we had cash and cash equivalents balance of approximately $1.1 million. On May 5, 2011, we entered into a credit facility arrangement with BOC, in which we can draw up to the cumulative amount of accounts receivable outstanding from our key customer. If we are unable to successfully generate enough revenues to cover our costs or secure additional financing, our liquidity and results of operations may be materially and adversely affected.

 

Environmental, Health and Safety Regulations

 

In our manufacturing process, we will use, generate and discharge toxic, volatile or otherwise hazardous chemicals and wastes in our manufacturing activities. We are subject to a variety of foreign, federal, state and local governmental laws and regulations related to the purchase, storage, use and disposal of hazardous materials. If we fail to comply with present or future environmental laws and regulations, we could be subject to fines, suspension of production or a cessation of operations. In addition, under some foreign, federal, state and local statutes and regulations, a governmental agency may seek recovery and response costs from operators of property where releases of hazardous substances have occurred or are ongoing, even if the operator was not responsible for the release or otherwise was not at fault.

 

Management believes that we have all environmental permits necessary to conduct our business and have obtained all necessary environmental permits for our facility in Shanghai. Management also believes that we have properly handled our hazardous materials and wastes and have appropriately remediated any contamination at any of our premises. We are not aware of any pending or threatened environmental investigation, proceeding or action by foreign, federal, state or local agencies, or third parties involving our current facilities. Any failure by us to control the use of or to restrict adequately the discharge of, hazardous substances could subject us to substantial financial liabilities, operational interruptions and adverse publicity, any of which could materially and adversely affect our business, results of operations and financial condition.

 

 

Solar Energy Industry

 

We believe that economic and national security issues, technological advances, environmental regulations seeking to limit emissions by fossil fuel, air pollution regulations restricting the release of greenhouse gasses, aging electricity transmission infrastructure and depletion and limited supply of fossil fuels, has made reliance on traditional sources of fuel for generating electricity less attractive. Government policies, in the form of both regulation and incentives, have accelerated the adoption of solar technologies by businesses and consumers. For example, in the U.S., the Energy Policy Act (EPACT) enacted a 30% investment tax credit for solar, and in January 2006, California approved the largest solar program in the country's history that provides for long term subsidies in the form of rebates to encourage use of solar energy where possible.

 

Government Subsidies and Incentives

 

Various subsidies and tax incentive programs exist at the federal and state level to encourage the adoption of solar power including capital cost rebates, performance-based incentives, feed-in tariffs, tax credits and net metering. Capital cost rebates provide funds to customers based on the cost or size of a customer's solar power system. Performance-based incentives provide funding to a customer based on the energy produced by their solar system. Under a feed-in tariff subsidy, the government sets prices that regulated utilities are required to pay for renewable electricity generated by end-users. The prices are set above market rates and may be differentiated based on system size or application. Feed-in tariffs pay customers for solar power system generation based on kilowatt-hours produced, at a rate generally guaranteed for a period of time. Tax credits reduce a customer's taxes at the time the taxes are due. Under net metering programs, a customer can generate more energy than used, during which periods the electricity meter will spin backwards. During these periods, the customer "lends" electricity to the grid, retrieving an equal amount of power at a later time. Net time metering programs enable end-users to sell excess solar electricity to their local utility in exchange for a credit against their utility bills. Net metering programs are usually combined with rebates, and do not provide cash payments if delivered solar electricity exceeds their utility bills. In addition, several states have adopted renewable portfolio standards, which mandate that a certain portion of electricity delivered to customers come from a set of eligible renewable energy resources. Under a renewable portfolio standard, the government requires regulated utilities to supply a portion of their total electricity in the form of renewable electricity. Some programs further specify that a portion of the renewable energy quota must be from solar electricity.

