10-KT 1 v318990_10kt.htm FORM 10-KT

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

¨   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: ___________

 

x   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from November 1, 2010 to September 30, 2011

 

Commission file number: 000-51704

 

PERFECTENERGY INTERNATIONAL LIMITED

(Exact name of registrant as specified in its charter)

 

Nevada 98-0548438
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

No. 479 You Dong Road, Xinzhuang Town, Shanghai, People’s Republic of China, 201100

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code:   (8621) 5488-0958

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    

¨ Yes      x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  

o Yes      x No

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

Large accelerated filer   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 Act).     o Yes      x  No

 

As of September 30, 2011, the last business day of the registrant’s transition period covered by this report, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $450,000 based on the closing sale price of $0.03 as reported on the Over the Counter Bulletin Board and 15,000,009 shares held by non-affiliates.  

 

As of September 30, 2011, there were 29,626,916 shares of common stock outstanding.

 

 
 

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION 3
   
PART I 3
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
   
PART II 11
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16
Item 9A. Controls and Procedures 16
Item 9B. Other Information 17
   
PART III 18
Item 10. Directors, Executive Officers and Corporate Governance 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters 24
Item 13. Certain Relationships and Related Transactions, and Director Independence 25
Item 14. Principal Accounting Fees and Services  26
   
PART IV  27
Item 15. Exhibits, Financial Statement Schedules 27
   
SIGNATURES  28

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This transition report on Form 10-K contains forward-looking statements.  Such forward-looking statements include statements regarding, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans, and (e) our anticipated needs for working capital.  Forward-looking statements that involve assumptions and describe our future plans, strategies, and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology.  This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements.  These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this transition report generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the matters described in this transition report generally.  This transition report may contain market data related to our business that may have been included in articles published by independent industry sources.  Although we believe these sources are reliable, we have not independently verified this market data.  This market data includes projections that are based on a number of assumptions.  If any one or more of these assumptions turns out to be incorrect, actual results may differ materially from the projections based on these assumptions.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this transition report will in fact occur.  In addition to the information expressly required to be included in this transition report, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

 

Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this transition report as well as other public reports that may be filed with the United States Securities and Exchange Commission.  You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments.  We are not obligated to update or revise any forward-looking statement contained in this transition report to reflect new events or circumstances unless and to the extent required by applicable law.  Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) provides any protection for statements made in this transition report.

 

When used in this transition report, the terms the “Company,” “we,” “us,” “our,” and similar terms refer to Perfectenergy International Limited, a Nevada corporation, and our subsidiaries.

 

PART I

 

Item 1. Business

 

Corporate Overview

 

We were formed as a Nevada corporation in 2005. We conduct operations through our wholly owned subsidiary, Perfectenergy International Limited, a private British Virgin Islands corporation (“Perfectenergy BVI”), and Perfectenergy BVI’s three wholly owned subsidiaries (i) Perfectenergy (Shanghai) Limited, a company organized under the laws of the People’s Republic of China (“Perfectenergy Shanghai”), (ii) Perfectenergy GmbH, a German corporation (“Perfectenergy GmbH”), and (iii) Perfectenergy Solar-Tech (Shanghai) Ltd., a company organized under the laws of the People’s Republic of China (“Perfectenergy Solar-Tech”).

 

Perfectenergy BVI was incorporated under the laws of the British Virgin Islands as an International Business Company on April 1, 2005.  Perfectenergy Shanghai was organized under the laws of the People’s Republic of China on July 8, 2005.  Perfectenergy Solar-Tech was incorporated in the PRC on February 28, 2008.  Perfectenergy BVI, through Perfectenergy Shanghai and Perfectenergy Solar-Tech, is principally engaged in the research, development, manufacturing, and sale of solar cells, solar modules, and photovoltaic systems.

 

We conduct sales in Europe through Perfectenergy GmbH, which was formed in Germany on November 9, 2007, located at Tannenweg 8-10, 53757 Sankt Augustin, Germany.  The principal function of Perfectenergy GmbH is marketing, installation, and other after-sales services for our PV products.  

 

Our principal offices are located at No. 479 You Dong Road, Xinzhuang Town, Shanghai in the PRC.  

 

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Our Operations

 

Our operations consist of the research, development, manufacturing, and sale of solar cells, solar modules, and photovoltaic (“PV”) systems.  Our manufacturing and research facility is located in Shanghai, China.

 

We have a 45 megawatt (“MW”) solar cell production line and a 60 MW solar panel lamination line.  In our facility’s solar cell and solar panel lamination production lines, we are able to produce different kinds of cells, such as 6-inch cells and 8-inch cells, mono-crystalline cells and multi-crystalline cells, and different types and sizes of solar modules.  After the manufacturing process, our products are put through a rigorous quality assurance process.  All of our products are strictly in accordance with international standards, such as IEC61215, TUV Safe Class II, and UL1703, in order to maintain our competitiveness in international markets. 

 

We believe that our manufacturing processes allow us to produce PV solar products at a lower cost than traditional solar cell manufacturing for the same levels of production due to our lower capital cost.  Our production line requires less capital investment than traditional solar cell production lines for the same levels of production due to the proprietary nature and in-house manufacturing of our capital equipment, while the competition must import costly capital equipment from Germany and Japan.

 

We also have a sales and marketing force that is led by our Chief Executive Officer.  Our targeted customers, besides our existing customers, are mostly system integrators and distributors in Europe, and China.

 

Principal Products and Services

 

We believe our photovoltaic (“PV”) cells and modules are highly competitive with other products in the solar energy market in terms of efficiency and quality.  We expect to continue improving the conversion efficiency and power, and reducing the thickness, of our solar products as we continue to devote significant financial and human resources in our various research and development programs.

 

PV Cells

 

We design, manufacture, and market crystalline solar cells (approximately 6 inch squares composed of silicon and glass) sold as crystalline solar modules (metal grid structures housing 60 cells, 72 cells, and 96 cells respectively).

 

A PV cell is a silicon semiconductor device that converts sunlight into electricity by a process known as the photovoltaic effect.  The following table sets forth the specifications for samples of two types of PV cells we produce:

 

PV Cell Type  

Dimensions

(mm×mm)

 

Conversion

Efficiency (%)

 

Thickness

(microns)

 
Monocrystalline silicon cell     125x125   17.00 – 18.10 % 200-230  
Multicrystalline & Monocrystalline silicon cell     156x156   17.00 – 18.10 % 200-230  

  

The key technical efficiency measurement of PV cells is the conversion efficiency rate.  In general, the higher the conversion efficiency rate, the lower the production cost of PV modules per watt because more power can be incorporated into a given size package.  The average conversion efficiency rate of our monocrystalline PV cells reached 17.8% in April 2011, representing a 30% increase since December 2005 when we first began producing PV cells.  We currently produce a variety of PV cells ranging from 200 microns to 230 microns in thickness.  

  

PV Modules    

 

A PV module is an assembly of PV cells that is electrically interconnected and laminated in a durable and weatherproof package.  Our solar cells are often sold as components of assembled modules.  We are also developing PV modules with higher power to meet the rising expansion of on-grid configurations.  The majority of the PV modules we currently offer to our customers range in power between 185W and 250W.  We also perform limited original equipment manufacturing work for other solar cell producers, such as selling standalone solar modules.  We sell approximately 90% of our PV modules under our “Perfectenergy” brand and approximately 10% of our PV modules under the brand names of our customers.

 

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Distribution

 

We sell our products to a number of systems integrators and distributors, primarily located in Germany, who purchase their solar modules, purchase software, and hardware from other vendors and integrate and install the end-product for customers.  Many of our customers, in turn, sell turnkey solar systems to end-users that include individual owners of agricultural buildings; owners of commercial warehouses, offices, and industrial buildings; public agencies and municipal government authorities that own buildings suitable for solar system deployment; owners of land designated as former agricultural land, waste land, or conversion land, such as former military bases or industrial areas; and financial investors that desire to own large scale solar projects.

 

Market and Industry Overview

 

The solar power market has experienced rapid growth in the past several years.  According to global market research carried out by Photon International, the average estimate of the global solar power demand was 20.6GW in 2011 and is 23.3G in 2012. According to market analysis by Solarbuzz, even in the slowest growth scenario, the global market is expected to be 2.5 times its current size by 2014. 

 

We believe the solar power market will continue to grow as a result of the growing adoption of government incentives for solar energy sources, rising energy demand and limited fossil energy sources, and the growing awareness of the advantages of solar energy, all of which are discussed below.

 

Growing Adoption of Government Incentives for Solar and Other Renewable Energy Sources

 

In response to the increasing environmental concerns worldwide, many governments have promulgated regulations and implemented policies to limit the release of hazardous and greenhouse gases, such as carbon dioxide, and to encourage the use of renewable energy sources.  Due to the fact that most renewable energy sources are currently less cost competitive than traditional energy sources, a growing number of countries have created incentive programs for the solar sector, including:

 

·direct subsidies to end users to counter costs of equipment and installation;

 

·net metering laws enabling on-grid end users to sell electricity back to the grid at retail prices;

 

·government standards mandating minimum consumption levels of renewable energy sources; and

 

·low interest loans and tax incentives to finance solar power systems.

 

Due to government support in the past decade, solar energy has become an attractive alternative to traditional energy sources.  Set forth below are brief descriptions of the incentive programs adopted by the following selected countries:

 

China.  With cheaper raw materials and PV technology innovation, however, the cost of producing solar electricity in China (including the cost of equipment, installation and operating costs) has declined by 70% from 2008 to 2011, making solar power a strong candidate to become a major energy resource.  Falling solar power generation cost and rising demand as the main drivers for the uptake, China revised its 2020 target for solar power capacity from 1.8 GW to 20 GW.  In February 2005, China enacted the Renewable Energy Law, which became effective in January 2006.  This law provides certain financial incentives for the development of renewable energy projects.  Various local authorities have also introduced initiatives to encourage the adoption of renewable energy, including solar energy.  In addition, the government has enacted several policies to support the solar industry, including a regional feed-in tariff and national subsidies for solar PV installations such as subsidy scheme on rooftop projects.  We expect that the increase in solar energy consumption in local municipalities will encourage further growth of the solar energy industry in China.

 

Germany.   Under its Renewable Energy Sources Act, Germany aims to increase the share of electricity from renewable energy to 12.5% by 2010 and 20% by 2020.  In particular, the Renewable Energy Sources Act requires electricity transmission grid operators to connect various renewable energy sources to their electricity transmission grids and to purchase all electricity generated by such sources at guaranteed feed-in tariffs.  Additional regulatory support measures include investment cost subsidies, low-interest loans, and tax relief to end users of renewable energy.

 

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Italy.   Before 2005, the Italian PV market benefited primarily from regional support for PV installations with matching grants of up to 65% of amounts invested in regional solar energy projects in the absence of national incentive funds.  In 2005, Italy passed a new law that set fixed feed-in tariffs for electricity produced from renewable energy sources.  The incentives are available to individuals, companies, and public bodies.  In January 2006, the Italian government approved various measures relating to PV feed-in tariffs, including increasing the PV feed-in tariff cap to 500 MW by 2015. According to global research by Photon, the estimated market demand in Italy in 2012 will be 3,500MW which is about 30 times of the PV installed capacity in 2007 (about 120MW).

 

Japan.   The Japanese government has implemented a series of incentive programs, including the “PV 2030” roadmap that outlines government policies to support solar power electricity.  Japan also provides government subsidies for research and development. Though Japan too is affected by the global decline in solar module and polysilicon prices, the more mature Japanese solar market is grappling with slightly different market forces. Solar cell prices in Japan are nearly 70-percent higher than global prices. This has attracted a number of foreign investors to the Japanese market. A government-sponsored Japanese ‘buyback program’ continues to attract global players. Japan continues to realign its energy generation matrices as the country expects to see a massive energy shortage due to delays in approval for re-activating 54 nuclear reactors. As public opinion is not positive about energy generation from nuclear resources, Japan has drawn a long-term plan for energy generation from renewable resources.

  

United States.   At the federal level, several recent developments are favorable to the PV industry in general in the United States.  The United States Congress approved the Energy Policy Act of 2005, which provides a 30% investment tax credit for PV installations.  With the “Extension and Modification of Solar Energy and Fuel Cell Investment Tax Credit” bill passed by Congress in 2008, the tax credit for PV installation was extended through 2016.  This bill lifted a limitation that prevented public utilities from claiming the investment tax credit, which may increase solar panel sales to U.S. utilities that now qualify to receive a 30% tax credit for their first PV installation.  The bill also allows these credits to be used to offset the alternative minimum tax (AMT).  Further, President Obama’s New Energy for America plan set forth the goal for 10% of electricity generated in the U.S. to come from renewable energy sources by 2012 and 25% by 2025.  In addition, a number of states, including California and New Jersey, have committed substantial resources to developing and implementing renewable energy programs.  Under the California Solar Initiative, an investment of $3.2 billion will be made from 2006 to 2017 for the installation of 1 million PV plants with the total output of more than 3,000MW.  Investors in these PV plants will get refunds from the state and federal governments of approximately 75% of their total investment, and the investors are to receive a guaranteed profit of 12% on average for the electricity produced by their PV plants with certificates of green power.  In April 2006, the New Jersey Board of Public Utilities voted to approve new regulations which expand the state’s Renewable Portfolio Standard by extending the existing goals out to 2020 and increasing the required amount of renewable energy and solar energy.  Under the newly adopted regulations, 20% of New Jersey’s electricity must come from renewable sources by 2020.  The New Jersey regulations also include a 2% solar set aside, which is forecast to require 1,500MW of electricity to be generated through solar power, the largest solar commitment relative to population and electricity consumption in the United States.

 

Rising Energy Demand and Limited Fossil Energy Sources with Increasing Prices

 

In recent years, global economic development has resulted in surging energy demand and rising energy prices.  Electric power demand is expected to increase from 16.1 trillion kilowatt hours in 2002 to 31.7 trillion kilowatt hours by 2030 globally.  Meanwhile, the generation of electric power is capacity-constrained and dependent upon fossil fuel feedstock.  The situation is compounded by the finite supply of traditional energy sources, such as natural gas, coal, and petroleum.  In addition, petroleum prices have risen dramatically because of war, political instability, labor unrest, and the threat of terrorism in oil-producing regions.  Further, for national security reasons, many governments seek to further develop domestic sources of energy.  Thus, future energy demand is increasingly expected to be met by renewable energy sources, such as solar energy.

