BUSINESS ACQUISITION

6 Months Ended

Dec. 31, 2011

Notes to Financial Statements

BUSINESS ACQUISITION

NOTE 2 – BUSINESS ACQUISITION

On January 21, 2011 (“Closing Date”), the Company entered into an Asset Purchase Agreement under which the Company acquired substantially all of the net assets of Tier Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common stock, and (3) payment of approximately $245,000 of the Seller’s obligations.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  The following table reconciles the purchase price to the cash consideration paid:

Total purchase price	$	2,515,071
Less debt and equity issued to Seller:
Note payable		(1,350,000	)
Common stock		(920,000	)
Total debt and equity issued to Seller		(2,270,000	)
Total cash paid		245,071
Less cash acquired		(19,149	)
Acquisition of business, net of cash acquired	$	225,922

The primary reason for the acquisition was to add a base of business so that the Company now offers a full range of energy storage, utilization, and management solutions that range from wind and solar converters to power quality, micro-grid systems, and hybrid electric drives for vehicles.

The Company accounted for the acquisition using the purchase method under U.S. GAAP.  The purchase method requires that assets acquired and liabilities assumed in a business combination be recognized at fair value.  The Company finalized the purchase price allocation during the three month period ended December 31, 2011.  A summary of the allocation of the assets acquired and the liabilities assumed in connection with the acquisition based on their estimated fair values is as follows:

Cash and cash equivalents	$	19,149
Accounts receivable		225,081
Inventories		772,932
Property and equipment		4,500
Other intangible assets		2,198,097
Accounts payable		(141,003	)
Accrued expenses		(203,823	)
Deferred revenue		(359,862	)
Net assets acquired	$	2,515,071

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities has been determined by management, with the assistance of an independent valuation firm, and are based on significant inputs that are generally not observable in the market (level 3 measurements).  Key assumptions that were used by management are as follows:

Financial Assets and Liabilities

Accounts receivable, accounts payable and accrued expenses, were valued at stated value, which approximates fair value.

Inventories were valued at fair value based on estimated net realizable value less costs to complete and sales costs.  Deferred revenues were valued at fair value based on the amounts that will be applied as customer credits to future shipments.

Property and Equipment

Property and equipment were valued based on the estimated market value of similar equipment.

Other Intangible Assets

The Company acquired certain identifiable intangible assets as part of the transaction which included:  $310,888 in a non-compete agreement, $288,087 in a license agreement, and $1,599,122 in a trade secrets agreement.  The fair values of these intangibles were estimated based upon an income approach methodology. Critical inputs into the valuation model for these intangibles include estimations of expected revenue and attrition rates, expected operating margins and capital requirements.  The other intangible assets were assigned an estimated useful life of three years.

Acquisition Related Expenses

Included in the consolidated statement of operations for the period from January 21, 2011 (date of acquisition) to June 30, 2011 were transaction expenses aggregating approximately $150,000 for advisory and legal costs incurred in connection with the business acquisition.

Tier Electronics LLC operates as a wholly owned subsidiary of the Company.  Tier Electronics LLC leases its facility from the former owner of the Seller under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.

In connection with this acquisition the Company awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics, LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets and (2) 330,000 vest in three equal annual installments beginning on January 21, 2012.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the results of operations for the period indicated as if the acquisition had been completed as of July 1, 2010.

These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of July 1, 2010 or that may be obtained in the future.

	Unaudited						Unaudited
	Three months ended December 31,						Six Months Ended December 31,
	2011			2010			2011			2010
Revenues	$	440,921		$	234,681		$	2,078,778		$	794,576
Loss from Operations		(2,765,336	)		(1,871,595	)		(4,461,818	)		(4,011,697	)
Net loss	$	(2,730,310	)	$	(1,945,464	)	$	(4,405,758	)		(4,144,573	)
Net Loss per share-
Basic and diluted	$	(0.08	)	$	(0.09	)	$	(0.14	)	$	(0.22	)
Weighted average shares-basic and diluted:
Basic		33,681,776			20,996,322			32,089,356			18,603,353
Diluted		33,681,776			20,996,322			32,089,356			18,603,353

Pro forma information primarily reflects adjustments relating to interest on the promissory note and the amortization of the intangible assets acquired in the acquisition.