 

Despite the benefits of solar power, there are also certain risks and challenges faced by solar power. Solar power is heavily dependent on government subsidies to promote acceptance by mass markets. We believe that the near-term growth in the solar energy industry depends significantly on the availability and size of these government subsidies and on the ability of the industry to reduce the cost of generating solar electricity. The market for solar energy products is, and will continue to be, heavily dependent on public policies that support growth of solar energy. There can be no assurances that such policies will continue. Decrease in the level of rebates, incentives or other governmental support for solar energy would have an adverse affect on our ability to sell our products.

 

Critical Accounting Policies

 

We consider our accounting policies related to principles of consolidation, revenue recognition, inventory reserve, and stock based compensation, fair value of equity instruments and derivative financial instruments to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in determining our consolidation policy, when to recognize revenue, how to evaluate our equity instruments and derivative financial instruments, and the calculation of our inventory reserve and stock-based compensation expense. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. Management believes that there have been no significant changes during the three months ended December 31, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis or Plan of Operations in our Annual Report on Form 10-K filed for the year ended September 30, 2011 with the Securities and Exchange Commission (the “SEC”). For a description of those critical accounting policies, please refer to our 2011 Annual Report on Form 10-K.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined by the weighted-average method. Market is defined principally as net realizable value. Raw material cost is based on purchase costs while work-in-progress and finished goods are comprised of direct materials, direct labor and an allocation of manufacturing overhead costs. Inventory in-transit is included in finished goods and consists of products shipped but not recognized as revenue because it does not meet the revenue recognition criteria. Provisions are made for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value.

 

Impairment of Long Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When such factors and circumstances exist, management compares the projected undiscounted future cash flows associated with the future use and disposal of the related asset or group of assets to their respective carrying values. Impairment, if any, is measured as the excess of the carrying value over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. No loss on property and equipment impairment was recorded during the three months ended December 31, 2011 and 2010.

 

 

Investment

 

Investment in an entity where we own less than twenty percent of the voting stock of the entity and do not exercise significant influence over operating and financial policies of the entity are accounted for using the cost method. Investment in the entity where we own twenty percent or more, but not in excess of fifty percent of the voting stock of the entity or less than twenty percent and exercises significant influence over operating and financial policies of the entity are accounted for using the equity method. We have a policy in place to review our investments at least annually and to evaluate the carrying value of the investments in these companies. The cost method investment is subject to impairment assessment if there are identified events or changes in circumstance that may have a significant adverse affect on the fair value of the investment. If we believe that the carrying value of an investment is in excess of estimated fair value, it is our policy to record an impairment charge to adjust the carrying value to the estimated fair value, if the impairment is considered other-than-temporary.

 

Warranty Cost

 

We provide product warranties and accrue for estimated future warranty costs in the period in which revenue is recognized. Our standard solar modules are typically sold with a two-year warranty for defects in materials and workmanship and a ten-year and twenty five-year warranty against declines of more than 10.0% and 20.0%, respectively, of the initial minimum power generation capacity at the time of delivery. We therefore maintain warranty reserves to cover potential liabilities that could arise from our warranty obligations and accrue the estimated costs of warranties based primarily on management’s best estimate. In estimating warranty costs, we applied FASB ASC 460 – Guarantees, specifically paragraphs 460-10-25-5 to 460-10-25-7 of the FASB Accounting Standards Codification. This guidance requires that we make a reasonable estimate of the amount of a warranty obligation. It also provides that in the case of an entity that has no experience of its own, reference to the experience of other entities in the same business may be appropriate. Because we began to commercialize our products in fiscal year 2007, there is insufficient experience and historical data that can be used to reasonably estimate the expected failure rate of our solar modules. Thus, we consider warranty cost provisions of other China-based manufacturers that produce photovoltaic products that are comparable in engineering design, raw material input and functionality to our products, and sold to a similar target and class of customer with similar warranty coverage. In determining whether such peer information can be used, we also consider the years of experience that these manufacturers have in the industry. Because our industry is relatively young as compared to other traditional manufacturing industries, the selected peer companies that we consider have less than ten years in manufacturing and selling history. In addition, they have a manufacturing base in China, offer photovoltaic products with comparable engineering design, raw material input, functionality and similar warranty coverage, and sell in markets, including the geographic areas and class of customer, where we compete.  Based on the analysis applied, we accrue warranty at 1% of sales. We have not experienced any material warranty claims to date in connection with declines of the power generation capacity of its solar modules and will prospectively revise its actual rate to the extent that actual warranty costs differ from the estimates. 