 

Growing Awareness of the Advantages of Solar Power     

 

Solar power offers a variety of advantages over other sources of power, including an absence of the need for fuel, environmental cleanliness, location based energy production, greater efficiency during peak demand periods, high reliability, and modularity.  These advantages include the following:

 

No fossil fuel requirement.  Solar power relies solely on sunlight rather than traditional fossil fuels that have historically experienced supply constraints, volatile pricing and delivery risk.

 

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Clean energy production.  Unlike traditional fossil fuel energy sources and many other renewable energy sources, solar power systems generate electricity with no emissions or noise impact.

 

Location-based energy production.  Solar power is a distributed energy source, meaning that the electricity can be generated at the site of consumption.  This provides a significant advantage to the end user who is not reliant upon the traditional electricity infrastructure for delivery of electricity to the site of use.

 

Energy generated to match peak usage times.  Peak energy usage and high electricity costs typically occur mid-day, which also generally corresponds to peak sunlight hours and solar power electricity generation.

 

Reliable Source of Electricity.  Solar power systems generally do not contain moving parts, nor do they require significant ongoing maintenance.  

 

Modular.  Solar power systems are made from interconnecting and laminating solar cells into solar modules.  Given this method of construction, solar power products can be deployed in many different sizes and configurations to meet specific customer needs.

 

Challenges Facing the Solar Power Industry

 

Although solar power has several advantages and is an attractive alternative to traditional energy sources, there remain certain key challenges that the solar power industry must overcome to accomplish broad commercialization of its products, including the following:

 

Possible Reduction or Elimination of Government Subsidies and Incentives.  The current growth of the solar power industry substantially relies on the availability and size of government subsidies and economic incentives, such as capital cost rebates, reduced tariffs, tax credits, net metering, and other incentives.  Governments may eventually decide to reduce or eliminate these subsidies and economic incentives.  It remains a challenge for the solar power industry to reach sufficient scale to be cost-effective in a non-subsidized marketplace.

 

High Cost of Solar Power.  Generally, the per kilowatt-hour cost of generating solar electricity, including the upfront capital costs, is greater than retail electricity rates.  While government policy mechanisms and heightened consumer awareness are driving solar power adoption, the cost of solar power products remains an impediment to growth.  To address this issue, manufacturers must improve the cost efficiency of solar power systems through innovation and continuous improvement of production techniques.  For example, improving conversion efficiencies of solar cells will reduce raw material requirements and lower costs required to manufacture a solar power system with a given output.  Higher conversion efficiencies also decrease the size of the solar power system, and thereby lower the system installation costs.

 

Shortages of Raw Materials.  Polysilicon is the main raw material used in manufacturing our solar cells.  Currently, there is some relief in the supply shortage of polysilicon in the industry.  However, due to strong demands in the PV products in next few years, we believe that the industry-wide shortage of polysilicon will continue to have a material impact on our liquidity because suppliers will likely require more advance payments for the polysilicon that they supply to us as our production expands.  Further, a shortage may also have a material effect on our results of operations because a shortage will likely cause the price of polysilicon to rise.  Such increase will likely cause an increase in the cost of producing our products especially if we must obtain more polysilicon in the market to produce our products as our production expands in the future.  In addition, we believe effective supply chain management is critical to ensure continued growth for the industry.

 

Competition

 

The global solar power market is highly competitive and has rapidly evolved.  Various government incentive and subsidy programs implemented in the United States, Europe, China, Japan, and other countries in recent years have further induced competition in solar energy product marketplace.  In particular, a large number of manufacturers have entered the solar market. In 2011, solar subsidies from European governments to producers and consumers of solar energy decreased sharply due to fiscal constraints. This reduction in subsidies has forced producers in general to cut prices for their products in order to continue to make sales. Reduced sales prices has in turn led to lowered and in some cases negative margins.

 

Our main overseas competitors, including those in the United States, include BP Solar, Kyocera Corporation, Mitsubishi Electric Corporation, Motech Industries Inc., Sharp Corporation, Q-Cells AG, Sanyo Electric Co., Ltd., and Sunpower Corporation.  Our primary competitors in China include Suntech Power Holding’s Co., Ltd., Baoding Tianwei Yingli New Energy Resources Co., Ltd., and Nanjing PV-Tech Co., Ltd.  

 

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We compete primarily on the basis of the power efficiency, quality, performance, and appearance of our products, price, strength of supply chain and distribution network, after-sales service, and brand image.  Many of our competitors, however, have longer operating histories and significantly greater financial or technological resources than we do and enjoy greater brand recognition.  Some of our competitors are vertically integrated and design and produce upstream silicon wafers, mid-stream PV cells and modules, and downstream solar application systems, which provide them with greater synergies to achieve lower production costs.  During periods when there is a shortage of silicon and silicon wafers, we compete intensely with our competitors in obtaining adequate supplies of silicon wafers. Moreover, many of our competitors are developing next-generation products based on new PV technologies, including amorphous silicon, transparent conductive oxide thin film, carbon material, and nano-crystalline technologies, which, if successful, will compete with the crystalline silicon technology we currently use in our manufacturing processes.  We are seeking to develop new technologies and products through our research collaborations.

 

We, like other solar energy companies, also face competition from traditional non-solar energy industries, such as the petroleum and coal industries.  The production cost per watt of solar energy is significantly higher than other types of energy.  As a result, we cannot provide assurances that solar energy will be able to compete with other energy industries in the long-term, especially if there is a reduction or termination of government incentives and other forms of support for solar energy.

 

Due to the nature of our operations, the volatility of prices in the polysilicon and solar power product markets may have negative impacts on the results of our operations. The reduction in the sales price of PV products may result in negative gross margins if not equal to the silicon price.

 

Sources and Availability of Raw Materials

 

Our manufacturing process uses approximately 20 types of raw materials and components that undergo a qualification process to construct a complete solar module.  We currently source these raw materials and components from domestic suppliers in China, and most of our critical materials and components are either sourced from only one supplier or supplied by a limited number of suppliers.  Supply of these materials is stable for the most part as a result of the maturity of solar related production in China.

 

One key raw material in our production process is silicon wafers.  We purchase all of our silicon wafers from a limited number of suppliers.  We have long term supply contracts with two major suppliers, which provides for monthly price adjustments based on the spot rate of silicon.  These contracts are more fully described below under “Principal Suppliers.”

 

Principal Suppliers

 

Silicon is essential for manufacturing our products and, as noted above, silicon manufacturers are not currently able to keep up with demand. We purchase silicon wafers and cells from several suppliers with long term co-operation relationship.  Due to fluctuations in the silicon supply market, the purchasing price of these silicon wafers is based on market conditions.

 

Other materials needed to produce cells and modules, such as chemicals, special-made glasses, etc. are relatively easy to purchase from multiple vendors, and we intend to work with two to three vendors to ensure the best pricing and quality of these supplies.

 

Customers

 

We sell our products to a number of systems integrators and distributors, mostly located in Europe and China, who purchase solar cells and solar modules from us, software and hardware from other vendors, and then integrate and install the end-product for their customers.  These systems integrators sell turnkey solar systems to end-users that include the following:

 

·Individual owners of agricultural buildings,

 

·Owners of commercial warehouses, offices, and industrial buildings,

 

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·Public agencies and municipal government authorities,

 

·Owners of land designated as former agricultural land, waste land, or conversion land, such as former military bases or industrial areas, and

 

·Financial investors interested in owning large scale solar projects.

 

Our top three customers by value, who accounted for 67% of our revenue during the eleven months ended September 30, 2011, are as follows:

 

·Energiebau GmbH, accounting for 35% of revenue;

 

·PV Partners accounting for 17% of revenue; and

 

·B&W Energy GmbH, accounting for 14% of revenue.

 

Intellectual Properties and Licenses

 

The following table describes the intellectual property owned by the Company:  

 

Type   Name   Issued by   Duration   Description
                 
Trademark     Trademark Bureau of the People’s Republic of China   Ten years from 2009 to 2019 (and renewable within six months prior to the end of each ten-year term for additional ten-year periods)   Logo, brand name used in our products
                 
Trademark     Trademark Bureau of the People’s Republic of China   August 21, 2010 to August 20, 2020   Logo, brand name used in our products
                 
Patent   Solar cell fire furnace equipment   Intellectual Property Bureau of the People’s Republic of China   May 25, 2006 to May 25, 2016 (10 years)   To increase cell efficiency with proper cell production technique
                 
Patent  

Solar wafer drying equipment

 

  Intellectual Property Bureau of the People’s Republic of China  

May 17, 2006 to May 17, 2016 (10 years)

 

 

  To dry wafers more effectively, thus improving quality and increasing yield
Patent  

Preparation method of Chalcogenide Glass (with Rare Earth elements)

 

 

Intellectual Property Bureau of the People’s Republic of China

 

  July 11, 2003 to July 10, 2013   To improve efficiency in absorption of sunlight to PV module system

 

We are certified by IEC61215 and Safety Class II for TUV.  Both IEC and TUV are international standards for electronic appliances.  We also applied for UL certification (standards for electronic appliance in the United States), and we expect this certification process to be completed by the end of 2012.

 

We have also filed applications for three patents in Shanghai, which are currently being reviewed by local authority.

 

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Research and Development

 

During the eleven month period ended September 30, 2011 and the fiscal year ended October 31, 2010, we incurred $446,413 and $509,181, respectively, for research and development primarily related to the development of new types of crystalline PV cells as well as improvement on the conversion efficiency of PV cell and module products. 

 

Environmental Matters

 

Our manufacturing processes generate noise, wastewater, gaseous wastes, and other industrial wastes.  We have various types of anti-pollution equipment installed in our facilities to reduce, treat, and, where feasible, recycle the wastes generated in our manufacturing process.  We outsource the treatment of some of our wastewater and other liquid wastes to third-party contractors.

 

Our operations are subject to regulation and periodic monitoring by local environmental protection authorities in Shanghai.  In conjunction with our efforts with the construction of our new solar cell production facility, we are planning to further improve management of the environmental issues relating to our operations, including consultations with local environmental protection authorities and compliance with regulations.  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.

 

Employees

 

As of June 30, 2012, we had approximately 150 employees, all of which are full-time employees. The majority of our employees work at our Shanghai locations, with approximately six employees at our office in Germany.

 

Item 2. Properties

 

Offices and Facilities

 

The table below provides a general description of our offices and facilities:

 

Location   Principal Activities   Area (sq. meters)     Lease Expiration Date  
                 
No. 479 You Dong Road, Xinzhuang Town, Shanghai, People’s Republic of China 201100  

Company headquarters;

manufacturing facility

    6,200     May 31, 2016  
                   

Tannenweg 8-10, 53757 Sankt Augustin,

Germany

  European sales and marketing office     649     February 28, 2014  
                   
569 Zhuan Sheng Road, Shanghai, People’s Republic of China 201100   Perfectenergy Solar-Tech production facility     1,943     (1)  

 

 

(1)This lease has expired, but we are negotiating a renewal with the landlord.  During negotiations, we have an oral agreement with the landlord to continue the terms of the expired leases.

 

We lease the space for our headquarters and factory premises under a property lease agreement that expires on May 31, 2016, with an option to renew the lease.  We lease the space for our sales and marketing office in Germany under a property lease agreement that expires in February 2014.   The additional production facility used by Perfectenergy Solar-Tech is leased under a property lease agreement that expired in March 2010.  The terms of the expired lease are still in effect under an oral agreement with the landlord during negotiations to renew the lease.  At September 30, 2011, minimum future commitments under the lease agreements were as follows:

 

10
 

 

Year Ended September 30,  Amount 
2012  $382,011 
2013   382,011 
2014   351,226 
2015   336,835 
2016 and Thereafter   224,557 

 

Item 3. Legal Proceedings

 

We are involved in disputes with Doorline GmbH (“Doorline”), a significant customer, and Hengdian Group DMEGC Solar Division (“DEMGC”), an OEM supplier. Doorline refused to make payment due the Company in the amount of €2,572,280 by claiming it received faulty products. As a result, we stopped payment in the amount of €2,053,976 to DEMGC pursuant to a warranty coverage clause in our OEM contract with DEMGC. DEMGC has taken legal action against the Company to collect the payment. We are currently negotiating with both parties, and there is a contingency that we will take the losses if the warranty coverage from DEMGC cannot meet total claims from Doorline.

 

Other than indicated above, we are not currently involved in any material legal proceedings, and we are not aware of any material legal proceedings pending or threatened against us.  We are also not aware of any material legal proceedings involving any of our directors, officers, or affiliates or any owner of record or beneficially of more than 5% of any class of our voting securities.

  

 PART II

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

On January 26, 2012, we were notified by the Financial Industry Regulatory Authority (“FINRA”) that our securities would not be eligible for quotation on the OTC Bulletin Board unless we were able to file this transition report on form 10-K by February 27, 2012. On February 28, 2012, our common stock began being quoted on the OTC Pink under the symbol “PFGY.”

 

The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock as reported by the OTC Pink.  The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions.

 

Quarter Ended  High Bid   Low Bid 
      
June 30, 2012   $0.03(1)   $0.01(1) 
March 31, 2012  $0.04(1)  $0.01 
December 31, 2011  $0.07(1)  $0.02 
           
September 30, 2011  $0.0402   $0.00 
June 30, 2011  $0.0333   $0.01 
March 31, 2011  $0.071   $0.00 
December 31, 2010  $0.11   $0.05 
           
September 30, 2010  $0.10   $0.05 
June 30, 2010  $0.24   $0.06 
March 31, 2010  $0.53   $0.16 
December 31, 2009  $0.42   $0.19 

 

 

(1)These prices reflect the high and low sales price of our common stock as reported by Yahoo! Finance.

 

On July 24, 2012, the closing sale price for shares of our common stock was $0.01 per share.

 

11
 

 

Holders

 

As of June 7, 2012, we had 23 shareholders of record of our issued and outstanding common stock based upon the records of our transfer agent. Our transfer agent is Holladay Stock Transfer, Inc. located at 2939 North 67th Place, Suite C, Scottsdale, Arizona 85251, and its telephone number is (480) 481-3940.

 

Dividend Policy

 

We do not currently intend to pay any cash dividends in the foreseeable future on our common stock and, instead, intend to retain earnings, if any, for operations.  Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, and other factors that our board of directors may deem relevant.

 

Securities Authorized for Issuance under Equity Compensation Plans or Individual Compensation Arrangements

 

The following table sets forth, as of September 30, 2011, certain information related to our compensation plans under which shares of our common stock are authorized for issuance.

 

 

Plan Category  COLUMN A:
Number of Securities
to be Issued upon
Exercise of
Outstanding Options
Warrants and Rights
   Weighted-Average Exercise
Price of Outstanding
Options, Warrants and
Rights
   Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in COLUMN A)
 
Equity compensation plans approved by security holders   1,369,387(1)  $2.52    121,238(2)
Equity compensation plans not approved by security holders            
Total   1,369,387   $ 2.52   121,238 

 

 

(1)Includes outstanding options granted pursuant to the Company’s 2007 Stock Incentive Plan.
(2)Includes shares remaining available for future issuance under the Company’s 2007 Stock Incentive Plan.

 

On September 5, 2007, our board of directors approved the 2007 Stock Incentive Plan (the “Plan”), which was also approved by a majority of our shareholders at our annual shareholder meeting held on September 2, 2008.  All of our employees, officers, and directors, and those of our consultants and advisors who (i) are natural persons and (ii) provide bona fide services to the Company not connected to a capital raising transaction or the promotion or creation of a market for our securities are eligible to be granted options or restricted stock awards (each, an “Award”) under the Plan.  The Plan is administered by our board, and the board establishes certain terms of option awards, including the exercise price and duration, in the applicable option agreement.  Awards may be made under the Plan for up to 1,500,000 shares of our common stock, and the maximum number of shares of common stock with respect to which Awards may be granted to any participant under the Plan is 500,000 shares of common stock.  The Plan allows for adjustments for changes in common stock and certain other events, including, but not limited to, any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off, any distribution to holders of common stock other than a normal cash dividend, and liquidation or dissolution.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the results of operations and financial condition of Perfectenergy International Limited for the eleven months ended September 30, 2011 and the fiscal year ended October 31, 2010 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report.  Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions.  Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Cautionary Statement Regarding Forward-Looking Information and Business sections in this report.  We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

12
 

 

OVERVIEW

 

We were originally incorporated on February 25, 2005 in the State of Nevada under our former name “Crestview Development Corporation.”  As a result of a share exchange transaction that closed on August 8, 2007, our business is the research, development, manufacturing, and sale of solar cells, solar modules, and photovoltaic (“PV”) systems through our direct and indirect wholly owned subsidiaries.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

This discussion and analysis are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods.  On an ongoing basis, we evaluate our estimates and assumptions.  We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

We changed our fiscal year end from October 31 to September 30 on May 4, 2011. In view of this change, the financial statements presented herein include the statements of operations and cash flows for the eleven month period ended September 30, 2011 (the transition period), and the twelve-month fiscal year ended October 31, 2010, which represents the period of the prior year most comparable to the transition period. There are no material factors or trends that affect the comparability of the periods.

 

RESULTS OF OPERATIONS

 

Comparison of Eleven Months Ended September 30, 2011 and Fiscal Year ended October 31, 2010

  

The following table sets forth the results of our operations for the eleven months ended September 30, 2011 and the fiscal year ended October 31, 2010.

 

   Eleven Months
Ended
September 30,
2011
   % of
Revenues
   Fiscal Year
Ended
October 31,
2010
   % of
Revenues
 
REVENUES  $50,327,548    100%  $74,601,090    100%
                     
COST OF REVENUES   52,658,649    104.6%   67,234,057    90.1%
                     
GROSS PROFIT   (2,331,101)   (4.6)%   7,367,033    9.9%
                     
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES   5,884,548    11.7%   9,635,261    12.9%
                     
LOSS FROM OPERATIONS   (8,215,649)   (16.3)%   (2,268,228)   (3.0)%
                     
OTHER INCOME, NET   612,039    1.2%   79,480    0.1%
                     
LOSS BEFORE PROVISION FOR INCOME TAXES   (7,603,610)   (15.1)%   (2,188,748)   (2.9)%
                     
PROVISION FOR INCOME TAXES   23,567    0.1%   539,350    0.7%
                     
NET LOSS   (7,627,177)   (15.2)%   (2,728,098)   (3.6)%
                     
OTHER COMPREHENSIVE INCOME                    
                     
Foreign currency translation adjustment   501,079    1.0%   164,540    0.2%
                     
COMPREHENSIVE LOSS   (7,126,098)   (14.2)%   (2,563,558)   (3.4)%

 

13
 

 

REVENUES.   During the eleven months ended September 30, 2011, we had revenues of $50.3 million as compared to revenues of $74.6 million during the fiscal year ended October 31, 2010, a decrease of approximately 33%. On an average monthly basis, the volume of shipment of PV modules increased by 10% between the transition period and in the year ended October 31, 2010. This, however, was offset by lower sales prices for our products, particularly in Europe.

 

COST OF REVENUES.  Cost of revenues for the eleven months ended September 30, 2011 was $52.6 million as compared to $67.2 million for the fiscal year ended October 31, 2010, a decrease of approximately 22%.   The decrease is due to a reduction by more than 50% in the cost of silicon wafers/cells compared to the same period last year. In addition, we made a Net Realizable Value provision of $1.2 million against our inventory as of September 30, 2011. We calculated Net Realizable Value based on the difference between the current market value of solar products, and the book value of our inventory.

 

GROSS PROFIT.  Our negative gross margin for the eleven months ended September 30, 2011 was $2.3 million as compared to a gross profit of $7.4 million for the fiscal year ended October 31, 2010, representing gross margins of approximately (4.6)% and 9.9%, respectively.  The decrease in gross profit was primarily due to significant reductions in the average module sales prices as a result of oversupply in the market, and the sharp reduction in European subsidies. These factors led to a decrease in our per-unit sales prices, which caused a decrease in our overall revenue, even though we sold more modules. During this period, our input costs, primarily in the form of silicon wafers/cells, also sharply decreased in this period, however, the decrease in input costs was not enough to entirely offset the decrease in per unit sales price, and at times our per unit sale price was below average cost. Accordingly, we experienced a decrease in gross profit.

 

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES.  Selling, general, and administrative expenses totaled $5.9 million for the eleven months ended September 30, 2011 as compared to $9.6 million for the fiscal year ended October 31, 2010, a decrease of approximately 39%.  On an average monthly basis, we maintained low spending on daily operational expenses at similar levels between the transition period and the year ended October 31, 2010. The decrease in operating expenses is attributable to decreases of shipping and transportation costs by $1.2 million and a decrease in stock option expenses to employees by $1.2 million. We made a one-time $2.1 million bad debts provision last year against other receivables compared with a $0.2 million bad debts provision made in the transition period.

 

OTHER INCOME. Other income for the eleven months ended September 30, 2011 consisted of non-operating income, interest income, and exchange gains in current accounts.  We had other income of $612,000 for the eleven months ended September 30, 2011 as compared to $79,480 for the fiscal year ended October 31, 2010.  Gains relating to currency translation were $502,000 between the two periods.

 

NET LOSS.  We had net loss of $7.6 million for the eleven months ended September 30, 2011 as compared to net loss of $2.7 million for the fiscal year ended October 31, 2010.  The increase in net loss is primarily attributable to negative gross margins from sales revenue due to reduced sales prices in the European market.

 

LIQUIDITY

 

Cash Flows

 

Eleven Months Ended September 30, 2011

 

Net cash provided by operating activities was $0.3 million for the eleven months ended September 30, 2011, while net cash used in operating activities was $1.1 million for the fiscal year ended October 31, 2010.  The increase in net cash flow from operating activities was mainly due to an increase in accounts payable balances offset by increased inventory and receivables. These changes were mainly due to additional business activities mostly carried out by our German subsidiary since March and April 2011. These business activities involved direct contracting to PV module manufacturers in China and re-sales to European customers.

 

14
 

 

Net cash used in investing activities was $0.1 million for the eleven months ended September 30, 2011, while net cash used in investing activities was $0.5 million for the fiscal year ended October 31, 2010.  During this period we continued to control our equipment-related costs.

 

There were no financing activities during the eleven months ended September 30, 2011 and the fiscal year ended October 31, 2010.  

 

CAPITAL RESOURCES

 

As of September 30, 2011, we had cash and cash equivalents of $2.6 million as compared to $2.4 million at October 31, 2010. We will require a significant amount of cash to fund expansion of our operations. Despite a reduction in revenues in the eleven months ended September 30, 2011, management projects continued growth of our business in future periods. Specifically, while the PV market has suffered a major setback over the past year, we believe the longer term trends involving higher energy prices from competing sources, growing environmental concerns and public interest in clean energy production, and falling input prices for solar components and materials, remain intact. Reduced revenue and profitability, which under present facts and circumstances management believes are temporary, have led us to revise our plans for capital spending until we achieve greater profitability or obtain access to capital on terms attractive to us. Further changes in our operating plans, an increase in our inventory, increased expenses, or other events, may prompt us to seek additional equity or debt financing. If we are unable to successfully generate enough sales to cover our costs, we only have limited cash resources to bear operating losses; meanwhile, we will need to continue to generate new sales while controlling our costs.

 

We have incurred recurring operating losses and had an accumulated deficit of $8.7 million as of September 30, 2011. Notwithstanding the foregoing, we had negative working capital of $2 million as of September 30, 2011. Despite negative cash flow positions, our management anticipates that we will generate sufficient cash flows to fund our operations for the next twelve months by increasing the profit margins of our product sales and strengthening cash flow support from our business partners. We have credit lines in the total amount of RMB30 million (equivalent to US $4.7 million) from one of our major export agents to fund future operations. If future sales do not meet our forecasts, we may be required to fund operations by raising additional capital or seek external financing. As such, our ability to achieve our business plan is primarily dependent upon our ability to grow our planned level of operations and/or obtain sufficient additional capital at acceptable costs. With respect to these objectives, we cannot provide any assurance that we will succeed. If events or circumstances occur such that we are unable to or do not meet our operating plan as expected and/or do not secure additional financing, we may be required to significantly curtail or cease operations. Our history of operating losses and lack of binding financing commitments, among other things, raise substantial doubt as to our ability to continue as a going concern.

 

We do not have any other binding commitments for, or readily available sources of, additional financing.  We may require additional cash due to changes in business conditions or other future developments, including any investments or acquisitions we may decide to pursue.  To the extent it becomes necessary to raise additional cash in the future, we may seek to raise it through the sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or loans, issuance of common stock, or a combination of the foregoing.  We cannot provide any assurances that we will be able to secure the additional cash or working capital we may require to continue our operations, either now or in the future.

   

OFF-BALANCE SHEET ARRANGEMENTS

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.  We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity, or market risk support to such entity.  We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk, or credit support to us or engages in leasing, hedging, or research and development services with us.

 

CONTRACTUAL OBLIGATIONS

 

We have certain fixed contractual obligations and commitments that include future estimated payments.  Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates.  We cannot provide certainty regarding the timing and amounts of payments.  We present in the table below a summary of the most significant assumptions used in our determination of amounts in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

 

15
 

 

The following table summarizes our contractual obligations as of September 30, 2011, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

   Payments Due by Period 
(in thousands)  Total   Less than
1 year
   1-3 Years   3-5 Years   5 Years + 
Contractual Obligations:                         
Operating Leases (1)     $1,677   $382   $733   $561   $ 
Total Contractual Obligations:  $1,677   $382   $733   $561   $ 

 

 

(1) Operating lease amounts include the lease for our main office and manufacturing facility.  All leases are on a fixed repayment basis.  None of the leases includes contingent rentals.

 

Item 8. Financial Statements and Supplementary Data

 

See "Index to Financial Statements" beginning on page F-1 below for our financial statements included in this transition report on Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

There have been no changes in or disagreements with our independent auditors, BDO China Shu Lun Pan Certified Public Accountants LLP (1818).

 

Item 9A. Controls and Procedures

 

Disclosure Controls and Procedures

 

Regulations under the Securities Exchange Act of 1934, as amended, require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms.  Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal accounting and financial officer) carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on those evaluations, as of September 30, 2011, our Chief Executive Officer and Chief Financial Officer believe that:

 

  (i) our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure; and

 

  (ii) our disclosure controls and procedures are ineffective due to the material weaknesses described below under “Management’s annual report on internal control over financial reporting.”

 

Notwithstanding management’s assessment that our internal control over financial reporting was ineffective as of September 30, 2011 due to the material weaknesses described below under “Management’s annual report on internal control over financial reporting,” we believe that the consolidated financial statements included in this report correctly present our financial condition, results of operations, and cash flows for the fiscal years covered by such statements in all material respects.

 

16
 

 

Internal Control over Financial Reporting

 

(a)           Management’s annual report on internal control over financial reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive officer and principal financial officer and effected by the Company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

  · Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

  · Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

  · Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2011 and 2010.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.

 

Based on that evaluation, our management concluded that our internal control over financial reporting is not effective, as of September 30, 2011 and 2010. Management identified the following material weaknesses in our financial statement reporting process during the transition period as well as during the fiscal year ended October 31, 2010:

 

(i)Lack of sufficient communications between our headquarters in Shanghai and our German subsidiary for timely resolutions on daily accounting issues and deficiencies in controls of financial reporting process; and
   
(ii)Lack of sufficient U.S. GAAP knowledge including experience and skills for the accurate accounting of different business issues.

 

These material weaknesses were also present as at September 30, 2010.

 

We have taken the following measures to remediate these material weaknesses:

 

(i)Developed a rigorous process of communications between all persons involved in the financial reporting process and improved the quality of reviewing of financial statements;

 

(ii)Hired and outsourced 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 financial reporting disclosure pursuant to SEC rules; and

 

(iii)Provided additional training and cross-training to our existing personnel, including in the areas of new and emerging accounting standards.

 

We plan on continuing to identify and implement remedial measures.

 

(b)           Changes in internal control over financial reporting

 

During our last fourth fiscal quarter, we implemented the measures described in (i) through (iii) above in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) or Rule15d-15(d) promulgated under the Exchange Act, which have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

17
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Current Management

 

Set forth below is a summary of our executive officers’ and directors’ business experience for the past 5 years. The experience and background of each of the directors, as summarized below, were significant factors in their previously being nominated as directors of the Company.