 

Income Taxes

 

We account for income taxes under the liability method per the provisions of FASB ASC 740, “Income Taxes”, formerly referenced as SFAS No. 109, “Accounting for Income Taxes”.

 

Under the provisions of FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between their financial statement carrying values and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Valuation Allowance

 

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

 

 

Unrecognized Tax Benefits

 

Effective on October 1, 2007, we adopted the provisions related to uncertain tax positions under FASB ASC 740, “Income Taxes”, formerly referenced as FIN 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”. Under FASB ASC 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority based solely on the technical merits of the associated tax position. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. We also elected the accounting policy that requires interest and penalties to be recognized as a component of tax expense. We classify the unrecognized tax benefits that are expected to result in payment or receipt of cash within one year as current liabilities, otherwise, the unrecognized tax benefits will be classified as non-current liabilities.

 

Fair Value of Derivative Financial Instruments and Warrants

 

Our management used the binomial valuation model to value the derivative financial instruments and warrants. The model uses inputs such as implied term, suboptimal exercise factor, volatility, dividend yield and risk free interest rate. Selection of these inputs involves management’s judgment and may impact estimated value. Management selected the binomial model to value these derivative financial instruments and warrants as opposed to the Black-Scholes-Merton model primarily because management believes the binomial model produces a more reliable value for these instruments because it uses an additional valuation input factor, the suboptimal exercise factor, which accounts for expected holder exercise behavior which management believes is a reasonable assumption with respect to the holders of these warrants.

 

Stock-Based Compensation

 

On January 1, 2006, Solar EnerTech began recording compensation expense associated with stock options and other forms of employee equity compensation in accordance with FASB ASC 718, “Compensation – Stock Compensation”.

 

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

 

Expected Term — Our expected term represents the period that our stock-based awards are expected to be outstanding.

 

Expected Volatility — We expected volatilities are based on historical volatility of our stock, adjusted where determined by management for unusual and non-representative stock price activity not expected to recur. Due to the limited trading history, we also considered volatility data of guidance companies.

 

Expected Dividend —The Black-Scholes-Merton valuation model calls for a single expected dividend yield as an input. We currently pay no dividends and do not expect to pay dividends in the foreseeable future.

 

Risk-Free Interest Rate— We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

 

Estimated Forfeitures— When estimating forfeitures, We take into consideration the historical option forfeitures over the expected term.

 

Revenue Recognition

 

We recognize revenues from product sales in accordance with guidance in FASB ASC 605, “Revenue Recognition”, which states that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is fixed or determinable; and collectability is reasonably assured. Where a revenue transaction does not meet any of these criteria it is deferred and recognized once all such criteria have been met. In instances where final acceptance of the product, system, or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met.

 

On a transaction by transaction basis, we determine if the revenue should be recorded on a gross or net basis based on criteria discussed in the Revenue Recognition topic of the FASB Subtopic 605-405, “Reporting Revenue Gross as a Principal versus Net as an Agent”. We consider the following factors to determine the gross versus net presentation: if we (i) act as principal in the transaction; (ii) take title to the products; (iii) have risks and rewards of ownership, such as the risk of loss for collection, delivery or return; and (iv) act as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis.

 

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are carried at net realizable value. We record our allowance for doubtful accounts based upon our assessment of various factors. We consider historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect customers’ ability to pay.

 

Recent Accounting Pronouncements

 

For recent accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated condensed financial statements, see “Note 3 — Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements of this Form 10-Q.