 

Wennan Li, 45, has been our Chairman, Chief Executive Officer, and President since August 8, 2007.  His current term as CEO and President ends on September 1, 2012.  Mr. Li is up for re-election to the Board at our 2012 annual shareholder meeting. Mr. Li has extensive experience with technological development, production management, and international marketing in the PV industry.  Mr. Li is the founder, director, and general manager of our subsidiary, Perfectenergy Shanghai, since August 2005.  From November 2002 to August 2005, Mr. Li was the Vice President of Topsolar Shanghai Limited, a leading PV company in China.  He has also served as a PV industry expert advising the Shanghai government in matters relating to the PV industry.  Mr. Li received a master’s degree in 1991 from the Management School of Shanghai Jiaotong University and a bachelor’s degree in 1988 from Xi’an Jiaotong University in Electrical Automation.

 

Min Fan, 46, has been a director since August 25, 2007, and he is up for re-election to the Board at our 2012 annual shareholder meeting.  Mr. Fan is one of the co-founders of Ctrip.com International Ltd. (Nasdaq: CTRP), a Chinese-based travel services business.  He has served as CTRP’s Chief Executive Officer since January 2006 and as a director since October 2006.  He also served as CTRP’s Chief Operating Officer from November 2004 to January 2006, and as CTRP’s Executive Vice President from 2000 to November 2004.  Mr. Fan is also a founding shareholder of Home Inns & Hotels Management, Inc. (Nasdaq: HMIN), an economy hotel developer, operator, and franchisor.  Mr. Fan obtained a master’s and bachelor’s degree from Shanghai Jiao Tong University, and studied at the Lausanne Hotel Management School of Switzerland in 1995.

 

Yunxia Yang, 54, has been a director since August 25, 2007, and she is up for re-election to the Board at our 2012 annual shareholder meeting.  Ms. Yang is one of China’s leading solar energy researchers with extensive experience in solar products development and has been a professor in the School of Materials Science and Engineering at the East China University of Science & Technology since 1987.  Ms. Yang received her bachelor’s degree in 1982 and a master’s degree in 1987 in the study of Materials, both from East China University of Science & Technology.

 

Adam Roseman, 33, has been a director since August 25, 2007, and he is up for re-election to the Board at our 2012 annual shareholder meeting.   Mr. Roseman has extensive experience in finance and management.  His principal employment over the past 5 years has been as the Chief Executive Officer of ARC China, Inc. and ARC Investment Partners, LLC, each of which he is the founder. Previously, Mr. Roseman was an investment banker in various sectors at Lehman Brothers, Piper Jaffray, and Goldman Sachs.  During the past five years, Mr. Roseman has also sat on the Boards of Directors of Big Brothers Big Sisters Los Angeles and Big Brothers Big Sisters Orange County. He has also served as a director of ARC China Investment Funds, an open-ended Luxembourg-registered umbrella-structure fund, since 2009, and a director of ARC Semper China Investment Funds, Ltd., a closed-end investment company, since 2008.

 

Yajun Wu, 52, has been a director since November 20, 2007, and he is up for re-election to the Board at our 2012 annual shareholder meeting.  Mr. Wu serves as the Executive Vice President and Deputy Chief Financial Officer of Alcatel Shanghai Bell Co., Ltd. in Shanghai, a position that he has held since February 2003.  From July 2002 to February 2003, he was Alcatel’s Director of Credit Management.  From March 1999 to July 2002, Mr. Wu served as Vice President and Deputy Chief Financial Officer of Shanghai Bell Alcatel Mobile Communication System Co., Ltd.

 

Family Relationships

 

There are no family relationships between or among any of the current directors, executive officers, or persons nominated or charged by the Company to become directors or executive officers.

 

18
 

 

Involvement in Certain Legal Proceedings

 

None of our directors or executive officers has, during the past ten years:

 

    Had any petition under the federal bankruptcy laws or any state insolvency law filed by or against, or had a receiver, fiscal agent, or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

 

    Been convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

    Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

 

  (i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

 

  (ii) Engaging in any type of business practice; or

 

  (iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;

 

    Been the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any federal or state authority barring, suspending, or otherwise limiting for more than 60 days the right of such person to engage in any activity described in (i) above, or to be associated with persons engaged in any such activity;

 

    Been found by a court of competent jurisdiction in a civil action or by the SEC to have violated any federal or state securities law, where the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated; or

 

    Been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, where the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended, or vacated;

 

    Been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

 

  (i) Any federal or state securities or commodities law or regulation; or

 

  (ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

 

  (iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

    Been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

19
 

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Exchange Act requires our executive officers, directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership, and annual reports concerning their ownership of our common shares and other equity securities on Forms 3, 4, and 5, respectively.  Executive officers, directors, and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.  Based on a review of the copies of such forms received by us, and to the best of our knowledge, no required reports during the eleven months ended September 30, 2011 were untimely filed by any executive officer, director, or greater than 10% shareholder other than the report described below:

 

·A Form 3 for Hui Zheng, our Chief Operating Officer from July 4, 2011 to October 8, 2011, was untimely filed on July 22, 2011.

   

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to our executive officers, directors, and employees, which code is attached to our annual report on Form 10-K filed with the SEC on January 26, 2009.  A copy of our code of ethics will also be provided to any person without charge upon written request sent to us at our offices.

 

Material Changes to the Procedures by which Security Holders may Recommend Nominees to the Board

 

 There have been no material changes to the procedures by which our security holders may recommend nominees to the Board of Directors.

 

Audit Committee; Audit Committee Financial Expert

 

We formed an Audit Committee of our board of directors and approved the charter for such committee on July 29, 2008.  The members of our Audit Committee are Yajun Wu, Adam Roseman, and Yunxia Yang.  Mr. Wu is the Audit Committee’s Chairman, and he is an independent member of the board, as defined by the SEC and the Nasdaq Listing Rules.  The board of directors has determined that Mr. Wu is also an “audit committee financial expert” as defined by SEC rules.

 

Item 11. Executive Compensation

 

The following summary compensation table indicates the cash and non-cash compensation earned during the eleven months ended September 30, 2011 and October 30, 2010 by (i) our Chief Executive Officer (principal executive officer), (ii) our Chief Financial Officer (principal financial officer), (iii) the three most highly compensated executive officers other than our CEO and CFO who were serving as executive officers at the end of our last completed fiscal year whose total compensation exceeded $100,000 during such fiscal year ends, and (iv) up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of our last completed fiscal year whose total compensation exceeded $100,000 during such fiscal year ends.  The compensation amounts reflected in the table below are expressed in U.S. Dollars based on the interbank exchange rate of RMB6.4 for each 1.00 U.S. Dollar, on October 31, 2010.

  

SUMMARY COMPENSATION TABLE

 

Name and
principal
position
  Year   Salary   Bonus   Stock
Awards
   Option
Awards
(1)
   Non-Equity
Incentive
Compensa-
tion
   Non-qualified
Deferred
Compensa-
tion
Earnings
   All Other
Compen-
sation
   Total 
Wennan Li,   2011   $116,800   $34,848   $   $   $   $   $   $151,648 
CEO   2010   $115,636   $34,848      $437,238(2)           $587,722 
                                              
Xiaolin Zhuang,   2011   $94,500   $21,969            $      $116,469 
CFO (3)   2010   $96,364   $21,969      $110,367(4)           $228,700 
                                              
Diping Zhou,   2011   $51,500                      $51,500 
VP of Operations (5)   2010   $96,364   $21,969      $211,158(6)           $329,491 

 

20
 

 

 

(1)Reflects dollar amount expensed by the Company during the applicable fiscal year for financial statement reporting purposes pursuant to FASB ASC Topic 718. The aggregate grant date fair value computed in accordance with FASB ASC Topic 718, and to then expense that value over the service period over which the options become exercisable (vested).  As a general rule, for time in service based options, the Company will immediately expense any option or portion thereof that is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. 

 

(2)On April 7, 2010, Mr. Li was granted options to purchase an aggregate 50,000 shares of our common stock at $0.20 per share, vesting at 33.33% per year.  These options expire on April 7, 2020.  The shares were valued at the market price on the date of grant.  The estimated fair value of stock options granted was $0.19 per share.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 170%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 2.98%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date. 

 

On August 8, 2007, Mr. Li was granted options to purchase an aggregate 407,274 shares of our common stock at $2.80 per share, vesting at 33.33% per year.  These options expire on August 8, 2017.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 4.5%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

(3)Mr. Zhuang was our Chief Financial Officer until April 1, 2012.

 

(4)On April 7, 2010, Mr. Zhuang was granted options to purchase an aggregate 30,000 shares of our common stock at $0.20 per share, vesting at 33.33% per year.  These options expire on April 7, 2020.  The shares were valued at the market price on the date of grant.  The estimated fair value of stock options granted was $0.19 per share.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 170%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 2.98%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

On February 1, 2008, Mr. Zhuang was granted options to purchase an aggregate 125,000 shares of our common stock at $4.08 per share, vesting at 33.33% per year.  These options expire on February 1, 2013.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 2.36%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 5 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

(5)Ms. Zhou was our VP of Operations until April 1, 2011.

 

(6)On April 7, 2010, Ms. Zhou was granted options to purchase an aggregate 30,000 shares of our common stock at $0.20 per share, vesting at 33.33% per year.  These options expire on April 7, 2020.  The shares were valued at the market price on the date of grant.  The estimated fair value of stock options granted was $0.19 per share.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 170%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 2.98%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

21
 

 

On August 8, 2007, Ms. Zhou was granted options to purchase an aggregate 196,488 shares of our common stock at $2.80 per share, vesting at 33.33% per year.  These options expire on August 8, 2017.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 4.5%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

Grants of Plan-Based Awards

 

There were no plan-based awards granted during the year ended September 30, 2011 to any named executive officer.

 

Employment Agreements

 

On March 25, 2011, our Board ratified and approved an increase in the monthly base salary for Wennan (Jack) Li, our Chief Executive Officer, to RMB68,000 (approximately US$10,382), beginning November 1, 2010.  Mr. Li’s bonus compensation arrangement for the current fiscal year, was also revised so that Mr. Li will receive a portion of performance-based bonus on the net profits realized by the Registrant during its current fiscal year, with a minimum guaranteed aggregate bonus payment of US$75,000 and a maximum of US$250,000.  We signed a salary adjustment letter on March 25, 2011 memorializing these terms.  These compensation terms replace the compensation terms of the previous employment agreement with Mr. Li, which became effective on September 2, 2008 and the compensation terms of which were amended on April 7, 2010.  The employment agreement expires on September 1, 2012.

 

Outstanding Equity Awards as of September 30, 2011  

 

 

   Option Awards   Stock Awards 
Name  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
   Option
Exercise
Price ($)
   Option
Expiration
Date
   Number
of Shares
or Units
of Stock
That Have
Not
Vested (#)
  

Market  

Value of

Shares or

Units of

Stock

That

Have Not
Vested ($)

   Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units, or
Other Rights
That
Have Not
Vested (#)
   Equity
Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units,
or Other
Rights That
Have Not
Vested (#)
 
                                     
Wennan Li  407,274(1)  0(1)      $2.80    8/8/17                 
                                              
Wennan Li   16,667(3)   33,333(3)      $0.20    4/7/20                 
                                              
Xiaolin Zhuang   83,333(2)   41,667(2)      $4.08    2/1/13                 
                                              
Xiaolin Zhuang   10,000(3)   20,000(3)      $0.20    4/7/20                 
                                              
Diping Zhou   196,488(1)   0(1)      $2.80    8/8/17                 
                                              
Diping Zhou   10,000(3)   20,000(3)      $0.20    4/7/20                 

 

22
 

 

 

(1)33.33% of these options vested on August 8, 2008, August 8, 2009, and August 8, 2010.
(2)33.33% of these options vested on February 1, 2009, February 1, 2010, and February 1, 2011.
(3)33.33% of these options vest(ed) on April 7, 2011, April 7, 2012, and April 7, 2013.

 

Director Compensation

 

The table below provides compensation information for our directors during the eleven months ended September 30, 2011.

 

Name  Fees
Earned or
Paid in
Cash ($)
   Stock
Awards ($)
   Option
Awards ($)
(1)
  

Non-Equity
Incentive Plan
Compensation ($)

   Non-Qualified
Deferred
Compensation
Earnings ($)
   All Other
Compensation
($)
   Total ($) 
                             
Wennan Li (2)  $   $   $   $   $   $   $ 
                                    
Min Fan  $17,200   $   $(3)  $   $   $   $17,200 
                                    
Yunxia Yang  $17,200   $   $(4)  $   $   $   $17,200 
                                    
Adam Roseman  $60,000   $   $(5)  $   $   $   $60,000 
                                    
Yajun Wu  $17,200   $   $(6)  $   $   $   $17,200 

 

(1)Reflects dollar amount expensed by the Company during the applicable fiscal year for financial statement reporting purposes pursuant to FASB ASC Topic 718. The aggregate grant date fair value computed in accordance with FASB ASC Topic 718, and to then expense that value over the service period over which the options become exercisable (vested).  As a general rule, for time in service based options, the Company will immediately expense any option or portion thereof that is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option.

 

(2)Mr. Li’s compensation as a director is reflected in the table titled “Summary Compensation Table” above.

 

(3)Mr. Fan had options to purchase an aggregate 80,000 shares of our common stock outstanding as of September 30, 2011.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 4.5%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

(4)Ms. Yang had options to purchase an aggregate 80,000 shares of our common stock outstanding as of September 30, 2011.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 4.5%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

(5)Mr. Roseman had options to purchase an aggregate 240,625 shares of our common stock outstanding as of September 30, 2011.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 4.5%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

(6)Mr. Wu had options to purchase an aggregate 80,000 shares of our common stock outstanding as of September 30, 2011.  We used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices, and expiration dates of the instruments and using an average risk-free rate of 4.5%.  Because we do not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of 10 years of the option.  This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date.

 

23
 

 

We compensate Min Fan, Yunxia Yang, and Yajun Wu with RMB120,000 (approximately $19,000) per annum each for their services as a director in 2011.  On November 29, 2007, Mr. Fan, Ms. Yang, and Mr. Wu each received options to purchase 50,000 shares of our common stock at $2.80 per share, of which 33.33% vested on the first, second, and third year anniversary of the grant date of such options.

 

We are party to a written three-year agreement with Adam Roseman that expires on November 12, 2013 for his services as a director, under which he received $5,000 per month as compensation for his services.  On November 29, 2007, Mr. Roseman received options to purchase 250,000 shares of our common stock at $2.80 per share, of which 30% vested on the grant date and 70% vests on a monthly basis over a period of two years from the grant date.  Mr. Roseman is entitled to certain travel and administrative expenses in connection with his services as a director and is provided liability insurance.

 

Compensation Committee Interlocks and Insider Participation

 

During the eleven months ended September 30, 2011, our Compensation Committee was comprised of Min Fan, Wennan Li, and Yunxia Yang.  Mr. Fan serves as the Chairman of the Compensation Committee.  During the eleven months ended September 30, 2011, Mr. Li also served as an executive officer of the Company.

 

During the eleven months ended September 30, 2011:

 

(i)none of our executive officers served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on our Compensation Committee;

 

(ii)none of our executive officers served as a director of another entity, one of whose executive officers served on our Compensation Committee; and

 

(iii)none of our executive officers served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a member of our Board of Directors.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

Securities Authorized for Issuance under Equity Compensation Plans

 

Please see the section titled “Securities Authorized for Issuance under Equity Compensation Plans or Individual Compensation Arrangements” under Item 5 above.

 

Security Ownership of Certain Beneficial Owners and Management

 

The following table sets forth information regarding the beneficial ownership of our common stock as of April 24, 2012 for each of our directors and officers; all directors and officers as a group; and each person known by us to beneficially own five percent or more of our common stock.

 

Beneficial ownership is determined in accordance with SEC rules.  Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the shareholder’s name.  Unless otherwise indicated, the address of each beneficial owner listed below is No. 479 You Dong Road, Xinzhuang Town, Shanghai 201100, People’s Republic of China.

 

24
 

 

Name of Beneficial Owner and Address  Number of Shares of
Common Stock Beneficially
Owned (1)
   Percent of Shares of
Common Stock
Beneficially Owned (1)(2)
 
Executive Officers and Directors:          
Wennan Li   6,819,160(3)   22.69%
Min Fan   4,127,600(4)   13.90%
Yunxia Yang   4,127,600(5)   13.90%
Adam Roseman (6)   366,391(6)   1.23%
Yajun Wu   60,000(7)   * 
           
All Executive Officers and Directors as a Group (5 persons)   15,635,751    51.82%

 

 

* Less than 1%

 

(1)Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares.  Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares).  In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided.  In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.  As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership or voting power with respect to the number of shares of common stock actually outstanding.

 

(2)The percentage of class beneficially owned is based on 29,626,916 shares of common stock outstanding on April 24, 2012.

 

(3)407,274 of these shares represent the number of shares of common stock that Wennan Li has the right to acquire upon exercise of an option granted on August 8, 2007. 16,667 of these shares represent the number of shares of common stock that he has the right to acquire upon exercise of an option granted on April 7, 2010.

 

(4)50,000 of these shares represent the number of shares of common stock that Min Fan has the right to acquire upon exercise of an option granted on August 8, 2007. 10,000 of these shares represent the number of shares of common stock he has the right to acquire upon exercise of an option granted on April 7, 2010.

 

(5)50,000 of these shares represent the number of shares of common stock that Yunxia Yang has the right to acquire upon exercise of an option granted on August 8, 2007. 10,000 of these shares represent the number of shares of common stock she has the right to acquire upon exercise of an option granted on April 7, 2010.

 

(6)240,625 of these shares represent the number of shares of common stock that Adam Roseman has the right to acquire upon exercise of an option granted on August 8, 2007.  123,766 of these shares are held in the name of Tapirdo Enterprises, LLC, of which Mr. Roseman is the manager and sole member. 2,000 of these shares are held in the name of ARC Investment Partners, LLC, of which Mr. Roseman is the sole officer and director. His address is 182 Chang Shu Road, Xu Hui District, Shanghai 200031, People’s Republic of China.

 

(7)50,000 of these shares represent the number of shares of common stock that Yajun Wu has the right to acquire upon exercise of an option granted on August 8, 2007. 10,000 of these shares represent the number of shares of common stock that he has the right to acquire upon exercise of an option granted on April 7, 2010.

  

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Related Party Transactions

 

There are no related party transactions to report.

 

Director Independence

 

Our board of directors has determined that it currently has 4 members who qualify as “independent” as the term is used in Item 407 of Regulation S-K as promulgated by the SEC and Nasdaq’s Marketplace Rule 5605(a)(2).  The independent directors are Min Fan, Yunxia Yang, Adam Roseman, and Yajun Wu.  All of the members of our Audit Committee qualify as independent.  All of the members of each of our Nominating and Compensation Committees qualify as independent, except for Wennan Li.

 

25
 

 

Item 14. Principal Accounting Fees and Services

 

Frazer Frost, LLP served as our independent registered public accounting firm for the year ended October 31, 2010 and for a portion of our eleven months ended September 30, 2011 and from November 1, 2010 through April 29, 2011. Starting on April 30, 2011, BDO China Shu Lun Pan Certified Public Accountants LLP (1818) served as our independent registered public accounting firm for the rest of our transition period. The following table shows the fees that were billed for audit and other services provided by these firms for the periods indicated:

 

   Frazer Frost, LLP   BDO China Shu Lun
Pan Certified Public
Accountants LLP (1818)
 
   Fiscal Year ended
October 31, 2010
   November 1,
2010 through 
April 29, 2011
   April 30, 2011 through
September 30, 2011
 
Audit Fees (1)  $175,000   $20,000   $156,250 
Audit-Related Fees (2)     $3,600    
Tax Fees (3)  $12,000   $12,000    
All Other Fees (4)         
Total  $187,000   $35,600   $156,250 

 

 

 (1)       Audit Fees – This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided by independent auditors in connection with the engagement for fiscal years.  This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

 

(2)       Audit-Related Fees – This category consists of assurance and related services by our independent auditors that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under "Audit Fees."  The services for the fees disclosed under this category include consultation regarding our correspondence with the SEC.

 

(3)       Tax Fees – This category consists of professional services rendered by our independent auditors for tax compliance and tax advice.  The services for the fees disclosed under this category include tax return preparation and technical tax advice.

 

(4)       All Other Fees – This category consists of fees for other miscellaneous items.

 

Pre-Approval Policies and Procedures of the Audit Committee

 

Our Audit Committee approves the engagement of our independent auditors and is also required to pre-approve all audit and non-audit expenses.  During the eleven months ended September 30, 2011, 100% of our audit and non-audit fees were pre-approved by the Audit Committee.

 

26
 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

Exhibit Table

 

Exh. No.   Description
3.1   Articles of Incorporation (5)
3.2   Bylaws (1)
10.1   Premises Lease Agreement (English translation) (2)
10.2   Lease Agreement between Shanghai Changlong Industry Co. and Perfectenergy Solar-Tech (Shanghai) Ltd., dated March 11, 2008  (English translation) (3)
10.3   Leasing Contract between Tannenweg 10 Vermögensverwaltung GbR and Perfectenergy GmbH, dated October 3, 2007 (English translation) (3)
10.4   Addendum of the Tenancy Contract between Tannenweg 10 Vermögensverwaltung GbR and Perfectenergy GmbH, dated January 25, 2008 (English translation) (3)
10.5   Employment Agreement between the Company and Wennan Li, dated January 16, 2009 and effective September 2, 2008 (3)
10.6   Employment Agreement between the Company and Diping Zhou, dated January 16, 2009 and effective September 2, 2008 (3)
10.7   Long Term Supply Contract between Perfectenergy (Shanghai) Co., Ltd. and Chengdu Jiayang Silicon Materials Technology Co., Ltd., dated January 8, 2010 (English translation) (4)  
10.8   Salary Adjustment Letter for Wennan (Jack) Li, dated March 25, 2011(6)
10.9   Salary Adjustment Letter for Xiaolin (Edward) Zhuang, dated March 25, 2011(6)
10.10   Employment Agreement between Perfectenergy International Limited and Xiaolin (Edward) Zhuang, dated March 25, 2011(6)
10.11   Salary Adjustment Letter for Diping Zhou, dated March 25, 2011(6)
10.12   Director Agreement with Adam Roseman, dated February 11, 2011 (8)
10.13   Employment Contract between Perfectenergy (Shanghai) Limited and Eric Hui Zheng, dated July 4, 2011 (English translation) (9)
10.14   Consulting Services Agreement between registrant and Xiaolin Zhuang, dated March 19, 2012 and effective April 1, 2012 (10)
14.1   Code of Business Conduct and Ethics (3)
16.1   Letter from Frazer Frost, LLP to the U.S. Securities and Exchange Commission, dated May 4, 2011 (7)
21.1   List of Subsidiaries (3)
31.1   Section 302 Certificate of Principal Executive Officer *
31.2   Section 302 Certificate of Principal Financial and Accounting Officer *
32.1   Section 906 Certificate of Principal Executive Officer and Principal Financial and Accounting Officer *
     
101.INS   XBRL Instance Document *
101.SCH   XBRL Taxonomy Extension Schema *
101.CAL   XBRL Taxonomy Extension Calculation Linkbase *
101.DEF   XBRL Taxonomy Extension Definition Linkbase *
101.LAB   XBRL Taxonomy Extension Label Linkbase *
101.PRE   XBRL Taxonomy Extension Presentation Linkbase *

 

 

* Filed herewith.

 

(1) Filed on December 8, 2005 as an exhibit to the Company’s Registration Statement on Form SB-2 and incorporated herein by reference.
(2)   Filed on November 23, 2007 as an exhibit to the Company’s Amendment No. 1 to Registration Statement on Form SB-2 and incorporated herein by reference.
(3) Filed on January 26, 2009 as an exhibit to our Annual Report on Form 10-K and incorporated herein by reference.
(4) Filed on January 29, 2010 as an exhibit to our Annual Report on Form 10-K and incorporated herein by reference.
(5) Filed on June 14, 2010 as an exhibit to our Quarterly Report on Form 10-Q and incorporated herein by reference. 
(6) Filed on March 30, 2011 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference.
   
(7) Filed on May 4, 2011 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference.
(8) Filed on June 14, 2011 as an exhibit to our Quarterly Report on Form 10-Q and incorporated herein by reference.
(9) Filed on July 8, 2011 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference.
(10) Filed on April 5, 2012 as an exhibit to our Current Report on Form 8-K and incorporated herein by reference.

 

27
 

  

INDEX TO FINANCIAL STATEMENTS

 

PERFECTENERGY INTERNATIONAL LIMITED

CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2011, and October 31, 2010

 

Index to Consolidated Financial Statements

 

    Pages  
       
Reports of Independent Registered Public Accounting Firms     F-2  
         
Consolidated Balance Sheets as of September 30, 2011 and October 31, 2010     F-4  
         
Consolidated Statements of Operations and Comprehensive Loss for the Eleven  Months Ended September 30, 2011 and fiscal year ended October 31, 2010     F-5  
         
Consolidated Statements of Shareholders’ Equity for the Eleven Months Ended September 30, 2011 and fiscal year ended October 31, 2010     F-6  
         
Consolidated Statements of Cash Flows for the Eleven Months Ended September 30, 2011 and fiscal year ended October 31, 2010     F-7  
         
Notes to Consolidated Financial Statements for the Eleven Months Ended September 30, 2011 and fiscal year ended October 31, 2010     F-8  

  

F-1
 

  

To the Board of Directors and Shareholders of

Perfectenergy International Limited

 

We have audited the accompanying consolidated balance sheet of Perfectenergy International Limited (the “Company”) as of September 30, 2011 and the related consolidated statements of operation and comprehensive loss, shareholders’ equity, and cash flows for the eleven months ended September 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2011, and the results of its operations and its cash flows in the eleven months ended September 30, 2011 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has negative working capital. These conditions, among other things, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements for the period ended September 30, 2011, do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ BDO China Shu Lun Pan Certified Public Accountants LLP

 

BDO China Shu Lun Pan Certified Public Accountants LLP

Shanghai, the People’s Republic of China

      

July 27, 2012

 

F-2
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of

Perfectenergy International Ltd. and subsidiaries

 

We have audited the accompanying consolidated balance sheet of Perfectenergy International Limited and subsidiaries as of October 31, 2010 and 2009 and the related consolidated statements of operations and other comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended October 31, 2010.  Perfectenergy International Ltd’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Perfectenergy International Ltd. and subsidiaries as of October 31, 2010 and 2009, and the results of their operations and their cash flows for the years in the two-year period ended October 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

  

/s/ Frazer Frost, LLP

 

Brea, California

January 31, 2011

 

F-3
 

 

PERFECTENERGY INTERNATIONAL LIMITED

 

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2011 AND OCTOBER 31, 2010

 

   September 30,
2011
   October 31,
2010
 
         
ASSETS          
           
CURRENT ASSETS:          
Cash  $2,553,260   $2,392,053 
Accounts receivable   2,552,808    3,992,826 
Other receivables   406,419    457,943 
Inventories, net   24,362,795    8,161,566 
Prepayments   459,763    1,246,154 
Total current assets   30,335,045    16,250,542 
           
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net   4,927,904    6,032,389 
           
OTHER ASSETS:          
Deferred tax assets   -    10,184 
Total other assets   -    10,184 
           
Total assets  $35,262,949   $22,293,115 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
           
CURRENT LIABILITIES:          
Accounts payable  $30,556,903   $7,661,988 
Accrued liabilities   1,172,607    1,012,588 
Customer deposits   450,975    354,923 
Other payables   174,231    73,641 
Taxes payables   -    3,195,366 
           
Total current liabilities   32,354,716    12,298,506 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS' EQUITY:          
           
Common stock, $.001 par value, 94,250,000 shares authorized, 29,626,916 shares issued and outstanding as of September 30, 2011 and October 31, 2010   29,627    29,627 
Additional paid-in capital   9,448,209    9,408,487 
Statutory reserves   110,068    110,068 
Accumulated deficit   (8,718,198)   (1,091,021)
Accumulated other comprehensive income   2,038,527    1,537,448 
Total shareholders' equity   2,908,233    9,994,609 
           
Total liabilities and shareholders' equity  $35,262,949   $22,293,115 

 

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

 

F-4
 

  

PERFECTENERGY INTERNATIONAL LIMITED

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 2011 AND FISCAL YEAR ENDED OCTOBER 31, 2010

 

   Eleven Months
Ended
   Fiscal Year Ended 
   September 30,   October 31, 
   2011   2010 
REVENUES  $50,327,548   $74,601,090 
           