 

Results of Operations for the three months ended December 31, 2011 and 2010

 

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

 

Sales, Cost of Sales and Gross Profit (Loss)

 

		Quarter Ended December 31, 2011								Quarter Ended December 31, 2010								Year-Over-Year Change
		Amount				% of net sales				Amount				% of net sales				Amount				% of change
Sales		$	2,107,000				100.0	%		$	15,507,000				100.0	%		$	(13,400,000	)			(86.4	%)
Cost of sales			(3,091,000	)			(146.7	%)			(14,391,000	)			(92.8	%)			11,300,000				(78.5	%)
Gross profit (loss)		$	(984,000	)			(46.7	%)		$	1,116,000				7.2	%		$	(2,100,000	)			(188.2	%)

 

For the three months ended December 31, 2011, we reported total sales of $2.1 million, representing a decrease of $13.4 million, or 86.4%, compared to $15.5 million of sales in the same period of the prior year. For the three months ended December 31, 2011, our $2.1 million in sales mainly comprised of solar module sales. In comparison, our $15.5 million in sales in the same period of the prior year comprised of $15.3 million in solar module sales and $0.2 million in solar cell sales. The solar module shipments decreased from 8.0 MW in the three months ended December 31, 2010 to 2.0 MW in the three months ended December 31, 2011. In addition, the unit selling price decreased from $1.91 per watt for the three months ended December 31, 2010 to $ 1.00 per watt for the three months ended December 31, 2011. The decline in sales was mainly due to a downturn in major European and Australia markets which has left module shipments well in excess of demand.

 

Selling, general and administrative

 

		Quarter Ended December 31, 2011								Quarter Ended December 31, 2010								Year-Over-Year Change
		Amount				% of net sales				Amount				% of net sales				Amount				% of change
Selling, general and administrative		$	1,017,000				48.3	%		$	2,351,000				15.2	%		$	(1,334,000	)			(56.7	%)

 

For the three months ended December 31, 2011, our selling, general and administrative expenses were $1.0 million, representing a decrease of $1.3 million, or 56.7%, from $2.4 million in the three months ended December 31, 2010. The decrease in the selling, general and administrative expenses was primarily due to a decrease in sales orders which caused a decrease in variable cost such as shipping and handling costs. Selling, general and administrative expenses as a percentage of sales for the three months ended December 31, 2011 increased to 48.3% from 15.2% for the three months ended December 31, 2010 due to lower sales during the three months ended December 31, 2011 compared to the same period a year ago.

 

Research and development

 

		Quarter Ended December 31, 2011								Quarter Ended December 31, 2010								Year-Over-Year Change
		Amount				% of net sales				Amount				% of net sales				Amount				% of change
Research and development		$	26,000				1.2	%		$	69,000				0.4	%		$	(43,000	)			(62.3	%)

 

Research and development expenses in the three months ended December 31, 2011 and 2010 were $26,000 and $69,000, respectively. Research and development expenses as a percentage of sales for the three months ended December 31, 2011 increased to 1.2% from 0.4% for the three months ended December 31, 2010.

 

In accordance with our joint research and development laboratory agreement with Shanghai University, dated December 15, 2006 (amended on November 12, 2010) expiring on December 15, 2016, we committed to fund the establishment of laboratories and completion of research and development activities at no less than RMB 30 million ($4.5 million) cumulatively within eight years (extended from five years). The funding requirements are based on specific milestones agreed upon by Shanghai University and us. Shanghai University needs to obtain pre-approval from us before incurring expenditures on the program. We provided $26,000 in funding to Shanghai University during the three months ended December 31, 2011. As of December 31, 2011, there were approximately $3.2 million remaining to be funded in full by December 15, 2014.

 

 

Gain on debt extinguishment

 

		Quarter Ended December 31, 2011								Quarter Ended December 31, 2010								Year-Over-Year Change
		Amount				% of net sales				Amount				% of net sales				Amount				% of change
Gain on debt extinguishment		$	—				0.0	%		$	(32,000	)			(0.2	%)		$	32,000				(100.0	%)

 

There was no gain on debt extinguishment recorded during the three months ended December 31, 2011.

 

During the three months ended December 31, 2010, $100,000 of the Series B-1 Note was converted into 666,667 shares of our common stock. As a result, we recorded a cumulative gain on debt extinguishment of approximately $32,000 as a result of the Conversion Agreement and the Exchange Agreement during the quarter ended December 31, 2010.

 

Reversal of payroll related tax accrual

 

		Quarter Ended December 31, 2011								Quarter Ended December 31, 2010								Year-Over-Year Change
		Amount				% of net sales				Amount				% of net sales				Amount				% of change
Reversal of payroll related tax accrual		$	—				0.0	%		$	(5,817,000	)			(37.5	%)		$	5,817,000				(100.0	%)

 

The reversal of payroll related tax accrual of $5.8 million during the three months ended December 31, 2010 represented $4.8 million of compensation expense related to our obligation to withhold tax upon exercise of stock options by Mr. Young in the fiscal year 2006 and the related interest and penalties, and $1.0 million of indemnification provided by us to Mr. Young  for any liabilities he may incur as a result of previous stock options granted to him by Ms. Blanchard, a former officer, in conjunction with the purchase of Infotech on August 19, 2008.

 

Both our obligation to withhold tax upon the exercise of stock options by Mr. Young and the indemnification have a three year statute of limitation. The statute of limitation expired as of December 31, 2010. As a result, we released the $5.8 million on December 31, 2010.

 

Other income (expense)

 

		Quarter Ended December 31, 2011								Quarter Ended December 31, 2010								Year-Over-Year Change
		Amount				% of net sales				Amount				% of net sales				Amount				% of change
Interest income		$	1,000				0.0	%		$	3,000				0.0	%		$	(2,000	)			(66.7	%)
Interest expense			(59,000	)			(2.8	%)			(71,000	)			(0.5	%)			12,000				(16.9	%)
Gain on change in fair market value
of compound embedded derivative			—				0.0	%			202,000				1.3	%			(202,000	)			(100.0	%)
Gain on change in fair market value
of warrant liability			—				0.0	%			466,000				3.0	%			(466,000	)			(100.0	%)
Other expense			(107,000	)			(5.1	%)			(158,000	)			(1.0	%)			51,000				(32.3	%)
Total other income (expense)		$	(165,000	)			(7.8	%)		$	442,000				2.9	%		$	(607,000	)			(137.3	%)

 

For the three months ended December 31, 2011, total other expense was $0.2 million, representing an increase of $0.6 million, or 137.3%, compared to total other income of $0.4 million for the same period of the prior year. Other expense as a percentage of sales for the three months ended December 31, 2011 was 7.8% compared to other income as a percentage of sales of 2.9% for the same period in the prior year. We incurred interest expenses of $59,000 and $71,000 in the three months ended December 31, 2011 and 2010, respectively, primarily related to 6% interest charges on the Series B-1 Note. In the three months ended December 31, 2011, there was no gain on change in fair market value of warranty liability and no gain on change in fair market value of compound embedded derivative compared to a gain on change in fair market value of warrant liability of $0.5 million and a gain on change in fair market value of compound embedded derivative of $0.2 million during the three months ended December 31, 2010.  Other expenses of $0.1 million and $0.2 million for the three months ended December 31, 2011 and 2010, respectively, were primarily related to foreign exchange loss.

 

 

Liquidity and Capital Resources

 

		December 31, 2011				September 30, 2011				Change
Cash and cash equivalents		$	1,095,000			$	1,324,000			$	(229,000	)

 

As of December 31, 2011, we had cash and cash equivalents of $1.1 million as compared to $1.3 million at September 30, 2011. We will require a significant amount of cash to fund our operations. Changes in our operating plans, an increase in our inventory, increased expenses, or other events, may cause us to seek additional equity or debt financing in the future. In order to continue as a going concern, we will need to continue to generate new sales while controlling our costs.  If we are unable to successfully generate enough sales to cover our costs, our liquidity and results of operations may be materially and adversely affected and we may not continue as a going concern.