COST OF REVENUES   52,658,649    67,234,057 
           
GROSS PROFIT   (2,331,101)   7,367,033 
           
OPERATING EXPENSES:          
Selling, general and administrative   5,438,135    9,126,080 
Research and development   446,413    509,181 
Total operating expenses   5,884,548    9,635,261 
           
LOSS FROM OPERATIONS   (8,215,649)   (2,268,228)
           
OTHER INCOME (EXPENSE):          
Interest expense and other bank charges   (49,925)   (6,541)
Non-operating income   661,964    56,457 
Change in fair value of derivative instruments   -    29,564 
Total other income, net   612,039    79,480 
           
LOSS BEFORE PROVISION FOR INCOME TAXES   (7,603,610)   (2,188,748)
           
PROVISIONFOR INCOME TAXES   23,567    539,350 
           
NET LOSS   (7,627,177)   (2,728,098)
           
OTHER COMPREHENSIVE INCOME          
Foreign currency translation adjustments   501,079    164,540 
           
COMPREHENSIVE LOSS  $(7,126,098)  $(2,563,558)
           
LOSS PER SHARE:          
Basic  $(0.26)  $(0.09)
Diluted  $(0.26)  $(0.09)
           
WEIGHTED AVERAGE NUMBER OF SHARES:          
Basic   29,626,916    29,626,916 
Diluted   29,626,916    29,626,916 

 

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

 

F-5
 

 

PERFECTENERGY INTERNATIONAL LIMITED

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

 

           Additional   Retained earnings/
(Accumulated deficit)
   Accumulated
Other
     
   Common stock   Paid-in   Statutory       comprehensive     
   Shares   Par value   capital   reserves   Unrestricted   income   Total 
BALANCE, October 31, 2009   29,626,916   $29,627   $8,137,766   $110,068   $1,637,077   $1,372,908   $11,287,446 
                                    
Options issued to employees             1,270,721                   1,270,721 
Net loss                       (2,728,098)        (2,728,098)
Foreign currency translation adjustments                            164,540    164,540 
                                    
BALANCE, October 31, 2010   29,626,916   $29,627   $9,408,487   $110,068   $(1,091,021)  $1,537,448   $9,994,609 
                                    
Options issued to employees             39,722                   39,722 
Net loss                       (7,627,177)        (7,627,177)
Foreign currency translation adjustments                            501,079    501,079 
                                    
BALANCE, September 30, 2011   29,626,916   $29,627   $9,448,209   $110,068   $(8,718,198)  $2,038,527   $2,908,233 

 

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

  

F-6
 

 

PERFECTENERGY INTERNATIONAL LIMITED

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 2011 AND FISCAL YEAR ENDED OCTOBER 31, 2010

  

   Eleven Months
Ended
   Fiscal Year Ended 
   September 30,   October 31, 
   2011   2010 
CASH FLOWS FROM OPERATING ACTIVITIES:          
 Net loss  $(7,627,177)  $(2,728,098)
Adjustments to reconcile net loss to cash          
provided by (used in) operating activities:          
Depreciation   1,500,094    1,838,838 
Bad debt expenses   163,298    2,120,398 
Provisions on inventory   1,243,524    - 
Recovery on obsolete inventory   -    (87,884)
Loss from discontinuance of construction project   -    28,280 
Stock-based compensation expense   39,722    1,270,721 
Change in fair value of derivative instruments   -    (29,564)
Changes in assets and liabilities:          
Accounts receivable   1,296,355    (548,288)
Other receivables   459,217    1,846,282 
Inventories   (17,009,262)   1,525,470 
Prepayments   838,328    (710,496)
Deferred tax assets   9,924    341,774)
Accounts payable   22,631,904    (4,214,023)
Accrued liabilities   155,860    (57,808)
Customer deposits   82,328    (1,860,780)
Other payables   133,920    (62,982)
Taxes payable   (3,628,945)   246,253 
Net cash provided by (used in) operating activities   289,090    (1,081,907)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of equipment and leasehold improvements   (145,632)   (762,719)
Refund of deposit from land use rights   -    279,850 
Net cash used in investing activities   (145,632)   (482,869)
           
EFFECT OF EXCHANGE RATE CHANGES ON CASH   17,750    373,975 
           
INCREASE (DECREASE) IN CASH   161,207    (1,190,801)
           
CASH, beginning of year   2,392,053    3,582,854 
           
CASH, end of year  $2,553,260   $2,392,053 
           
Supplemental disclosures:          
Interest paid  $-   $- 
Income taxes paid  $-   $- 

 

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

 

F-7
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Summary of Significant Accounting Policies

 

(a) Organization and Description of Business

 

Perfectenergy International Limited (“PFGY” or the “Company”) was incorporated in the State of Nevada on February 25, 2005.  The Company, through its subsidiaries, is principally engaged in the research, development, manufacturing, and sale of solar cells, solar modules, and photovoltaic (“PV”) systems.  The Company’s manufacturing and research facility is located in Shanghai, China, and it has sales and service offices in Shanghai, China and Germany.

 

On February 28, 2008, the Company formed Perfectenergy Solar-Tech (Shanghai) Ltd. (“Perfectenergy Solar-Tech”) under the laws of the People’s Republic of China as a wholly owned subsidiary of Perfectenergy International Limited (“Perfectenergy BVI”), a wholly owned subsidiary of the Company. The Company obtained approval from local authority for a reduction in Perfectenergy Solar-Tech's required registered capital from $20 million to $4 million. All registration documents of Perfectenergy Solar-Tech were completed in early September 2010.

 

The Company has incurred a net loss of $7.6 million for the eleven months ended September 30, 2011 and has an accumulated deficit of $8.7 million as of September 30, 2011. Notwithstanding the foregoing, the Company has negative working capital of $2 million as of September 30, 2011. Although it can provide no assurances that it will be successful, management anticipates that the Company will generate sufficient cash flows to fund its operations for the next twelve months by increasing the volume of its product sales and using a RMB 30 million line of credit from a local export agent.   The Company’s ability to continue its operations for the next 12 months is primarily dependent upon its ability to grow its planned level of operations and obtain sufficient financial support and additional capital at acceptable costs.  If events or circumstances occur such that the Company is unable to or does not meet its operating plan as expected and obtained additional financing within 12 months, the Company may be required to significantly curtail or cease its operations.  The Company’s history of operating losses and lack of binding financing commitments raise substantial doubt as to its ability to continue as a going concern.

 

(b) Basis of Presentation and Principles of Consolidation

 

The Company changed its year end from October 31 to September 30 effective May 4, 2011. The financial statements presented herein include the statements of operations and cash flows for the eleven months ended September 30, 2011, and the fiscal year ended October 31, 2010, which represents the period of the prior year most comparable to the current period. There are no material factors or trends that affect the comparability of the periods.

 

The accompanying consolidated financial statements of the Company and all its wholly owned subsidiaries, Perfectenergy BVI, Perfectenergy (Shanghai) Limited (“Perfectenergy Shanghai”), Perfectenergy GmbH (“Perfectenergy GmbH”), and Perfectenergy Solar-Tech, as of September 30, 2011 and for the fiscal year ended October 31, 2010, have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP’).

 

All significant intercompany balances and transactions have been eliminated in consolidation.  The Company has reclassified certain prior year amounts to conform to the current year presentation. These reclassifications have no effect on net loss.

 

F-8
 

 

 PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(c) Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes and assumptions that affect various accounts, including but not limited to long-lived assets, income taxes, inventories, revenue recognition and related sales reserves, allowance for doubtful accounts, and stock compensation as reported in the financial statements and accompanying notes.  Management considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the assumptions used to prepare these financial statements.  Management must apply significant judgment.  Among the factors, but not fully inclusive of all factors that may be considered by management, are the following: the range of accounting policies permitted by accounting principles generally accepted in the United States of America; management’s understanding of the Company’s business - both historical results and expected future results; the extent to which operational controls exist that provide high degrees of assurance that all desired information to assist in the estimation is available and reliable or whether there is greater uncertainty in the information that is available upon which to base the estimate; expectations of the future performance of the economy, both domestically and globally, within various areas that serve the Company’s principal customers and suppliers of goods and services; expected rates of exchange; sensitivity and volatility associated with the assumptions used in developing estimates; and whether historical trends are expected to be representative of future trends.

 

The estimation process often times may yield a range of potentially reasonable estimates of the ultimate future outcomes, and management must select an amount that lies within that range of reasonable estimates based on the quantity, quality, and risks associated with the variability that might be expected from the future outcome and the factors considered in developing the estimate.  This estimation process may result in the selection of estimates that could be viewed as conservative or aggressive by others.  Management attempts to use its business and financial accounting judgment in selecting the most appropriate estimate; actual amounts, however, may differ from those estimates.

  

(d) Deferred Rent Obligation

 

The Company accounts for rent expense under the non-cancelable operating lease and amendments by amortizing the abated rent and scheduled rent increases on a straight-line basis over the lease term beginning with the effective lease commencement dates.

 

(e) Revenue Recognition

 

The Company recognizes revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists, which is when a signed sales contract or purchase order is received from the customer; 2) delivery has occurred, which is when legal title and risk of loss pass to the customer and no other performance obligations remain; 3) the fee is fixed and determinable, and 4) collection is reasonably assured. All of the Company’s products that are sold in the PRC are subject to a Chinese VAT at a rate of 17% of the gross sales price or at a rate approved by the PRC local government. All of the Company’s products that are sold in Germany are subject to a German VAT at a rate of 19% of the gross sales price or at a rate approved by the German government. The revenue is recognized net of VAT tax, discount and allowance at the time.

  

The Company retains limited ownership of goods delivered to customers governed by Section 449 of the German Civil Code for the sole purpose of enabling recovery of goods in the event of customer default on payment.  The Company recognizes revenue upon delivery, assuming all other revenue recognition criteria have been met, as the Company is not entitled to direct the disposition of the goods, cannot rescind the transaction, cannot prohibit its customer from moving, selling or otherwise using the goods in the ordinary course of business.

 

For certain sales to one of the Company’s distributors, payment is contingent upon that distributor’s ability to resell the products.  As a result, revenue is not recognized until the distributor has resold the products.

 

The Company offers pricing protection to some of its distributor customers whereby the Company supports the distributor’s resale product margin on certain products held in the distributor’s inventory. The Company analyzes current requests for credit in process, also known as ship and debits, and inventory at the distributor to determine the ending sales reserve required for this program. Reserves are reduced directly from revenue and recorded as a reduction to accounts receivable at the time the related sales is recorded.

  

F-9
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(f) Fair Value Measurement of Financial Instruments

 

The accounting standards regarding fair value of financial instruments and related fair value measurements define financial instruments, define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement, and enhance disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for current assets and current liabilities qualify as financial instruments and reflect reasonable estimates of fair value because of the short period of time between the origination of such instruments and their expected realization. The three levels of valuation hierarchy are defined as follows:

 

  · Level 1 inputs to the valuation methodology, which are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

  · Level 2 inputs to the valuation methodology that includes quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, substantially for the full term of the financial instrument.

 

  · Level 3 inputs to the valuation methodology that are unobservable and significant to the fair value measurement.

 

The Company did not identify any asset and liability that is required to be presented on the balance sheet at fair value in accordance with this accounting standard.

 

(g) Foreign Currency Translation

 

The Company’s principal operating subsidiaries established in the PRC use the local currency, Renminbi (“RMB”), as their functional currency.  The Company’s sales offices in Germany use the Euro (“EUR”) as their functional currency. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

The reporting currency of the Company is the United States dollar. In translating the financial statements of the Company’s subsidiaries from their functional currency into the Company's reporting currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date, and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in shareholders’ equity.

 

In accordance with the accounting standard regarding "Statement of Cash Flows," cash flows from the Company's operations are calculated based on local currencies using the average exchange rate prevailing during the reporting period translated into the Company's reporting currency of United States dollars. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

 

(h) Cash

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash.

 

(i) Accounts Receivable

 

The Company conducts its business operations in the PRC, and it has sales offices in Germany. Management reviews its accounts receivable on a regular basis and analyzes historical bad debts, customer credit worthiness, current economic trends, and changes in customer payment patterns to determine if the allowance for doubtful account is adequate and adjusts the allowance when necessary. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance and ultimate losses may vary from current estimates.  As adjustments to these estimates, become necessary, they are reported in operations in the periods that they become known.  If all attempts to collect a receivable fail, the receivable is written off against the allowance.

  

F-10
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(j) Other Receivables

 

Other receivables consist of advanced payment to be refunded by the Company’s suppliers and intercompany transfer of foreign currencies held by the Company’s export agents.  Management reviews its other receivables on a regular basis and analyzes the financial conditions of the Company’s suppliers and export agents to determine if the allowance for doubtful account is adequate and adjusts the allowance when necessary.  An estimate for doubtful accounts is recorded when collection of the full amount is no longer probable.

 

(k) Inventories

 

Inventories are stated at the lower of cost or market using a weighted average cost method.  The Company reviews its inventory periodically for possible obsolete goods to determine if any reserves are necessary for potential obsolescence.  The Company provides for slow moving inventory based on an analysis of the aging and utility of the inventory.   The Company believes that the reserve is adequate to provide for expected losses.

 

(l) Prepayments

 

Prepayments are prepayments to the Company’s suppliers. Some of the Company’s suppliers require advanced payment before a delivery is made. Such prepayments are recorded in the financial statements as prepayments until delivery has occurred.

 

(m) Property and Equipment, net

 

Equipment and leasehold improvements are stated at cost.  Depreciation is computed by using the straight-line method at rates based on the estimated useful lives of the various classes of property.  Estimates of useful lives are based on a variety of factors including durability of the asset, the amount of usage that is expected from the asset, the rate of technological change, and the Company’s business plans for the asset.  Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.  Should the Company change its plans with respect to the use and productivity of property and equipment, it may require a change in the useful life of the asset or incur a charge to reflect the difference between the carrying value of the asset and the proceeds expected to be realized upon the asset’s sale or abandonment.  Expenditures for maintenance and repairs are expensed as incurred and significant major improvements are capitalized.