 

Our liquidity is impacted to a large extent based on both the nature of the products we sell and also the geographical location of our customers, as our payment terms on sale vary greatly depending on both factors. With respect to the products we sell, while in the past we have engaged in transactions where we have resold our raw materials due to our overstock of materials relative to our then limited production capacity, as our production capacity has increased over the years, our sales now consist primarily of solar modules to solar panel installers in Europe and Australia who incorporate our modules into their power generating systems that are sold to end-customers. Payment terms for the sale of our modules are generally longer than payment terms where we resell our raw materials in China and as a result, our payment terms have lengthened relative to prior years. In addition, with respect to the geographic location of our customers, the payment terms for the sale of our solar modules are generally longer for our customers in the United States than for our customers in Europe and Australia. While our current sales to customers in the United States are limited, if we are able to increase our sales in the U.S. market or in other markets that may have longer payment terms, our payment terms may lengthen. Payment terms for our solar module sales generally range from 0 to 60 days. In some cases, these terms are extended up to 200 days for certain qualifying customers of whom we applied rigorous credit requirements. If we have more sales of products or in geographies with longer payment terms, the longer payment terms will impact the timing of our cash flows.

 

		Quarter Ended December 31,
		2011				2010				Change
Net cash provided by (used in):
Operating activities		$	462,000			$	(4,927,000	)		$	5,389,000
Investing activities			(74,000	)			(169,000	)			95,000
Financing activities			(273,000	)			151,000				(424,000	)
Effect of exchange rate changes on cash and cash equivalents			(344,000	)			66,000				(410,000	)
Net decrease in cash and cash equivalents		$	(229,000	)		$	(4,879,000	)		$	4,650,000

 

Net cash provided by operating activities was $0.5 million for the three months ended December 31, 2011, representing an increase of $5.4 million, compared to net cash used in operating activities of $4.9 million for the three months ended December 31, 2010. Cash flow from operating activities reflected a net loss of $2.2 million adjusted for non-cash items, including depreciation of property and equipment, stock-based compensation, amortization of note discount and deferred financing cost and payment of interest by issuance of shares. The increase of $5.4 million in net cash provided by operating activities from the three months ended December 31, 2010 to the three months ended December 31, 2011 was mainly attributable to collected receivables, partially offset by more cash out flow for purchase of raw materials in the three months ended December 31, 2011 compared to the same period in 2010. The payment terms granted by our major vendors were from 0 to 60 days. There was no material change in the payment terms granted by our major vendors in the three months ended December 31, 2011 compared to the same period in the prior year. The net income excluding non-cash expenses for the three months ended December 31, 2011 decreased compared to the same period in 2010, coupled with lower balances in accounts payable, accrued liabilities and customer advance payment as of December 31, 2011 compared to December 31, 2010.

 

Net cash used in investing activities was $0.1 million and $0.2 million in the three months ended December 31, 2011 and 2010, respectively. The decrease of $0.1 million in net cash used in investing activities was primarily due to lower property and equipment acquisitions during the three months ended December 31, 2011 compared to the three months ended December 31, 2010.

 

 

Net cash used in financing activities was $0.3 million in the three months ended December 31, 2011 and net cash provided by financing activities in the three months ended December 31, 2010 was $0.2 million. The increase of $0.4 million in net cash used in financing activities was primarily due to us paying off our credit facility at IBC.