 

Estimated useful lives of the Company’s assets are as follows:

 

    Useful Life  
Leasehold improvements   Lease term  
Transportation equipment   5 years  
Machinery   5 - 10 years  
Office equipment   5 years  

 

(n) Impairment of Long-Lived Assets

 

The Company evaluates long-lived assets for impairment annually, and more often if an event or circumstance occurs that triggers an impairment test.  Substantial judgment is necessary in the determination as to whether an event or circumstance has occurred that may trigger an impairment analysis and in the determination of the related cash flows from the asset.  Estimating cash flows related to long-lived assets is a difficult and subjective process that applies historical experience and future business expectations to revenues and related operating costs of assets.  Should impairment appear to be necessary, subjective judgment must be applied to estimate the fair value of the asset, for which there may be no ready market, which oftentimes results in the use of discounted cash flow analysis and judgmental selection of discount rates to be used in the discounting process.  If the Company determines an asset has been impaired based on the projected undiscounted cash flows of the related asset or the business unit over the remaining amortization period, and if the cash flow analysis indicates that the carrying amount of an asset exceeds related undiscounted cash flows, the carrying value is reduced to the estimated fair value of the asset or the present value of the expected future cash flows.  As of September 30, 2011, the Company expects these assets to be fully recoverable.

  

F-11
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(o) Customer Deposits

 

Customer deposits are prepayments from our customers.  Some of our sales require customers to prepay before delivery is made.  Such prepayments are recorded in our financial statements as customer deposits until delivery has occurred.

 

(p) Value Added Tax (“VAT”)

 

The Company’s sales of products in the PRC and Germany are subject to a value added tax (“VAT”) in accordance with tax laws.  The VAT applied is 17% in the PRC and 19% in Germany of the gross sales price.  A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products and payment of freight expenses can be used to offset the VAT due on sales of the finished products.

 

(q) Provision for Income Taxes

 

The Company accounts for income taxes in accordance with the Accounting Standard Codification (“ASC”) 740 Income Tax for income taxes. Under the asset and liability method as required by this accounting standard, the Company must recognize deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities.  Provision for income taxes consist of taxes currently due plus deferred taxes. The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.  Valuation allowances are established when necessary based on the judgment of management to reduce deferred tax assets to the amount expected to be realized and could be necessary based on estimates of future profitability and expenditure levels over specific time horizons in particular tax jurisdictions. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. 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.

 

The Company adopted Accounting Standard Codification (“ASC”) 740 Income Tax for Accounting for Uncertainty in Income Taxes.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The accounting standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The Company accounts for interest and penalties related to uncertain tax positions as income tax expenses.

 

(r) Shipping and Handling

 

Costs related to shipping and handling of the products sold is included in selling, general and administrative expenses.  Shipping and handling expense of sales amounted to $963,977 for the eleven months ended September 30, 2011 and $2,166,191 for the fiscal year ended October 31, 2010.

 

(s) Advertising

 

Advertising expenses are expensed as incurred, and the expense was nil during the periods.

 

(t) Research and Development Costs

 

Research and development expenses are expensed as incurred.  Research and development expenses include salaries, consultant fees, supplies, and materials, as well as costs related to other overhead such as facilities, utilities, and other departmental expenses.  The costs the Company incurs with respect to internally developed technology and engineering services are included in research and development expenses.

  

F-12
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(u) Earnings per Share

 

The Company reports earnings per share in accordance with the provisions of Accounting Standard Codification (“ASC”) 260 Earnings Per Share. This standard requires the presentation of earnings per share (EPS) as basic EPS and diluted EPS in conjunction with the disclosure of the methodology used in computing such earnings per share.  Basic EPS excludes dilution and is computed by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

 

The following is a reconciliation of the basic and diluted earnings per share computation:

 

   Eleven Months Ended 
September 30, 2011
   Fiscal Year Ended
October 31, 2010
 
         
Net loss for basic earnings per share  $(7,627,177)  $(2,728,098)
           
Weighted average shares used in basic computation   29,626,916    29,626,916 
Diluted effect of options and warrants   -    - 
Weighted average shares used in diluted computation   29,626,916    29,626,916 
           
Weighted Average Earnings per share          
Basic  $(0.26)  $(0.09)
Diluted  $(0.26)  $(0.09)

 

For the eleven months ended September 30, 2011 and fiscal year ended October 31, 2010, none of the issued and outstanding warrants and options were included in the calculation of diluted earnings per share since their effect would be anti-dilutive.

 

(v) Stock-Based Compensation

 

The Company records and reports stock based compensation pursuant to Accounting Standard Codification (“ASC”) 718 Compensation-Stock Compensation which defines a fair-value-based method of accounting for stock based employee compensation and transactions in which an entity issues its equity instruments to acquire goods and services from non-employees.  Stock compensation for stock granted to non-employees has also been determined in accordance with FASB’s related accounting standard as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured. 

 

F-13
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 2 – Recently Issued Accounting Standards

 

In April 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The adoption of this ASU did not have a material impact on its consolidated financial statements.

  

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standard (“IFRS”), to converge fair value measurement and disclosure guidance in U.S. GAAP with the guidance in the International Accounting Standards Board’s (“IASB”) concurrently issued IFRS 13, Fair Value Measurement. The amendments in ASU 2011-04 do not modify the requirements for when fair value measurements apply; rather, they generally represent clarifications on how to measure and disclose fair value under ASC 820, Fair Value Measurement. The amendments in the ASU 2011-04 are effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted for public entities. The Company is currently assessing the impact of ASU 2011-04 on its financial statements. Adoption of this standard is not expected to have a material impact on the financial statements.

  

F-14
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 3 – Accounts Receivable

 

Accounts receivable consisted of the following:

 

   September 30, 
2011
   October 31, 
2010
 
Accounts receivable  $2,716,106   $3,992,826 
Less: allowance for doubtful accounts   163,298    - 
    2,552,808   $3,992,826 

 

At September 30, 2011, a 100% allowance was provided on those outstanding balances that we believe to be doubtful. There was no doubtful allowance at October 31, 2010.

 

Note 4 – Other Receivables

 

Other receivables consisted of the following:

 

   September 30, 
2011
   October 31, 
2010
 
Other receivables – Current  $406,418   $457,943 
Other receivables – Noncurrent   3,803,387    3,803,387 
Less: allowance for doubtful accounts   (3,803,387)   (3,803,387)
Total  $406,418   $457,943 

 

Other receivables mainly consist of deposits to the landlord and VAT tax receivable of $388,608 as of September 30, 2011.  Based on an analysis of the ending balance, no allowance for doubtful account is considered to be necessary.

 

In June and July 2008, Perfectenergy Shanghai entered into three purchase contracts for purchasing original MEMC granular polysilicon from Sun Materials GmbH (“Sun Materials”).  In accordance with the terms of the purchase contracts, Perfectenergy Shanghai paid 100% of the advance payments to Sun Materials totaling approximately $3.8 million. However, as of December 2009, Sun Materials was unable to either deliver the goods or return most of the advancement. Followed by an abstract debt acknowledgement and repayment agreement between Sun Materials and Regus Management Corp., British Virgin Island (“Regus BVI”), its original supplier for the MEMC granular polysilicon, Regus BVI was obligated to repay the prepayments in five installments.  Regus BVI made a small initial repayment, which was not in accordance with the terms established in the repayment agreement.  There have been no payments from any parties involved.  Based on our continuous assessment on September 30, 2011, doubts as to the collectability of this advancement still exists, management estimated that a 100% provision (approximately $3.8 million) is necessary against the full amount.  The Company will continue to assess the collectability and make necessary adjustment if circumstances dictate.

 

F-15
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 5 – Inventories

 

Inventories consisted of the following: 

 

   September 30, 
2011
   October 31, 
2010
 
Raw materials  $671,548   $703,452 
Finished goods   25,317,752    7,726,441 
Work in progress   202,426    277,760 
Supplies   -    15,709 
Less inventory reserve   (1,828,931)   (561,796)
Total  $24,362,795   $8,161,566 

 

 Movement on inventory reserve:

   September 30, 
2011
   October 31, 
2010
 
Beginning balance  $561,796   $637,335 
Additions charged to costs of goods sold   1,243,524    84,389 
Recovery on obsolete inventory   -    (172,274)
Foreign currency translation adjustments   23,611    12,346 
Ending balance  $1,828,931   $561,796 

  

The increase in inventory reserve is mainly related to additional net realizable value provision against the PV modules held on hand/in transit due to devaluation of modules in the current market.

 

Note 6 – Prepayments

 

Prepayments are mostly monies deposited or advanced to outside vendors on future inventory purchases.  Some of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will receive their purchase on a timely basis and lower than market price.  This amount is refundable and bears no interest.  Total outstanding prepayments for inventory purchases were $335,682 and $1,197,636 as of September 30, 2011 and October 31, 2010, respectively.

 

Note 7 – Property and Equipment, net

 

Property and equipment consisted of the following:

 

   September 30, 
2011
   October 31, 
2010
 
Leasehold Improvements  $2,082,494   $1,959,528 
Transportation equipment   335,094    321,774 
Machinery   7,643,211    7,321,695 
Office equipment   313,792    219,731 
Less: accumulated depreciation   (5,446,687)   (3,790,339)
Total  $4,927,904   $6,032,389 

 

Depreciation expense for the eleven months ended September 30, 2011 amounted to $1,500,094 and for the fiscal year ended October 31, 2010 amounted to $1,838,838.

  

F-16
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8 – Late Registration Penalties

 

In connection with the issuance of common stock and warrants (“Investor Warrants,” and together with the common stock, the “Securities”) on August 8, 2007, pursuant to Section 1(b) of the Registration Rights Agreement between the holder of the Securities (“Investors”) and the Company, the Company was required to have a registration statement relating to the resale of the Securities declared effective by the SEC by January 5, 2008.  A late registration entitled the Investors to a payment by the Company of an amount equal to 2% of the purchase price paid for the Securities due for January 7, 2008 and each 30 days thereafter, not to exceed in the aggregate 15% of the purchase price of the Securities.  The registration statement was declared effective on March 5, 2008.  The Company owed the Investors a total of $1,079,467 as a late registration payment, which was accrued and charged to general and administrative expenses during the year ended October 31, 2008.

 

In lieu of making cash payments, the Company offered to issue restricted common stock at a valuation of $4.00 per share for the first 30 days that the registration statement was late in being declared effective by the SEC, to which certain of the Investors agreed.  Thus, the Company owed the Investors taking cash payments a total of $912,347 as late registration payments.  As of September 30, 2011, the Company paid $390,744 to the Investors and issued aggregate 41,780 shares of common stock valued at $167,120 to seven of the Investors in lieu of a cash payment.  The settlement of the remaining $521,603 is still in progress and is recorded in accrued liabilities, and the expected final payment date is pending by the Company’s Board of Directors.

 

Note 9 – Retirement Benefit Plans

 

Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all permanent employees.  Employees are entitled to an annual pension at retirement.  The PRC government is responsible for the benefit liability to these retired employees.  The Company is required to make contributions to the state retirement plan at 22% of the monthly basic salaries of the current employees. The Company made pension contributions in amount of $284,590 for the eleven months ended September 30, 2011, and $227,504 for the fiscal year ended October 31, 2010.

  

F-17
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 10 – Accounting for Stock-Based Compensation

 

PFGY Stock Options

 

On September 5, 2007, the Company adopted the “Perfectenergy International Limited 2007 Stock Incentive Plan” (the “Stock Incentive Plan”). The Company reserved 1,500,000 shares of its common stock pursuant to the Stock Incentive Plan. During the ten months ended October 31, 2007, under the Stock Incentive Plan, the Company issued 1,282,358 options to employees and directors, of which 164,298 options were cancelled in December 2007, 25,000 were cancelled in March 2008, 39,298 were forfeited in July 2010, and 9,375 were exercised in April 2008. The Company used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices and expiration dates of the instruments, and using an average risk-free rate of 4.5%. The fair value of such options was $4,641,629 as of the grant date. The cost of the options had been amortized evenly over the vesting period, which was three years ended in October 2010.

 

On February 1, 2008, the Company issued 125,000 options to the Company’s Chief Financial Officer. These options vested evenly on an annual basis over the three years following the date of grant. The Company used the Cox-Ross-Rubinstein binomial model to value the options at the time they were issued, based on volatility of 70%, dividend yield of 0%, the stated exercise prices of the instruments, and using an average risk-free rate of 2.36%. The fair value of such options was $328,117 as of the grant date. The cost of the options had been amortized evenly over the vesting period, which was three years ended in January 2011.

 

On April 7, 2010, the Company granted a total of 200,000 stock options to three executives and four directors. The shares were valued at the market price on the date of grant. The estimated fair value of stock options granted was $0.19 per share. On April 7, 2011, 1/3 of the granted stock options vested and became exercisable, and the remaining 2/3 of the granted stock options vest evenly on April 7, 2012 and April 7, 2013, respectively.

 

The fair value is determined using the following assumptions: 

 

   April 7, 2010 
Expected volatility   170.00%
Risk-free interest rate   2.98%
Expected dividend   - 
Expected forfeiture rate   - 
Expected life (in years)   6.50 

 

The volatility of the Company’s common stock was estimated by management based on the historical volatility of the Company’s common stock, the risk free interest rate based on Treasury Constant Maturity Rates published by the U.S. Federal Reserve for periods applicable to the estimated life of the options, and the expected dividend yield based on the current and expected dividend policy. The Company has never declared or paid cash dividends and does not plan to pay cash dividends in the foreseeable future; therefore, the Company used an expected dividend yield of zero. Forfeiture is estimated at the time of grant. The Company’s estimate is zero at April 7, 2010 because of the small number of employees involved, and there is no expected future employee termination prior to vesting.  The expected life represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules. Because the Company does not have a history of employee stock options, the estimated life is based on one-half of the sum of the vesting period and the contractual life of each option. This is the same as assuming that the options are exercised at the mid-point between the vesting date and expiration date. 

 

F-18
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 10 – Accounting for Stock-Based Compensation (continued)

 

Stock-based award activity was as follows:

 

   Option 
Available
for Grant
   Options
Outstanding
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
(In years)
   Aggregate
Intrinsic Value
 
Outstanding at October 31, 2010   121,238    1,369,387   $2.54    6.76   $ 
Granted                    
Cancelled                    
Exercised                    
Outstanding at September 30, 2011   121,238    1,369,387   $2.52    5.83   $ 
                          
Exercisable at September 30, 2011       1,236,054   $2.79    5.55   $ 

  

As of September 30, 2011, approximately $19,425 of estimated expense with respect to non-vested stock-based awards has yet to be recognized and will be recognized as an expense over the employee’s remaining weighted average service period of approximately 1 year.  The following table shows the share-based compensation for the comparative period in 2011 and 2010.

 

   Eleven Months
ended
September 30,
2011
   Year ended
October 31,
2010
 
Selling, general and administrative  $39,722   $1,270,721 
Research and development        
   $39,722   $1,270,721 

  

The following table summarizes ranges of outstanding and exercisable stock-based award as of September 30, 2011:

 

Outstanding Options   Exercisable Options 
        Average           Average 
        Remaining           Remaining 
    Average   Contractual       Average   Contractual 
Number   Exercise   Life   Number   Exercise   Life 
of Options   Price   (in years)   of Options   Price   (in years) 
 1,044,387   $2.8    5.86    1,044,387   $2.8    5.86 
 125,000   $4.08    1.33    125,000   $4.08    1.33 
 200,000   $0.2    8.51    66,667   $0.2    8.51 
 1,369,387   $2.52    5.83    1,236,054   $2.79    5.55 

 

F-19
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 11 – Statutory Reserves

 

The laws and regulations of the PRC require that before an enterprise distributes profits to its owners, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations to investors, in proportions determined at the discretion of the board of directors, after the statutory reserve.  The statutory reserve includes the surplus reserve fund and the enterprise fund.  The statutory reserve represents restricted retained earnings.

 

Surplus Reserve Fund

 

Pursuant to the PRC’s accounting standards, Perfectenergy Shanghai and Perfectenergy Solar-Tech are required to set aside 10% of their after-tax profit each year to their general reserves until the accumulative amount of such general reserves reaches 50% of their respective registered capital.  These allocations must be made before Perfectenergy Shanghai or Perfectenergy Solar-Tech can distribute any cash dividends to their sole shareholder, Perfectenergy BVI. 

  

In addition to using the funds in their surplus reserves to distribute cash dividends to their shareholders, Perfectenergy Shanghai and Perfectenergy Solar-Tech may also use such funds (i) during a liquidation, (ii) to cover a previous years’ losses, if any, (iii) for business expansion, or (iv) for conversion to registered capital by issuing new shares to existing shareholders in proportion to their holdings, provided that the remaining surplus reserve fund balance after such issue is not less than 25% of each of their registered capital, or by increasing the par value of the shares currently held by existing shareholders.  For the eleven months ended September 30, 2011 neither Perfectenergy Shanghai nor Perfectenergy Solar-Tech made any contribution to their respective surplus reserve fund.

 

Enterprise Fund

 

The enterprise fund may be used to acquire plant and equipment or to increase working capital to expand on production and business operations.  No minimum contribution is required, and neither Perfectenergy Shanghai nor Perfectenergy Solar-Tech made any contributions to their respective enterprise fund for the eleven months ended September 30, 2011.

 

Note 12 – Income Taxes

 

Perfectenergy International Limited

 

The Company is incorporated in the United States. U.S. federal marginal income tax rate of 34% is levied. Under the U.S. tax code, the Company’s operating loss carryforwards will expire, if not utilized, between 2027 and 2031.

 

Perfectenergy Shanghai

 

As a manufacturing-related foreign-invested enterprise, Perfectenergy Shanghai is located in Shanghai, China. Under the new enterprises income tax (“EIT”) law that was enacted in China from January 1, 2008, the statutory EIT rate is 25%. Perfectenergy Shanghai was granted a two-year income tax exemption and a three-year 50%-reduction starting from January 1, 2005. On January 1, 2008, Perfectenergy Shanghai received the high technology certification from the tax authority. The certification allows Perfectenergy Shanghai to receive the 15% preferential income tax rate for a period of three years from January 1, 2008 to December 31, 2010. The applicable income tax rates are summarized as follows:

 

Calendar Year   Tax program   Applicable tax rate  
2008   Tax Holiday     12.5 %
2009   Tax Holiday     12.5 %
2010   Preferential income tax rate     15 %
2011   Corporate income tax rate     25 %
2012   Corporate income tax rate     25 %

 

According to the new PRC EIT law, the losses can be carried forward to offset income for the next 5 years successively without any other limitation.

 

Perfectenergy Solar-tech

 

Perfectenergy Solar-tech is located in Shanghai, China. The applicable tax rate is 25%.

 

F-20
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 12 – Income Taxes (continued)

 

Perfectenergy BVI

 

Perfectenergy BVI is incorporated in British Virgin Islands and is not subject to income tax under the current applicable tax law.

 

Perfectenergy GmbH

 

Perfectenergy GmbH is a wholly owned subsidiary of Perfectenergy BVI located in Germany. Perfectenergy GmbH’s aggregated tax burden, including corporate income tax plus solidarity surcharge and trade tax is 31.5%. German corporations will now be subject to limitation on the utilization of loss carry forwards for corporation tax. The first €1 million of net operating loss is allowed to carry forward to offset taxable income, while any utilization above that threshold will generally be limited to 60% of taxable income. There is no expiration date for the utilization of net operating loss.

 

The income tax expense is summarized as follows:

  

   Eleven Months
ended
September 30, 2011
   Fiscal Year
ended
October 31, 2010
 
Current:          
PRC  $23,567   $293,072 
U.S.  $   $ 
German  $   $246,279 
   $23,567   $539,351 
Deferred:          
PRC  $   $ 
U.S.  $   $ 
German  $   $ 
   $   $ 
Income tax expense  $23,567   $539,351 

 

Perfectenergy US, Perfectenergy GmbH, Perfectenergy Shanghai, and Perfectenergy Solar-tech all suffered an operating loss for the fiscal year ended October 31, 2010 and for the eleven months ended September 30, 2011 as well. Management reviews the valuation allowance periodically. As a result, a full valuation allowance has been recognized on the deferred tax asset benefit to reduce the asset to zero, since the Company determined that it was more likely than not that the deferred tax assets would not be utilized based on the Company’s limited operating history and future operating projections.

 

Significant components of the Company’s deferred tax assets are as follows:

 

   As of 
September 30,
2011
   As of 
October 31,
2010
 
Deferred tax assets          
Losses carried forward (PRC)  $158,379   $- 
Losses carried forward (U.S.)  $135,000   $- 
Losses carried forward (German)  $1,570,184   $10,184 
Less: valuation allowance  $(1,863,563)  $- 
Deferred tax asset, net  $-   $10,184 
Non-current portion  $-   $10,184 

 

There was no material effect to loss per share if the statutory income tax had been applied.

 

The Company also recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by tax authorities, based solely on the technical merits of the position. The Company has made the assessment at the level of tax authority for each tax position (including the potential application of interest and penalties) based on the technical merits. As a result, the Company determined that there were no material unrecognized tax benefits as of September 30, 2011.

 

F-21
 

  

 PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 13 – Concentration of Risk

 

Cash and Cash Equivalents

 

Cash and cash equivalents includes cash on hand and demand deposits in accounts maintained with either state owned banks or renowned local banks within the PRC, the United States, Hong Kong, and Germany.  Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash.  The Company maintains cash balances at financial institutions which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for the banks located in the United States, may exceed Hong Kong Deposit Protection Board insured limits for the banks located in Hong Kong, or may exceed Compensation Scheme of German Banks and Deposit Protection Fund of Association of German Banks insured limits for the banks located in Germany (amounts up to €1.5 million per depositor are fully protected in German Banks).  Balances at financial institutions or state owned banks within the PRC are not covered by insurance.  Total cash in banks at which the Company’s deposits are not covered by insurance amounted to $181,481 and $1,170,245 at September 30, 2011 and October 31, 2010, respectively.  The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

 

Major Customers

 

Five customers together accounted for approximately 74% of the Company’s net revenue for the eleven months ended September 30, 2011 and 64% for fiscal year ended October 31, 2010 of the Company’s sales. These customers accounted for approximately 69% and 47% of the Company’s accounts receivable as of September 30, 2011 and October 31, 2010, respectively.

 

The following table summarizes customers that contributed greater than 10% of net revenues:

 

Name of Customer  Eleven months
ended
 September 30,
2011
   Fiscal Year
ended
 October 31,
2010
 
Customer A   35%   * 
Customer B   17%   * 
Customer C   14%   22%
Customer D   *    28%

 

 

* Less than 10%

 

The following table summarizes customers with greater than 10% of outstanding accounts receivables:

 

Name of Customer  

As of

September 30,

2011

   

As of

October 31,

2010

 
Customer A     34 %     *  
Customer B     39 %     *  
Customer C     * %     20 %

 

 

* Less than 10%

 

Major Vendors

 

For the eleven months ended September 30, 2011, the Company purchased approximately 55% and 46% for the fiscal year ended October 31, 2010 of raw materials from three major suppliers. These suppliers represented 50% and 64% of the Company’s total accounts payable as of September 30, 2011 and October 31, 2010, respectively.

  

F-22
 

 

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 13 – Concentration of Risk (continued)

 

The following table summarizes suppliers that provided greater than 10% of net purchases:

 

Name of Supplier  Eleven
Months
ended
September 30,
2011
   Fiscal Year
ended
October 31,
2010
 
Supplier A   26%   16%
Supplier B   14%   * 
Supplier C   15%   12%
Supplier D    *    18%

 

 

* Less than 10%

 

The following table summarizes suppliers with greater than 10% of outstanding accounts payables:

 

Name of Supplier  

As of

September 30,

2011

   

As of

October 31,

2010

 
Supplier A     24 %     *  
Supplier B     22 %     *  
Supplier C     4 %     *  
Supplier D     *     24 %
Supplier E     *     23 %
Supplier F     *     17 %

 

 

* Less than 10%

 

Political and Economic Risk

 

The Company's major operations are carried out in the PRC.  Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal circumstances in the PRC and by the general state of the PRC's economy.

 

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe.  These include risks associated with, among other things, the political, economic, and legal environments and foreign currency exchange.  The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

 

F-23
 

 

 PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 13 – Concentration of Risk (continued)

 

Revenue by Geographic Area

 

Revenues are attributed to geographic areas based on the final shipping destination of the Company’s products.  The following table summarizes the financial information for the Company’s revenues based on geographic area:

 

Geographic Area   Eleven Months Ended
September 30, 2011
   Fiscal Year
ended October
31, 2010
 
China  $1,818,677   $4,341,814 
Germany   48,508,871    70,259,276 
Total revenues  $50,327,548   $74,601,090 

 

Note 14 – Commitments

 

Operating Lease Commitments

 

The Company’s office lease for Perfectenergy Shanghai is under a five-year term expiring May 31, 2011 with a monthly rent of approximately $17,000 (RMB 115,199) and extends the lease for another 5 years with monthly rent of approximately $26,000 (RMB170,000) until May 31, 2016.   The Company entered into a three-year office lease for Perfectenergy GmbH expiring February 28, 2014 with a monthly rent of approximately $5,720 (approximately EUR 3,855).  The Company entered into a two-year lease for Perfectenergy Solar-Tech that expired March 14, 2010 with a monthly rent of $5,900 (approximately RMB 40,000), which lease was extended through 2012 and can be suspended upon mutual agreement of both parties based on an oral agreement with the landlord.  At September 30, 2011, total future minimum lease payments under an operating lease were as follows: 

 

Period Ended September 30,  Amount 
2012  $382,011 
2013  $382,011 
2014  $351,226 
2015  $336,835 
2016 and Thereafter  $224,557 

 

Total rent expense for the eleven months ended September 30, 2011 and fiscal year ended October 31, 2010 amounted to $329,225 and $304,569, respectively.

 

Note 15 – Subsequent Event

 

In accordance with ASC 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, we have evaluated all events or transactions that occurred after September 30, 2011 through the date we issued the consolidated financial statements and disclose the following:

 

We are involved in disputes with Doorline GmbH (“Doorline”), a significant customer, and Hengdian Group DMEGC Solar Division (“DEMGC”), an OEM supplier. All the sales to Doorline that are the subject of these disputes were made subsequent to September 30, 2011. Doorline refused to make payment due to the Company in the amount of €2,572,280 by claiming it received faulty products. As a result, the Company stopped payment in the amount of €2,053,976 (outstanding Accounts Payable at €4,894,399 as of September 30, 2011) to DEMGC pursuant to a warranty coverage clause in our OEM contract with DEMGC. DEMGC has taken legal actions against the Company to collect the payment. We are currently negotiating with both parties and there is a contingency that we will take the losses if the warranty coverage from DEMGC cannot meet total claims from Doorline.

  

F-24
 

  

PERFECTENERGY INTERNATIONAL LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 15 – Subsequent Event (continued)

 

Also according to a memorandum with Shenzhen Top Grade dated December 14, 2011, Shenzhen Top Grade agreed to lend us up to CNY30 million (equivalent to $4.7 million) based on the condition that we use Shenzhen Top Grade as our export agent for a total value of $26 million during the 2012 calendar year. At the end of March 2012, the Company had borrowed a total of $2.6 million from Shenzhen Top Grade to fund our operations.

  

Note 16 - Transition Period Comparative Data

 

The following table presents certain financial information for the eleven months ended September 30, 2011 and 2010 respectively:

 

   Eleven Months Ended  September 30, 
   2011   2010 (Unaudited) 
         
Revenue  $50,327,548   $68,922,542 
Gross Profit/(Loss)   (2,331,101)   6,058,922 
Losses Before Taxes   (7,603,610)   (2,707,308)
Income Taxes   23,567    49,415 
Net Losses   (7,627,177)   (2,756,723)
           
Weighted average shares outstanding   29,626,916    29,626,916 
           
Weighted Average Losses per share Basic and Diluted  $(0.26)  $(0.09)

  

F-25
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
  PERFECTENERGY INTERNATIONAL LIMITED
   
 Dated: August 1, 2012 /s/ Wennan Li
  Wennan Li, Chief Executive Officer and President

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

NAME   TITLE   DATE
         
/s/ Wennan Li   Chairman of the Board, Chief Executive Officer (Principal Executive Officer), President, Principal Financial and Accounting Officer   August 1, 2012
Wennan Li        
         
/s/ Min Fan   Director   August 1, 2012
Min Fan        
         
/s/ Yunxia Yang   Director   August 1, 2012
Yunxia Yang        
         
/s/ Adam Roseman   Director   August 1, 2012
Adam Roseman        
         
             Director   August 1, 2012
Yajun Wu        

  

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