 

Our consolidated balance sheet, statements of operations and cash flows have been prepared on the assumption that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

 

On March 19, 2010, we entered into an Exchange Agreement (the “Exchange Agreement”) with Capital Ventures International (“CVI”) whereby we issued a Series B-1 Convertible Note (the “Note”) to CVI with an original principal amount of $1,815,261, which is due on March 19, 2012 and bears interest at 6% per annum. On May 11, 2011, we executed an amendment with CVI (“Amendment”) whereby CVI waives the following Trigger Events: (a) the migration of our listing from the OTCBB to the OTCQB, (b) the failure of us to timely pay the interest payment due on April 1, 2011 and (c) any other Trigger Event that may exist as of the date of this Amendment. According to the Amendment, Section 3(c) of the Exchange Agreement is amended to reduce the conversion price of the Note from $0.15 to $0.10 per common share, subject to further adjustment upon certain specified events as defined in the Exchange Agreement. Notwithstanding the above, our liquidity and financial position raises substantial doubt about our ability to continue as a going concern. If we are unable to renegotiate the terms of the Note prior to the March 19, 2012 due date, we may not be able to continue as a going concern. As of December 31, 2011, the outstanding principal of the Note was $1,540,261, the carrying value was $1,507,000 and the related interest was $23,294.  

 

On March 25, 2010, we entered into a one year contract with China Export & Credit Insurance Corporation (“CECIC”) to insure the collectability of outstanding accounts receivable for two of the key customers. We pay a fee based on a fixed percentage of the accounts receivable outstanding and expense this fee when it is incurred. In addition, on March 30, 2010, we entered into a one year revolving credit facility arrangement with IBC that is secured by the accounts receivable balances of the two key customers insured by CECIC above. On March 25, 2011, we renewed our contract with CECIC for another one year to insure the collectability of outstanding accounts receivable of one of the key customers for up to $3.5 million. On May 5, 2011, we terminated the credit facility arrangement with IBC and on the same day, we entered into a revolving credit facility arrangement with Bank of China (“BOC”), which is also secured by the accounts receivable balances of the key customers insured by CECIC above. If the insured customer fails to repay the amounts outstanding due to us, the insurance proceeds will be remitted directly to BOC instead of us.  The interest rate of the credit facility is variable and ranged from 3.78% to 5.30% during the three months ended December 31, 2011. We repaid all amounts on August 12, 2011 when the loan came due. No amount was drawn down as of December 31, 2011 and there have been no insurance claims submitted to CECIC. The credit facility contains certain non-financial ratios related covenants, including maintaining creditworthiness, complying with all contractual obligations as requested by BOC, fulfillment of other indebtedness (if any), maintaining its business license and continuing operations, ensuring its financial condition does not deteriorate, remaining solvent, and other conditions, as defined in the credit facility agreement. We complied with these covenants as of December 31, 2011. If we fail to comply with our covenants on our credit facility, our debt may be accelerated or future drawdown requests may not be honored.

 

As of December 31, 2011, we had cash and cash equivalents balance of approximately $1.1 million. If we experience a material shortfall versus our operating plans, we can take actions to try to remediate the cash shortage, including but not limited to raising additional funds through debt financing, securing a credit facility, entering into secured or unsecured bank loans, or undertaking equity offerings such as a rights offering to existing shareholders. However, due to the conditions of capital and credit markets, we cannot be sure that external financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. If we are unable to successfully generate enough revenues to cover our costs or secure additional financing, our liquidity and results of operations may be materially and adversely affected, and we may not be able to continue as a going concern.

 

Off-Balance Sheet Arrangements

 

Pursuant to a joint research and development laboratory agreement with Shanghai University, dated December 15, 2006 and expiring on December 15, 2016, we are committed to funding the establishment of laboratories and completion of research and development activities. On November 12, 2010, we amended the agreement with Shanghai University and extended the commitment from five years to eight years, and consequently the agreement will end on December 15, 2014. Based on the amendment, we committed to fund no less than RMB 30 million ($4.5 million) cumulatively across the eight years. The funding requirements are based on specific milestones agreed upon by Shanghai University and us. As of December 31, 2011, there are approximately $3.2 million remaining to be funded in full by December 15, 2014.

 

We intend to increase research and development spending as we grow our business. The payment to Shanghai University will be used to fund program expenses and equipment purchase. Shanghai University needs to obtain the pre-approval from us before incurring expenditures on the program. If we fail to make pre-approved funding payments, when requested, we will be deemed to be in breach of the agreement. If we are unable to correct the breach within the requested time frame, Shanghai University could seek compensation up to an additional 15% of the total committed amount for approximately $0.7 million. As of December 31, 2011, we are not in breach as we have not received any additional compensation requests for pre-approved funding payment from Shanghai University.

 

On September 22, 2008, the registered capital of Solar EnerTech (Shanghai) Co., Ltd was increased from $25 million to $47.5 million, which was approved by our Board of Directors and authorized by Shanghai Municipal Government (the “Shanghai Government”). The paid-in capital as of December 31, 2011 was $32 million. The Board of Directors of the Company has decided not to fund the remaining balance of $15.5 million. On September 11, 2011, Solar EnerTech (Shanghai) Co., Ltd received approval from the Shanghai Government to reduce the capital requirement to $32 million.

 

 

On January 15, 2010, we incorporated a wholly-owned subsidiary in Yizheng, Jiangsu Province of China to supplement our existing production facilities to meet increased sales demands.  The subsidiary was formed with a registered capital requirement of $33 million, of which $23.4 million was to be funded by October 16, 2011.  The Board of Directors of the Company decided not to continue to fund the investment in the Yizheng Jiangsu Province subsidiary. We received the approval on December 22, 2011 to write-off the registration of the Yizheng Jiangsu Province subsidiary.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15 of the Securities Exchange Act of 1934, our Chief Executive Officer and Chief Financial Officer evaluated our company's disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, these disclosure controls and procedures were not effective to ensure that the information required to be disclosed by our company in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities Exchange Commission, and to ensure that such information required to be disclosed by our company in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The conclusion that our disclosure controls and procedures were not effective was due to the lack of finance and accounting personnel with an appropriate level of knowledge, experience and training in the application of U.S. GAAP. Our fiscal 2011 financial reporting close process was ineffective in recording certain transactions according to the applicable accounting pronouncement and preparing certain critical financial statement disclosures. Our plan to remediate the material weaknesses primarily consisted of hiring finance and accounting personnel with an appropriate level of knowledge, experience and training in the application of U.S. GAAP and training, educating and equipping our existing personnel on U.S. GAAP accounting matters and enhance our accounting and finance policy.

 

We are in the process of implementing the following measures to remediate these material weaknesses: (a) hire additional financial reporting and accounting personnel with relevant account experience, skills, and knowledge in the preparation of financial statements under the requirements of U.S. GAAP; and (b) continue to work with internal and external consultants to improve the process for collecting and reviewing information required for the preparation of financial statements. 

 

Changes in Internal Control over Financial Reporting

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has concluded there were no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

 

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None

 

ITEM 1A. RISK FACTORS

 

The Company’s risk factors are included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 and remain the same.

 

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

 

On January 1, 2012, we issued 1,589,024 shares of our common stock as accrued interest to the holder of our Series B-1 convertible note. These shares were exempt from any registration requirement under the Securities Act pursuant to Section 3(a)(9) of the Securities Act and Rule 144 promulgated under the Securities Act.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. REMOVED AND RESERVED

 

None

 

ITEM 5. OTHER INFORMATION

 

None

ITEM 6. EXHIBITS

 

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

 

31.1	Section 302 Certification - Chief Executive Officer
31.2	Section 302 Certification - Chief Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Executive Officer.
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief Financial Officer.
101	Interactive Data File (XBRL)

 

 

 

 

SIGNATURES

 

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

 

SOLAR ENERTECH CORP.

 

Date: February 14, 2012	By:	/s/ Yihong Yao
		Yihong Yao
		Chief Financial Officer